17/04/2018

Still a rocky road ahead, but the worst might be behind

The worst might be behind, but challenges do remain. After policy hesitation in Argentina exacerbated the negative effects of increased global ... 17/04/2018

The worst might be behind, but challenges do remain. After policy hesitation in Argentina exacerbated the negative effects of increased global uncertainty, the local economic and political situation seems to have stabilized in the last couple of weeks. First, BCRA´s recent actions suggest a more prudent and decided approach to monetary policy implementation, recovering some anchoring of inflation expectations after the December-February inflation target fiasco. Second, a slightly higher inflation and weaker currency will probably help to keep positive economic growth momentum and fiscal consolidation on track. Third, pension reform and tariff adjustments have constituted a political toll, but fiscal accounts are benefiting from them already, increasing the credibility of the official deficit reduction path. Forth, the government has lost popularity but this has occurred among the most loyal voters, while the poor continue to be broadly supportive of a government that delivers basic infrastructure, partial security improvement, and marginal employment growth. Fifth, the government has kept its reform commitment, passing the capital market reform and the de-regulation decree as Congress law, while restarting negotiations on the labor market reform.  


Decelerating but keeping positive growth. The economy grew 2.9% last year and preliminary data this year remain encouraging. Investment continues to show a healthy growth pace, leading the economic expansion along with durable goods demand. A more restrictive fiscal stance and still high real interest rates explain some deceleration in the short term, adding to the negative consequences of a large drought affecting agriculture production. Growth will slowdown to 2.6% this year, but solid investment demand and improvements in sustainability should create the conditions for positive economic growth to be more protracted than in the past.


Rebuilding inflation targeting guidance. February inflation simply worsened January´s already bad outlook, confirming a scenario of high inflation in the first semester of the year, and a major challenge for the BCRA. This reality forced the monetary authority to halt its rate cutting cycle, and to take a more hawkish stance seeking to rebuild the confidence lost since December. Nevertheless, the scratched inflationary commitment of the monetary authority and the associated higher expected peso volatility anticipate wilder inflation expectations for the time being, warranting continued intervention in the FX market to prevent higher peso and inflation volatility.


Fiscal consolidation continues gradual but firmly while financing will be looking inwards. In February, public accounts showed another primary deficit reduction of -24.4% y/y and steady fall in primary spending adjusted by inflation (-5.6%). Thus, the government continues to show that its fiscal strategy remains firm, reinforcing prospects for compliance with the official deficit reduction path, with a primary imbalance projected to reach 2.2% of GDP by the end of the mandate next year. As noted, the high initial fiscal deficit together with the gradual approach chosen by the authorities demands that fiscal consolidation should remain a non-negotiable objective, particularly in the current global backdrop. Meanwhile the Ministry of Finance has anticipated that financing remaining for the year will be mostly done in local markets to moderate the impact of unsettled global markets. A current account deficit projected to reach 5.6% of GDP this year remains the main vulnerability.


And the suggested trades are: For ARS portfolios, short term Lebacs continue to reign. However, for those seeking some degree of diversification, provincial Badlar floaters (BCD24 y BCD22) seem a good value proposition in a context where a soaring credit demand will put increasing pressure on banking liquidity. In the hard currency curve, even in an environment where global rates continue to rise but gradually, we see value in spread terms in the belly of the curve, particularly in Discounts. For those looking for more defensive positions, AA21 and AY24 seem to offer the best options around. We still believe current levels in the local equity present another opportunity to position in expectation of a potential reclassification to Emerging Market by MSCI in May. We continue to hold a constructive view on utilities and the banking sector. We still see growth potential in CEPU, and see value in PAMP and YPF. The incoming tender offer from DGCE could be a good opportunity as well. Among banks, we believe GGAL should outperform due to its ability to profit from its credit card penetration.


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