June 30, 2017 / 2:33 PM / 3 years ago

UPDATE 2-Argentina steps up borrowing, spending ahead of mid-term vote

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By Hugh Bronstein

BUENOS AIRES, June 30 (Reuters) - Argentina has increased its dollar-denominated Bonar 2024 sovereign bond issuance to $4 billion, the government announced on Friday, as President Mauricio Macri boosts public spending ahead of a crucial mid-term election.

The bond was originally sold in 2014 for $3.25 billion with a 8.75 percent coupon. At the time the country was locked out of the international capital markets due to a debt default that was resolved last year, soon after Macri came to power in late 2015.

The president promised to “normalize” the economy after eight years of heavy trade and currency controls imposed by his predecessor, Cristina Fernandez, a free-spending populist who feuded with international investors and Argentina’s key farm sector.

But the wave of bricks-and-mortar investment promised by Macri has been slow to come and the economy is mired in inflation that, while slowing, remains above 20 percent.

Macri has increased welfare and public works spending ahead of the mid-term election four months from now. The vote will determine if he has the legislative clout to get market-friendly reforms through Congress in the second half of his term.

His success will influence his chances of being re-elected in 2019 as he tries to reintegrate Argentina into the global financial and trade system. Some glimmers of hope for the economy are beginning to show.

Argentina offered $2.75 billion of a 100-year bond this month that sold out quickly, and the Macri administration increased its overall 2017 foreign currency bond issuance target to $12.75 billion.

Investors should monitor how long the government continues financing its deficit by borrowing and spending, said Jay Newman, a private investor and former executive with Elliott Management, a hedge fund involved in a decade-long court battle settled last year over bonds Argentina defaulted on in 2002.

Former leader Fernandez, a standard bearer of the country’s Peronist movement, is running for the Senate in October.

“Macri had a great first year. But Peronism is still strong, unions are strong, and historical relationships and patterns die hard. If Macri is given eight years to really make changes, maybe there will be a paradigm shift,” Newman said.

“But it’s too soon to tell.”

Argentine industrial production turned positive in May, snapping a 15-month streak of declines. May economic activity numbers have not yet been released. The economy grew by 0.6 percent in April.

“We expect the cyclical economic recovery to strengthen and broaden with private consumption supported by rising real wages and public investment adding a significant impulse to growth,” Goldman Sachs said in a note to clients.

Reporting by Hugh Bronstein, Hernan Nessi and Walter Bianchi; Editing by Clive McKeef

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