29/06/2018

Argentina: Monthly Report SBS

A more robust policy path, but at significant political cost 29/06/2018

 

 


 

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Facing the underlying risks of gradualism. Recent global market turbulences have exacerbated the negative effects of the unforced errors that the government has been making since December, stressing the local market and leading the authorities to seek IMF assistance. Confronted with the risks embedded in its gradual strategy, the government chose to stabilize local markets despite knowingly facing a significant political cost. And the international support to the chosen policy path was extraordinary, with an agreement that demands an extra fiscal effort and strengthens monetary policy, while it also allows the government to remain out of global debt markets for some time. More than ever, authorities have confirmed their understanding of the importance of fiscal consolidation, standing up to their word when they promised to accelerate fiscal adjustment in case the context demanded it. Overall, we are now facing a more robust policy path, though at a significant political cost.  

Sailing against the tide. The economy grew at a very fast pace in 1Q18, though it is now going through a recession. The toughest drought in decades was then combined with a severe flood, monetary policy became gradually restrictive despite lagging expectations, fiscal policy should continue to harden, real incomes are being eroded by inflation ac-celeration and the recent volatility spike was a final blow to confidence that may well challenge a solid investment demand. Against this backdrop, the IMF agreement significantly reduces risks and creates the conditions for the recession to be short lived. So, as long as the government manages to stabilize expectations, the reversal of some transitory factors and an improvement in most economic indicators could lead to an activity rebound as soon as 4Q18 and better economic performance during next year.

A revamped monetary policy framework. Federico Sturzenegger’s resignation to the BCRA, and the appointment of Luis Caputo as the new Governor, presents a unique opportunity to revamp a monetary policy framework that could well use an extra dose of credibility. This time, the new inflation targets are much better aligned with the rest of the economic policy, while some aspects of the IMF agreement significantly increase BCRA’s firepower. Even as the first policy changes proved effective, inflation continues to be challenging and credibility rebuilding will likely take time and be costly.

Fiscal consolidation accelerates, with financing risks off the horizon. Fiscal improvement since early 2017 has been probably the best policy achievement so far, and it is even picking up further pace. The primary deficit fell 71.3% y/y in May, reaching a cumulative 3.0% of GDP in the trailing 12 months that leaves the government very well positioned ahead of this year’s 2.7% target. Expecting an over-achievement of this goal, as long as the economic slowdown does not significantly hurt revenues the government could even have some extra room to pay 2019 expenses in advance, easing next year’s fiscal effort. In the meantime, the IMF agreement means the government would not need to return to debt markets at least until next year. Still, further structural reforms will be key to resume spread compression, especially in a global context that promises to turn even more challenging.

And the suggested trades are... The government’s conviction to continue moving forward with deficit reduction and its anti-inflationary commitment were under siege. In this respect, seeking IMF assistance seems a healthy choice and guarantees the sustainability of the chosen policy path. This, combined with some positive moves from the government and an opposition with no favorable policy results in the past and lacking alternative leadership, are our main reasons to expect a change in current trends. Still awaiting further signs of stabilization despite recent changes, we believe it is not yet time to increase risk exposure. Among sovereign hard currency bonds, we rather receive the short end of the curve and strongly believing duration should not exceed DICY in the belly. Awaiting increased peso stability before increasing duration in local currency, we consider short term Lebacs offer the best risk-return profile, while the short end of the CER curve (AF19) also remains attractive. Finally, the upgrade to Emerging Market status by MSCI should provide some oxygen and renew convictions for equity investors, favoring companies with ADRs that would make it into the indices. We favor GGAL among banks, YPF and PAM as attractive bets in the energy sector and CEPU and TGS among utilities.

 


 

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TRADING
Sebastián Cisa, CFA

Int.116 / scc@gruposbs.com

 

María Laura Segura
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Francisco Bordo Villanueva
Int.114 / fbv@gruposbs.com

 

Mauro Pérez
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INVESTMENT STRATEGY
Adrián Yarde Buller
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Damián Zuzek, CIIA
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Cristian Brau, CFA
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Emilio Muiña
Int. 120 / em@sbsfondos.com

 

Gustavo Giugale
Int. 132 / gg@sbsfondos.com

 


 

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