TAX BREAKS FOR ME, AUSTERITY FOR THEE
Kevin Simauchi
Thu, Jun 13, 2024, 11:11 AM MDT3 min read
(Bloomberg) -- Investors welcomed congressional approval of President Javier Milei’s omnibus bill, saying it showed he can push through contentious reforms many see as key to getting Argentina’s economy back on track.
The president won just enough support to advance his landmark austerity package in the Senate early Thursday morning, following weeks of horse-trading and pushback from opposition lawmakers.
The vote confirmed many investors’ base case scenario, sending sovereign bonds higher. US-listed shares of Argentine companies and an exchange-traded fund that tracks the country’s stocks also climbed.
Still, some see additional gains as limited since much of the reform was already priced in, and the Senate’s rejection of a provision that would expand income tax triggered concerns over Milei’s ability to eliminate fiscal deficits. A cobweb of capital controls and a weaker peso in parallel markets may also hinder foreign investment, they said.
Graham Stock, senior EM sovereign strategist at RBC BlueBay Asset Management:
The bill’s approval is a “very important milestone,” as it moves the “government a step closer to having some legislative underpinning for its reform program rather than relying solely on executive actions”
Move has “positive implications” for bond prices as it puts the fiscal adjustment on a more sustainable footing
“It is very important that the Lower House reinstates the personal income tax, both as a source of revenue for the provinces and as a signal that Argentina is returning to more normal public policy settings”
Kate Moreton, analyst at Columbia Threadneedle:
“It proves that Milei has some governability and that his reform story has legs, but I expect us to kind of top out where we are” in terms of the levels at which bonds are trading, given how much reforms were already priced in
“My base case is that we will still need a restructuring at some point”
“This is kicking the can down the road further, but I think there’s still a lot of of risk here”
Citigroup Inc. strategists led by Donato Guarino:
The bill’s approval marks a “bittersweet win” for Milei’s administration as it has been in the works for the last six months, but has been “constantly diluted”
Remains overweight on Argentina’s bonds and reiterates call to go long on notes due 2030
Stuart Sclater-Booth, portfolio manager for emerging-markets debt at Stone Harbor Investment Partners:
While watered down, the bill demonstrates that Milei and team can in fact pass legislation, which is “important for credibility with investors and with likely negotiations with the IMF”
“The passage of the bill was a necessary, but not necessarily sufficient condition for the Argentina recovery. There is still progress to be made on normalizing FX, improving domestic credit and generating growth”
While the reforms facilitate some foreign investment, the lack of a normalized FX regime still presents some obstacles for “meaningful FDI”
David Austerweil, deputy portfolio manager for emerging-markets at Van Eck Associates Corp.:
The bill’s “passage was largely expected and due to the many compromises needed to gain its acceptance, it will not generate material fiscal savings”
“We currently have no position in Argentine sovereign bonds. With the likely passage of the Omnibus bill, the expected good news is likely behind us”
The pace of the country’s reserve accumulation has slowed and “even turned slightly negative this month”
“At the current overvalued level of the exchange rate and low interest rates, exporters can finance inventories and wait to sell them at a cheaper exchange rate and so reserve accumulation will likely continue to underwhelm. This should increase expectations of another FX devaluation and add further pressure on international reserves”
“For us to become more constructive on Argentine sovereign bonds, the exchange rate would need to move to a floating regime that restores competitiveness and allows for competitiveness to be retained without the need to future one-off devaluations”
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Kevin Simauchi
Thu, Jun 13, 2024, 11:11 AM MDT3 min read
(Bloomberg) -- Investors welcomed congressional approval of President Javier Milei’s omnibus bill, saying it showed he can push through contentious reforms many see as key to getting Argentina’s economy back on track.
The president won just enough support to advance his landmark austerity package in the Senate early Thursday morning, following weeks of horse-trading and pushback from opposition lawmakers.
The vote confirmed many investors’ base case scenario, sending sovereign bonds higher. US-listed shares of Argentine companies and an exchange-traded fund that tracks the country’s stocks also climbed.
Still, some see additional gains as limited since much of the reform was already priced in, and the Senate’s rejection of a provision that would expand income tax triggered concerns over Milei’s ability to eliminate fiscal deficits. A cobweb of capital controls and a weaker peso in parallel markets may also hinder foreign investment, they said.
Graham Stock, senior EM sovereign strategist at RBC BlueBay Asset Management:
The bill’s approval is a “very important milestone,” as it moves the “government a step closer to having some legislative underpinning for its reform program rather than relying solely on executive actions”
Move has “positive implications” for bond prices as it puts the fiscal adjustment on a more sustainable footing
“It is very important that the Lower House reinstates the personal income tax, both as a source of revenue for the provinces and as a signal that Argentina is returning to more normal public policy settings”
Kate Moreton, analyst at Columbia Threadneedle:
“It proves that Milei has some governability and that his reform story has legs, but I expect us to kind of top out where we are” in terms of the levels at which bonds are trading, given how much reforms were already priced in
“My base case is that we will still need a restructuring at some point”
“This is kicking the can down the road further, but I think there’s still a lot of of risk here”
Citigroup Inc. strategists led by Donato Guarino:
The bill’s approval marks a “bittersweet win” for Milei’s administration as it has been in the works for the last six months, but has been “constantly diluted”
Remains overweight on Argentina’s bonds and reiterates call to go long on notes due 2030
Stuart Sclater-Booth, portfolio manager for emerging-markets debt at Stone Harbor Investment Partners:
While watered down, the bill demonstrates that Milei and team can in fact pass legislation, which is “important for credibility with investors and with likely negotiations with the IMF”
“The passage of the bill was a necessary, but not necessarily sufficient condition for the Argentina recovery. There is still progress to be made on normalizing FX, improving domestic credit and generating growth”
While the reforms facilitate some foreign investment, the lack of a normalized FX regime still presents some obstacles for “meaningful FDI”
David Austerweil, deputy portfolio manager for emerging-markets at Van Eck Associates Corp.:
The bill’s “passage was largely expected and due to the many compromises needed to gain its acceptance, it will not generate material fiscal savings”
“We currently have no position in Argentine sovereign bonds. With the likely passage of the Omnibus bill, the expected good news is likely behind us”
The pace of the country’s reserve accumulation has slowed and “even turned slightly negative this month”
“At the current overvalued level of the exchange rate and low interest rates, exporters can finance inventories and wait to sell them at a cheaper exchange rate and so reserve accumulation will likely continue to underwhelm. This should increase expectations of another FX devaluation and add further pressure on international reserves”
“For us to become more constructive on Argentine sovereign bonds, the exchange rate would need to move to a floating regime that restores competitiveness and allows for competitiveness to be retained without the need to future one-off devaluations”
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