Argentina: Provincial Lineup

With the Province of Cordoba tapping the international capital markets, investors can chose from an impressive array of Argentine local government bonds. The Provinces of Buenos Aires, Chubut, Mendoza and Salta have bonds in the marketplace. The City of Buenos Aires also issued earlier this year. Moreover, a slew of other provinces are considering placing international debentures. In contrast to the wave of bond issues that were completed during the 1990s, that were backed by coparticipation receipts, the new issues are either full-faith and credit of the provincial governments or securitized by energy royalties. The rash of new issues confirms the fact that international investors are taking a new view on Argentine risk. The successful completion of the sovereign debt exchange, along with the high level of acceptance, allowed the country to recuperate its image in the eye of the international community. There are rumours that the credit rating agencies are considering raising Argentina’s sovereign debt rating. The recent rally of Argentine financial assets also affirms a more bullish outlook. Therefore, it may pay off to see what the country has to offer on the provincial side.

The economic history of the provinces was shaped by Argentina’s geography. Lacking the gold and silver deposits of Peru, Colombia and Mexico, the region was considered to be an empty backwater. It slowly gained significance during the 18th century as a hub of contraband, as English and French traders tried to circumvent the Spanish mercantile system by smuggling cheap manufactured goods into the rich mining towns near Potosi (located in present-day Bolivia). Using the extensive river system that drained the Altiplano, Chaco and Pampas, European entrepreneurs established the early trading posts that eventually developed into the various provinces. However, these rivers emptied into the River Plate, which flowed past the port of Buenos Aires. Therefore, it became the natural location for the customs house, and the main source of the colony’s wealth. Whoever dominated Buenos Aires controlled the customs house, as well as the provinces’ only source of fiscal revenues. Not surprisingly, the history of Argentina became a bloody struggle for the control of Buenos Aires—a process that still goes on today. In order to stop the bloodshed and restore order after years of civil war, the country established a system of coparticipation—whereby each province received a percentage of federal tax receipts. Unfortunately, their dependence on coparticipation led most of the provinces to neglect their own tax collection efforts. In 2002, the deficiency was brought to light when a sovereign debt crisis forced the government to carve out two important sources of coparticipation funds, namely export levies and a check debit tax, thus leaving the provinces in a pinch. Provinces with large populations and industrial complexes, such as Buenos Aires, Cordoba and Santa Fe, supplemented their coparticipation funds with property, automobile and income taxes. Provinces with large hydrocarbon deposits, such as Mendoza, Salta, Neuquén, Chubut, Tierra del Fuego, Santa Cruz and Formosa, supplemented their coparticipation funds with energy royalties. However, the vast majority of the other 26 provinces found themselves in dire straits, with little access to government funds or the capital markets. Fortunately, the City of Buenos Aires was never part of the coparticipation arrangement. As the site of the customs house, it benefited from the ancillary port activities associated with managing the country’s trade flows. Hence, it developed a long tradition of operating a robust tax collection system.

Understanding the natural characteristics and economic development of Argentina allows investors better insights into making selections from the provincial line-up. The top of the list is naturally composed by the country’s major energy producers, such as Chubut, Mendoza and Salta. The bond issues from Chubut and Salta are directly backed by hydrocarbon royalties, principally oil and gas. Their bonds yield between 8 ½% to 10%+. These credits are followed by the City of Buenos Aires, which has a rich tax base. Its bonds yield roughly 10 ½%, and the rear is brought up by the Provinces of Buenos Aires and Cordoba. The latter debenture was recently issued at a discount to the Province of Buenos Aires, even though Cordoba does not suffer from the same burgeoning payroll and social obligations. This is one of the reasons why the bonds from the Province of Cordoba rallied so much after they were issued. With the Argentine Discount bonds trading at a yield of 10.5%, investors can assess the line-up of relative values, and the trajectories the various bonds will take after the country’s debt credit rating is upgraded.