11/05/2019

Argentina: Monthly Report SBS

Emergencies leave no time for structural reforms 11/05/2019

Argentina: Monthly Report SBS

 

Emergencies leave no time for structural reforms

 

 


 

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Tough times demand tough measures. Less than 6 months into the first round, the economic rebound has not yet arrived and real incomes remain depressed. IMF targets leave no room for anti-cyclical fiscal policy and there is no space for a credit boost a la 2017. Against this backdrop, the best the government can do is accept that economic conditions will be adverse and focus on easing exchange rate pressures to avoid entering a vicious cycle.  

Paying the costs of political risk. Activity figures for December-February showed that the economy could be stepping out of recession. However, financial volatility spiked in March and seems to have put the economic recovery at risk. Although growth will be lifted by the soybean harvest and wage renegotiations, we believe conditions are not set for a significant boost and expect only a timid rebound.

The BCRA modifies its scheme, again. March inflation dealt a serious blow to the task of rebuilding expectations the BCRA had initiated in September. The monetary authority seized the opportunity and announced several changes to its program, mainly aimed at enhancing its control over the FX market. Although April inflation would remain high, some factors suggest the situation could improve in May.

The fiscal consolidation loses momentum, investors fear debt sustainability. March’s fiscal balance allowed the government to meet its’ first quarter target, although it also showed the recession continues to affect fiscal dynamics. Instead of introducing further spending cuts in the wake of falling revenues, the government announced extra spending measures that pushed it further away from the zero deficit target. Meanwhile, market action in April reminded authorities that the fiscal consolidation is an urgent objective, with debt sustainability demanding a 2% of GDP primary surplus in the medium term.

And the suggested trades are... Looking at the balance of risks to the debt profile, we like instruments allowing regional diversification such as our Franklin Templeton SBS Latam FI USD FCI, at least until the political scenario clears. Among local currency bonds, we continue to prefer short-end inflation linkers (X30G9 - X30S9) and reiterate that short-end Lecaps still do not compensate risks to our inflation outlook. Regarding equities, we continue to prefer defensive bets on energy and utilities with CEPU and TGS as our top picks followed by YPF and PAMP amid their liquidity. We remain underweight banks relative to the benchmark, with GGAL as our top pick among the sector.

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