02/11/2018

Informe Mensual

Camino a la sustentabilidad, bajo amenaza populista 02/11/2018

Argentina: Monthly Report SBS

 

Headed towards sustainability, under populist threat

 

Versión en Español 

 

 

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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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