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Reality forces an
abrupt adjustment. Under a global context of draining
liquidity and subdued risk appetite, investors punished Argentina for its
external vulnerabilities and forced a faster fiscal consolidation that
could put public debt back into a sustainable path. In this scenario, the
huge international support embedded in the IMF loan greatly lowers
liquidity risks and provides extra time for the government to move
forward on fiscal consolidation. Nevertheless, even an adequate policy
response that reinforces the compromise towards deficit and inflation
reduction does not guarantee a successful stabilization; as the road
ahead poses major real costs, possibly further damaging confidence and
feeding doubts around the political capacity to stick to the program in
an election year. Still, even as the government faces a tough reality, a
very weak non-Kirchnerist opposition and Cristina Fernandez´s high
rejection rates continue to be our main reason to expect President
Mauricio Macri to re-elect, keeping Argentina on the road to
sustainability.
Activity bearing the
stabilization cost. Activity data continues to confirm
that the recent financial volatility further deepened the negative
effects of the drought. Facing a sudden stop, the economy is closing its
large current account gap through an abrupt contraction in domestic
absorption. In this sense, tighter credit conditions and depressed real
wages froze consumption, while the exchange rate depreciation and
political uncertainty notably hurt investment. The following quarters
would continue to show declining activity, with the additional negative
impulse of a pro-cyclical fiscal policy. All in all, the recession should
extend into 2019 and the economy would grow at a modest 2% q/q (s.a.)
annualized pace ahead of the election, at least unless some extra boost
can finally revive domestic demand.
The BCRA aims at a
confidence shock. The confidence crisis that triggered
sharp exchange rate depreciation also fed significant inflation
acceleration in September, forcing a major monetary policy shift. Aiming
at a confidence shock, the BCRA began to implement its monetary targets,
with incipient indicators pointing that the new policy has set off to a
good start and is beginning to anchor nominal variables. Therefore, even
as we acknowledge recent events have created conditions for very high
inflation at least until March, we also believe the new strategy is
setting the groundwork for Argentina to experience a strong disinflation
process in 2019.
A challenging
target, but impossible is nothing. The fiscal restraint
continues to be the best economic result that the government can show
since 2017 and September data was no exception, pointing to an
over-compliance with this year’s targets. Ahead of next year, we see
major risks to the fiscal outlook and consider the conditions are still
not set for zero primary deficit, especially due to the lagged effects of
the depreciation on subsidy expenses, a longer than expected recession
and disinflation dynamics that should raise the burden of social
spending. On the back of the promised fiscal path and IMF financing, the
government would have some extra time to correct imbalances, allowing for
net debt to remain below 40% of GDP by the time the fiscal consolidation
is completed in 3 years.
And the suggested
trades are... It has become increasingly evident that
Argentina is at a turning point, navigating a costly stabilization path
but at the same time haunted by the possibility of a populist comeback.
Even as the clock keeps ticking in favor of Cambiemos and the opposition
still cannot profit from an ideal scenario to position ahead of the
election, confidence in the government is not recovering and we
understand that this demands a cautious stance. Regarding positioning in
hard currency bonds, we believe our FT SBS ARG FIXED INCOME USD FCI fund
can act as a vehicle with moderate duration to combine strategic bets on
the long end with a short/medium portfolio that simultaneously adds carry
and reduces interest rate risks. Among the peso bond universe, our
baseline scenario favors bets in the short end of the CER curve (AF19 and
A2M2) with inflation forecasts that give them significant advantage over
fixed rate instruments. In relation to equities, we continue to bet on
dollarized revenues and low debt levels, with ALUA, TXAR, CEPU and TGS
being our top picks among this space. Nevertheless, we favor the SBS
Acciones Argentina FCI as a vehicle to place these bets within a
diversified portfolio with active risk management that should better surf
volatility.
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