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Friday, February 17, 2012 - 12:41

Argentina Surge in GDP Warrants Signals Rosier Econ Prospects


--End of Drought Raised Hopes for Soy Crop, Tax Revenues

BUENOS AIRES (MNI) - Argentine GDP warrants have surged by up to 47% over the past two months to become the country's hottest investment and a sign the economy is doing better than expected.

Prices of warrants, which pay holders once a year if economic growth exceeds government forecasts, plunged Dec. 15, after a coupon payment was made as concerns swelled about a slowing economy.

Warrants are the third most popular investment in Argentina now, trailing dollars and inflation-linked bonds in pesos. By geography, the holder are broken down as follows: Argentina 52%, Europe 24%, US 23%, and Asia: 1%.

There were $54.6 billion in outstanding GDP-linked warrants as of September 30, 2011, based on nominal value in dollars, according to Economy Ministry data. The warrants were issued in dollars, euros, pesos and yens.

The original nominal value was $62 billion but has been reduced as the central bank and other state entities buy them. For every $100 the warrants will pay $6.35, Dec. 15, 2012, or an estimated 9.35 pesos for each 100 peso in warrants, according to market estimates.

At the end of last year, capital flight was on the rise, foreign reserves were shrinking, investment stalled and state spending was rising faster than tax collections as President Cristina Fernandez de Kirchner started her second four-year term.

This put a dent in the fiscal and trade surpluses, while 25% annual inflation hung over the economy, eroding confidence and the warrant prices.

CFK responded by ordering mining and oil companies to repatriate 100% of their export earnings. Then she ramped up capital controls to stem a decline in reserves as worried investors dumped pesos to buy dollars and take them out of the country.

She then started to cut state spending by slashing subsidies for big companies and on all but the poor, preparing for an expected downturn in tax collections.

Economists started to warn that the economy would grow 3% or less in 2012 after 8% annual expansion between 2003 and 2011.

That would be lower than the 3.26% threshold for the government to pay holders of the GDP warrants, an estimate that spawned a wave of sales and sell recommendations.

Investor confidence in the warrants -- and the economy -- continued to sour in January as a drought hit the corn and soybean fields, threatening to reduce harvests of the country's biggest crops and exports. Corn and soybeans and their derivatives are a key source of revenue for the state and dollar inflows for hard-currency reserves.

This raised concerns that the country, which has not been able to readily tap global financial markets since a $100 billion default in 2001, could run into financing problems.

But then storms started blowing over the country in February -- actual rainstorms, not the financial kind.

"It rained just in time to dissipate concerns about the soybean harvest," said Ramiro Castineira, an economist at Econometrica in Buenos Aires.

At the same time, soybean prices started to rise and have gained 16% since a 14-month low in December, according to the Rosario Stock Exchange. This means that dollar inflows could be as strong this year as in 2011 even with a smaller harvest, Castineira said.

This turn of events has helped fuel investment in the GDP warrants, which mature in 2035 and pay every Dec. 15 based on the previous year's growth.

Prices of warrants in pesos shot up 47% to 14.46 pesos Feb. 15 from 9.85 pesos Dec. 15, while those in dollars climbed 32% to $70.4 from $53.30 over the same period.

Castineira said it is still too early to raise his GDP estimate for this year from 2%, but he admitted there is more likelihood he will.

Others are doing so already. A central bank survey of economic forecasters this month shows they expect the economy to expand 4.6% in 2012, up from a 4.2% estimate in January.

"The rains calmed nerves and improved estimates," said Agustin Trella, portfolio manager at Puente Hermanos, an investment brokerage in Buenos Aires.

Also helping are brighter expectations for Europe's economic recovery, which would bolster Brazil's economy, the biggest buyer of Argentine goods.

Improved confidence in Europe already is increasing liquidity in global markets.

"The European situation is not resolved but volatility has gone down in the market and there is a flow of liquidity looking for securities," Trella said, adding that international banks have started recommending Argentine GDP warrants again.

Another reason for the climb in the warrants is a move by the Argentine government to restrict the purchase of dollars starting last October. This has driven down interest rates, improving prospects for an increase in bank lending and corporate investment, said Juan Jose Vazquez, head of research at Bull Market Brokers in Buenos Aires.

Badlar, the interest rate that private banks pay for 30-day deposits of more than one million pesos, has receded to 14.25% annual from 18-19% in December, according to the central bank.

"This will stimulate lending and help spur economic growth," he said.

There are risks.

"A week ago, investors were worried about the drought," Trella said. "Now investors are looking at what will happen in Europe."

A slower-than-expected recovery or a worsening of the economies in Europe could spread to Brazil and Argentina.

Indeed, Castineira said Argentina's rate of economic growth is "not guaranteed" this year. "Europe may not recover as expected."

** Market News International - Buenos Aires **

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