The inflation acceleration in recent weeks, which threatens to continue over the next few months, will jeopardize a commitment that the Government made in the economic program agreed with the International Monetary Fund: to reduce the issuance of price-indexed debt. The stock of CER-tied bonds represents more than 80% of all securities in local currency and, for some analysts, a marked increase in these types of instruments poses a challenge to public accounts.
The Ministry of Economy assured in the fine print with the agency that it will seek to reduce the burden of debt indexed to prices and that it will try to diversify the bond menu offered to investors in the local market. Almost 60% of the maturities in pesos in the coming months are explained by this type of financing instrument.
The commitment on local financing also includes a call for notice on debt tied to the CER index, which follows price developments. “In this regard, and in line with the projected path of disinflation, we plan to gradually reduce the use of instruments linked to inflation, expand the portfolio of benchmark debt instruments and extend the maturity profile,” the memorandum of understanding considered.
When consulted by Infobae, official sources stated that the commitment signed to the IMF has no goals in detail, but rather is explicitly stated as a statement of principles. “It is a medium-term goal that must be pursued. There is no time or quantitative limit as in other variables, but there is a commitment to go in that direction,” they said.
For now, inflation-tied debt represents 58% of the debt maturities faced by the Ministry of Economy in the next six months, according to official information. In addition, it accounts for just over 80% of the stock of debt in pesos reported by the Ministry of Finance: $6.7 trillion in stock compared to the $8.2 billion currently in circulation. The rest of the debt in local currency is bills and fixed-rate bonds.
This Tuesday afternoon, the Ministry of Finance held a new debt tender to cover a limited amount of maturities, close to $15 billion and collected almost $44 billion. In the menu for investors, once again, indexed instruments appeared, albeit with long terms.
First, one that expires on July 26, 2024 and that had an award of $19,336 million and a second largest with an end date of November 9, 2026, with $5,182 million placed. In global numbers, almost 40% of investment demand for this latest debt operation was focused on securities tied to inflation.
Indexed debt: what does the market think
A recent report by the consultancy firm Analytica argued why it believes that this government financial policy objective could be hampered in a context of accelerating price indices. “The goal of reducing CER debt issues seems difficult to meet. No one would be willing to invest in fixed-coupon instruments or Badlar if a rate pull is expected as the steep peso curve would generate large capital losses,” they explained.
In this regard, the economist of that consultancy firm Claudio Caprarulo considered that “today the main risk to liquidity in pesos is the expected rate of inflation, because the agreement with the IMF allowed us to avoid a big jump in the exchange rate. In the coming months, more than 50% of the Treasury's maturities are from CER instruments,” he said in a dialogue with Infobae.
“In this context, in order to renew them and in turn get financing above them, they will have to maintain or increase the supply of inflation-tied securities. Today, the fixed rate that should be validated to change the composition of its indebtedness should be too high and given the great uncertainty, it is not a guarantee that the market will lean towards that option,” he said.
For Juan Ignacio Paolicchi, economist at the consultancy firm Empiria, “the latest tenders show us a difficult starting point for that goal,” he said. “If we look at the latter especially, 70% of demand was concentrated in CER instruments with maturities of less than one year. In other words, not only are you indexing your debt issues, but you are also doing so in an increasingly shorter term,” he said.
“I think that in this context of inflation acceleration (which ends up leaving the real rate in negative terrain) it is very difficult to predict a decrease in the load of indexed instruments,” Paolicchi concluded.
For his part, Martín Vauthier, from Anker Latin America, also agreed that “it is a very difficult compromise under these conditions.” “When you look at the positive financing of the last two years, virtually all of the net financing was via indexed debt placements, and some dollar linked,” he told Infobae.
“But fixed-rate placements had a much smaller stock. Going forward and even more with these levels of inflation and with such deteriorating expectations about macro variables, it is very difficult for Finance to get out of these instruments,” said the economist.
“It's more like the end of the road. When the economy can stabilize, the objectives of a positive real rate are sustained, with a tendency to fiscal balance, with positive expectations and with an improvement in the balance sheet of the Central Bank, it is only then that Finance will be able to increase the portion of debt placed at a fixed rate,” Vauthier concluded.
In general, there are other commitments that the Government made to the IMF with regard to the placement of debt in local currency. “Our plan aims at net financing from the private sector in pesos to the Treasury of about 2% of GDP per year during 2022-24, based on our properly balanced fiscal consolidation plan,” the economic policy memorandum states. At nominal terms today, 2% of GDP represents about 1.3 trillion pesos.
In addition, he anticipated that by December this year a financial plan will be developed that will focus on: rationalizing the current number of instruments; improving the predictability of debt tenders; limiting the use of minimum prices in tenders only to provide guidance on new instruments and for periods of tension in the market and develop benchmark bonds to support liquidity and price discovery in the secondary market, the Ministry of Economy said.
The need for larger tenders in the domestic market responds to one of the goals required in the memorandum with the IMF. This is the goal of reducing monetary assistance to the Treasury by the Central Bank, which this year should fall from 3.7% of GDP to 1%.
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