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Another
stabilization attempt. Under a more challenging backdrop for
emerging markets, investors punished Argentina for its high external
vulnerability. This triggered a confidence crisis that led to a sharp
peso depreciation and weakened debt sustainability, forcing authorities
to frontload their fiscal consolidation effort and seek further IMF
assistance. Categorically reinforcing the international support for
Argentina, the revised agreement with the Fund will provide extra time so
that the government can launch a new economic program to correct macro
imbalances in the least traumatic way possible. Despite significant
external support, Cambiemos will face a major challenge ahead of the
elections, having to accelerate the fiscal adjustment with damaged
approval ratings and just as the economy is entering another recession.
Across the sidewalk, the opposition remains weak and unable to present a
viable alternative to the government, this being our main source of hope
to expect a re-election of President Mauricio Macri. Still, the political
scenario for the government seems more challenging than ever.
Growth under the
siege of macro adjustments. Latest activity data showed
the recession is becoming deeper, with the outlook for the following
months anticipating an ever harder blow. In a lethal combo, wages would
be defenseless against a notable inflationary acceleration, a restrictive
fiscal policy should turn even tougher and investment would suffer a
double punch from financial instability and political uncertainty. The
combined effect of all this factors should overweight the cushion of
increased exports, creating the conditions for GDP to fall both this year
and the next. Still, we expect the economy to begin a rebound with the
soy harvest in 2Q19, possibly growing at a 3.0% q/q (s.a.) annualized
pace ahead of the election.
A fresh start for
monetary policy. The sizable peso depreciation and increased
financial volatility fueled high inflation in August and a significant
acceleration in September. This completely changed the outlook for the
BCRA, that under new management decided to abandon inflation targets and
will now seek to decelerate monetary aggregates growth by keeping the
monetary base constant. The lags under which monetary policy operates
leave little hope that the outlook can improve during the rest of this
year, though conditions indicate that we could see a strong disinflation
in 2019.
Fiscal consolidation
accelerates, with huge international support. Fiscal
restraint continues to be the best economic result that the government
can show since 2017, with improving prospects. In August, the primary
deficit fell 68.75% y/y in real terms and reached 2.5% of GDP in the
trailing 12 months, meaning that this year’s fiscal target is almost
accomplished. Nevertheless, this was not enough to ease investor concerns
and now the government will target zero primary deficit in 2019 on the
back of higher export taxes. Almost eliminating external financing needs,
IMF funds will provide extra time to correct imbalances, thus allowing
net public debt to converge below 40% of GDP by the time the fiscal
consolidation is over in 3 years.
And the suggested trades
are... Financial stress cornered the government into
having to accelerate the correction of the main macroeconomic imbalances,
leaving Argentina at a turning point. Even as we are much closer to
finally setting the bases for long-term sustainable growth, authorities
are also imposing a very hard stabilization program that risks derailing
the political strategy despite the opposition remains weak. In this
context, we still expect a change in current trends and remain
constructive, though waiting for reinforced confidence in the government
before adding risk. Among sovereign hard currency bonds, we suggest
positioning in the short end and the belly of the curve, anticipating
that it could recover some of its slope in a scenario where liquidity
concerns have significantly declined. In the local currency space, we
like the short end of the CER curve (AF19 and A2M2) as a way
of capturing very high inflation in coming months, while we also see
value in Badlar floaters (AM20 among sovereigns and BDC24 for provincials)
after the BCRA launched a hard monetary program. In relation to equities,
we suggest positioning in companies in the export sector as well as those
with dollar denominated revenues and low net debt. ALUA and TXAR stand
out in this regard, CEPU and TGS are still strong bets in the energy
sector and we believe it is time to increase exposure to BYMA and lower
positioning in the top 4 banks.
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