Former debt pariah Argentina to join flagship emerging bond index

Monday, 9 January 2017 00:25 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Argentina, a pariah among international debt investors until last year, will join JPMorgan’s flagship GBI-EM index group for emerging currency bonds following government measures to ease access to the country’s financial markets.

The GBI-EM Global Diversified index is tracked by investment funds managing $ 185 billion, and Argentina will have an estimated 1.16% weight when it enters at the end of February, JPM said in a note to clients late on Thursday.

That implies fairly significant inflow from index-tracking funds to Argentina which, according to JPM, will be the first country in four years to enter the GBI-EM.

The news will be welcomed by Argentina’s government which has struggled to attract investment, despite sweeping reforms by centre-right President Mauricio Macri who took office at the end of 2015 with a vow to revive an economy in crisis.

Argentina fought a long legal battle with hedge funds over unpaid debt resulting from its record $ 100 billion default in 2002, which locked it out of global debt markets for years.

That dispute was settled last year. But while Macri has also floated the peso, removed capital curbs and brought Argentina back to the global bond market, it remains mired in recession with 40% inflation. Macri sacked his finance minister last month. New Treasury Minister Nicolas Dujovne took fresh steps this week to revive investment, removing a mandatory 120-day holding period for foreigners wanting to repatriate funds from Latin America’s third biggest economy.

JPM said peso-denominated bonds maturing 2021, 2023 and 2026 would join the GBI-EM “following a series of measures implemented recently to facilitate access to the FX and government bond market for foreign investors”.

Argentine debt will also be eligible for inclusion in JPM’s GBI-EM (Narrow) Diversified and the GBI-EM Broad Diversified series with estimated weights of 3.34 and 0.78% respectively, JPM said.

“(Index entry) is a significant move for Argentina and it will help bring down borrowing costs. It will also provide support for the peso,” said Jakob Christensen, head of emerging markets research at Danske Bank. “It’s been cut out of financial markets for many years so it hasn’t been able to leverage itself as (much) as other emerging markets, which is a good thing.”

JPM now plans to assess Argentine peso non-deliverable forwards for eligibility to enter its ELMI Plus index of emerging currency short-term rates. If the currency derivative meets liquidity and transparency criteria, Argentina will have a 1.4% weight in the ELMI Plus.

Separately, Argentine stocks could also re-join the most widely used emerging equity benchmark from MSCI, which is tracked by around $ 1.4 trillion in funds.

MSCI had moved Argentina out of that index to the smaller frontier market index in 2009 due to curbs on capital movement but it has proposed reclassifying the country as an emerging market again, with the outcome due to be announced in June.