Luis Caputo is getting frustrated with the bond market.
He’s guarded about it—he has to be. After all, he’s the finance minister of Argentina, the biggest bond issuer in the developing world, which means he’s constantly hitting up investors for cash. But the tension comes out deep into an hourlong interview in his Buenos Aires office. Why is it, the former Wall Street banker wants to know, that the investing community doesn’t appreciate all that the country has achieved?
Eighteen months have passed since Argentina shed its status as an international pariah mired in bond default litigation. There was the elimination of currency controls, the stabilization of the peso, the revival of the mortgage market, the reduction of the budget deficit. Sure, investors have given some measure of respect to the government—after all, they were willing to fork over $2.75 billion in a sale of 100-year bonds with a 7.1 percent coupon in June—but the yields they demand remain high, the credit rating is low, and the country’s stock market is still in the same class as far-flung places such as Mauritius, Tunisia, and Bangladesh.
“I don’t understand why people aren’t more conscious of the big change that’s going on here,” Caputo, 52, says. And then he flashes a bit of that swagger that Argentines are so well-known for throughout South America. “I’m convinced Argentina will be the star of emerging markets for the next 20 years,” he says. “I don’t mean to be cocky, but it’s very evident.”
Perhaps. But 20 years is a long time. And investors have much more immediate concerns, such as the sluggish pace of the economic recovery, the stubborn nature of double-digit inflation, and a budget deficit that, while shrinking, is still large. “The fiscal numbers are the main concern,” says David Robbins, a New York-based money manager at TCW Group Inc., which owns Argentine dollar bonds and remains bullish on the debt despite a heavy issuance calendar next year and high inflation. “The most recent growth numbers are encouraging, and this quarter it looks like growth numbers will be very strong, and that should create more positive momentum.”
Most important for investors is the specter of ex-President Cristina Fernández de Kirchner. If Caputo and his boss, President Mauricio Macri, represent the globalist, free-market approach that’s sweeping much of the region once again, Fernández is the embodiment of the kind of populist, interventionist policies that foreign investors have loathed. “The old ways that have doomed this country over the last 70 years aren’t coming back,” Caputo says. “Cristina isn’t coming back.”
And yet Fernández is suddenly somewhat resurgent two years after leaving power, discredited by the economic disarray and claims of corruption she left behind. In August she garnered more votes than Macri’s candidate in a primary that’s seen as an accurate prediction of how candidates will perform in October’s congressional elections. Whatever happens, polls and those primary results suggest she’ll land one of the three provincial seats up for grabs in the Oct. 22 election. Once ensconced in the Senate chamber, Fernández would no doubt be a thorn in Macri’s side. How many votes she receives may signal her chances of rebuilding her Peronist party movement and even running in the 2019 presidential election.
In a country where heterodox policies have been embraced for so much of the past half-century, this triggers a disconcerting thought for investors: Is the Macri approach just a short-term blip on the road back to politics as usual? It’s the kind of concern that makes it impossible for them to accept the same yields on Argentine debt that they take from a much steadier neighbor such as Chile. Argentina pays 5.7 percent on 10-year dollar bonds, whereas Chile pays 2.8 percent. Caputo calls Brazil—at 4.5 percent—a more realistic yield target for Argentina to pursue for now, but he’s adamant that the hand-wringing over Fernández is overblown. “We can’t lose track of our economic goals, of our fiscal goals,” he says. “We have to get the economy to keep growing and inflation to keep slowing.”
The economy has contracted in three of the six quarters Macri has been in office, as spending cuts and the plunge in the peso after currency controls were lifted weighed on growth. But the country is finally seeing the bruises heal from that first financial shakeup and reaping the returns, as gross domestic product climbed out of its slump and expanded 2.7 percent in the second quarter, driven by private consumption and investment spending. That should bode well for Macri’s party in the October election.
Caputo cuts a relaxed, confident, and studious image in his fifth-floor office at the economy ministry. The collar on his white oxford is unbuttoned, a few ties are strewn across a coffee table—“I put them on when I have an important meeting, not that this isn’t important,” he says, laughing—and stacks of data printouts are piled up on almost every inch of his desk save the corner, reserved for a picture of him with his wife and six children. Just across the street is the Casa Rosada, the presidential palace Eva Perón made so famous.
