Argentine data reform efforts convincing markets

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

BUENOS AIRES, Argentina — Nine months after Argentina became the first nation to be censured by the International Monetary Fund for misreporting its economic data, the nation's pledge to fix its inflation index is winning over the fund and helping propel the biggest drop in borrowing costs in three and half years.

The extra yield that investors demand to hold Argentine debt instead of U.S. Treasuries has tumbled 2.75 percentage points since Sept. 16, when Economy Minister Hernan Lorenzino traveled to Washington for talks with the IMF and speculation emerged the nation would settle arbitration suits filed with the World Bank. Over the same span, the yield gap for developing nation government bonds increased.

IMF Managing Director Christine Lagarde, who warned in September 2012 that she may have to pull a red card on Argentina, in reference to an expulsion in soccer, recommended this week that the nation be given more time to introduce a new consumer price index, said two IMF board officials. In the past five weeks, Lorenzino negotiated the settlement of $677 million of arbitration claims and discussed the disbursement of $3 billion of loans with the World Bank through 2016.

"It's an apparent improvement of relations between Argentina and the international community, and that by definition has to be good news," Alberto Bernal, head of fixed- income research at Bulltick Capital Markets, said in a telephone interview from Miami.

Argentina is also weighing whether to allow the IMF to resume reviewing its finances, La Nacion reported Thursday, citing unidentified officials in the government and the lender.

Norma Madeo, a spokeswoman at the Economy Ministry, declined to comment on the content of Lagarde's report and on the possibility of allowing an article IV review. IMF spokesman Raphael Anspach declined to comment on Lagarde's report.

The IMF said in an emailed statement it will tentatively meet Dec. 9 to discuss Lagarde's report. Under IMF rules, the next step after censure is to declare the country ineligible to borrow from the fund's general resources.

Lagarde said in an interview with CNN en Espanol on Nov. 10 that progress is being made with Argentina and she hopes the nation delivers on its commitment.

Over the past six months, the IMF has had a "very intense dialogue" with Argentine officials and was able to ask many questions about the new index, Alejandro Werner, director of the IMF's Western Hemisphere Department, said at an emerging markets exchange event at Bloomberg's headquarters in New York.

"Clearly the Argentines have been working with the fund and have demonstrated much more concern than they've let on publicly about resolving the problem," said Claudio Loser, a former IMF director who now heads research firm Centennial Group Latin America. "I don't think the fund made this decision lightly."

Since former President Nestor Kirchner replaced senior officials at the statistics agency, known as INDEC, in 2007, private economists have questioned official data, and estimated inflation is more than double the rate reported by the government.

Consumer prices rose 10.5 percent in September from a year earlier, INDEC said Oct. 15. That compares with a 25.4 percent increase estimated by private economists in a report issued monthly by opposition lawmakers.

Credit Suisse Group said in a report Thursday that the new index may be put into place in the first half of 2014 and may begin to show a faster increase in consumer prices. Official inflation may accelerate to 13.4 percent next year and 15.8 percent in 2015, the Zurich-based bank said.

Relations between the IMF and Argentina deteriorated after the South American nation defaulted on a record $95 billion in 2001. Kirchner, President Cristina Fernandez de Kirchner's predecessor and late husband, blamed the IMF "dictatorship" for leading the country into an economic crisis that culminated in the default.

Since paying back $9.8 billion of debt to the IMF in 2006, the government has yet to allow the fund to conduct an article IV review of its finances as it does in other member countries.

Argentine dollar debt has returned 16.7 percent this year, the second most in emerging markets after Belize, according to data compiled by JPMorgan. Bonds have surged since August primaries signaled Fernandez wouldn't have enough support to seek a third term. The results were confirmed in Oct. 27 congressional elections.

While some investors are starting to speculate that Fernandez will be replaced by a more market-friendly successor, her recent inroads with the IMF and World Bank may be an attempt to shore up reserves that have sunk 25 percent this year to $32.6 billion, the lowest in six years, according to Juan Pablo Fuentes, an economist at Moody's Analytics Inc.

Argentina has space to negotiate with the IMF, and any new index won't mean inflation statistics will immediately reflect levels reported by private economists, Fuentes said.

"This is going to be a negotiated solution that falls somewhere in the middle with a very gradual adjustment," Fuentes said in telephone interview from West Chester, Pa. "The IMF isn't interested in severely punishing Argentina."

While questions remain about how the government will backdate prices and whether it will be willing to pay investors for lost profits from misreported data, there is progress being made in addressing the issue, Bulltick's Bernal said.

"There are still lots of things left to fix," Bernal said. "But the important thing is, this marks the end of the deterioration of relations."

_ With assistance from Sandrine Rastello in Washington, Katia Porzecanski in New York and Eliana Raszewski in Buenos Aires.