June 6, 2016 / 3:11 PM / in 2 years

Argentina curbs short-term foreign inflows lured by Macri

BUENOS AIRES, June 6 (Reuters) - Argentina is pushing back against a tide of short-term foreign investment driven by confidence in center-right President Mauricio Macri’s reform drive and big profits.

The central bank is curbing foreign purchases of short-term “Lebac” securities, used by policymakers to soak up pesos and contain one of Latin America’s quickest inflation rates.

The move, combined with interest rate cuts of 375 basis points, is a sign of how much investors’ attitudes toward Argentina have changed since Macri took office in December. He quickly cut a deal with holdouts from Argentina’s 2002 default, ditched capital controls and let the peso float.

Nomura estimates some $400 million in portfolio inflows in the first 4 months of 2016, helping the peso hit a four-month high last month and prompting the central bank’s bid to contain the tide by limiting the Lebac purchases.

It now decides before each weekly auction which Lebac maturities will be open to investors settling through Euroclear, one of the biggest stock and bond settlement houses, and which can only be settled onshore.

In the last three auctions, the central bank has exercised the curbs on foreign purchases and has also cut interest rates to 34.25 percent from 38 percent.

“It was the right decision,” said Rodolfo Rossi, a former central bank chief. “Longer term are no problem but... this is obviously consensual interest rate arbitrage, which the central bank cannot tolerate,” he said.

Macri’s election marked the end of more than a decade of leftist and interventionist policies, and he has guided Argentina back to international capital markets.

After reaching an over $6 billion deal with holdouts in April, the government, provinces and companies have successfully placed billions of dollars in debt.

Investors were lured by eye-popping yields of 38 percent that the central bank began offering on Lebacs in April to help rein in inflation and ease the currency’s slide since a devaluation in December.

But the peso has since strengthened as the annual soy harvest and the debt issuance boosted demand for pesos.

The government now worries the peso’s rise could hurt exporters, and the central bank is wary of a surge in portfolio investment driving up asset prices and the currency too quickly.

“What we can’t allow is when two boys on Wall Street say, ‘Hey, let’s invest in Argentina’ ... and they put the cart before the horse,” central bank chief Federico Sturzenegger told Congress in May after unveiling the new curbs.

He said the measures are designed to ensure the currency strengthens “along with the real economy... and not at the pace of the financial world.”

Walter Molano, chief economist at BCP Securities LLC in New York, applauded the change and said Argentina “is not just a feed bank for all little piggies to come and eat at, and that is what Argentina could easily become.”

However, even if the central bank is successful in stemming short-term investments, it may struggle to redirect investors into longer-term bonds.

“The problem with foreigners is if you want to roll over your exposure to Lebacs, you are going to have to roll it over to 6-month paper and that is exposing you maybe to much more FX risk,” said Siobhan Morden, head of Latin America fixed income strategy at Nomura. (Reporting by Alexandra Alper and Jorge Otaola; Editing by Dan Grebler)

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