When Macri took up residence there almost two years ago, he tapped Caputo to form part of his crack team of former Wall Street bankers tasked with cleaning up the country’s financial mess. Joining him were alums from Goldman Sachs Group, Morgan Stanley, Barclays, JPMorgan Chase, and Deutsche Bank. Caputo did stints at those last two firms, running trading desks for a decade and then overseeing Deutsche Bank’s Argentine unit. Eventually he left to manage Argentina-focused hedge funds in Buenos Aires.
Caputo goes way back with the Macri family. He did his prep school studies in the same all-boys’ Catholic institution that Macri and former Finance and Treasury Minister Alfonso Prat-Gay attended, in Buenos Aires. Caputo’s cousin, Nicolás, became close friends with the president there. He then earned a bachelor’s degree in economics at the University of Buenos Aires and a doctorate in economics and finance at the Pontifical Catholic University of Argentina.
Mission One for Macri’s Wall Street crew back in December 2015 was ending the country’s decade-long legal battle with billionaire hedge fund magnate Paul Singer. Singer’s New York fund, Elliott Management Corp., held a large position in the bonds that Argentina had defaulted on 14 years earlier and was refusing to accept the pennies-on-the-dollar restructuring deal that most other creditors took. Fernández had refused to offer him more, creating an impasse that kept the country locked out of international credit markets for more than a decade.
Caputo says he loved every second of being in the negotiations and gets animated reflecting on those heady times. Flashing a wide grin as he leans back in his chair, he calls it “by far the best, most adrenaline-filled moment” of his career.
In the end, Argentina’s deal wasn’t cheap—the country handed over $4.65 billion in cash to Singer and a handful of other holdout creditors—but it achieved its goal. Singer agreed to the deal, and two months later Argentina started the process of becoming a normal country again, selling its first foreign bond since 2001 to pay the claim. “It’s a treasure I hold, having been able to end that issue,” he says. “The only thing I regret is to not have taken notes. … It’s much more incredible than what you can imagine.”
Eleven other overseas sales have since followed, raising some $30 billion in global sales; more than $20 billion has also come locally. Those tallies put the country ahead of every other issuer in emerging markets. The ability to sell so much debt in so short a time is in part a testament to Caputo’s credibility—not to mention the rest of the economic team—but it also highlights some key weaknesses.
Argentina’s overall budget deficit is estimated to equal 6.1 percent of GDP this year, a staggering figure that requires it to borrow large amounts of money. And because its domestic debt markets are still fragile after Fernández ravaged them by manipulating inflation data (Macri’s team had to reset the figures), the government has to get much of that financing from abroad. That’s a dangerous formula for any country, let alone one with a long history of defaults. “Every time I turn around, there’s a new issue,” says John Peta, head of emerging market debt at Old Mutual Global Investors in London, who’s nonetheless bullish on the country’s bonds.
Miguel Kiguel, who was in Caputo’s shoes selling Argentine bonds as undersecretary of finance in the ’90s, says the key is to expand the local market. “They’re not selling so much debt because they like to; they do it because they need to,” he says. “We have a very small market. The banks are small, the funds are small, and that’s a vulnerability that forces us to go to the international market.”
Caputo shares this concern and says he expects a capital markets law to be approved in Congress after legislative elections. The hope is to boost the local market by making it easier for issuers to raise financing and more attractive for investors to buy local securities. He also plans to shift more issuance to the local market next year.
The $5.3 billion in issuance left this year will be roughly split between the local market and the nondollar global market, he says, adding that he won’t prefinance 2018 debt before monetary tightening in the U.S. Argentine yield spreads should keep compressing amid accelerating global growth and gradual rate hikes by the Federal Reserve, Caputo says.
Overall borrowing needs should fall in 2018 from this year’s $40 billion because the budget gap will decline, he says. The government aims to trim the deficit—as measured by a narrow gauge called the primary deficit—by about 1 percentage point of GDP each year. “Of all the goals, the deficit is the nonnegotiable one,” Caputo says.
It will have to keep coming down if he’s to get the additional credit rating upgrades he so craves. The nation last got an upgrade in May 2016, and at B, the debt remains firmly in junk territory and below that of major peers in the region. Caputo is perplexed by this but adamant that further recognition will come soon. “This is a historic, multidecade change,” he says. “We’re only in the first year and a half.”
Or so he hopes.
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