An initial bet towards a moderate road

Monthly Report 03/01/2020
Argentina: Monthly Report
An initial bet towards a moderate road
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The first steps were constructive. The initial moves of the new government showed signs of political and economic moderation. Authorities moved closer to other political spaces and announced some measures to attack urgent matters without deepening macroeconomic imbalances. Even as many uncertainties remain and the strategy is exposed to sizable risks, we highlight that the first steps were constructive.  

Seeking a demand push. Authorities believe they can reignite activity by stabilizing the economy and boosting demand through transfers to low-income households. Nevertheless, the relief will be financed through higher taxes, discouraging both savings and investment. Against this backdrop, consumption should rebound without import acceleration and activity could stabilize by mid-year.

The social pact cannot replace monetary policy. From the very beginning, the new BCRA stressed that there is limited room for monetary financing and showed some continuity, though it also distanced from the previous administration by favoring lower real rates. The new government seems to aim at a disinflation with the “social pact” acting as an anchor, though success will actually depend on policy consistency.

The fiscal course remains unchanged, new reprofiling eases pressures. The first fiscal announcements were higher taxes and some changes to primary spending that should significantly improve the fiscal position. Meanwhile, authorities decided to reprofile USD Treasury Bills again to gain some extra degrees of freedom while managing to successfully roll-over the bulk of peso debt maturities, setting the groundwork for a scenario with lower needs to resort to money printing.

And the suggested trades are... Among hard currency sovereign bonds, we continue to like PARY and DICY, while we remain out of the Global curve as it seems rich relative to our baseline. Regarding peso denominated bonds, our bet on short-end inflation linkers (A2M2 and TC21) remains attractive while we like our SBS Gestión Renta Fija FCI to position on corporate debt. Finally, lower corporate financing costs and a better outlook for economic activity should favor bets on equities through our SBS Acciones Argentina FCI.
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