06/03/2020

Walking up the hill

Monthly Report 06/03/2020
Argentina: Monthly Report
Walking up the hill
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Global risk, domestic uncertainty. The spread of the Coronavirus substantially heightened global risk just as the government is about to launch a debt restructuring offer. A closer relation with the IMF could improve confidence and reduce holdout risk while lowering the probability of tail risk scenarios. Still, the fiscal path is unambitious, thus anticipating the initial offer could be worse than markets are pricing.

Too early to expect a rebound. Activity remains stagnant and shows high volatility, a reasonable dynamic under significant uncertainty. The government’s bet on a demand impulse could lead to a timid rebound by the end of 2Q20, though expectations need to improve substantially for that scenario to materialize.

The risk of a transitory stabilization. The BCRA seized the opportunity of falling inflation to continue easing. However, confidence remains low and the economic program is still unclear, leading us to expect these months of disinflation to be followed by an acceleration.

An unambitious fiscal path ahead of the initial offer. The year did not start on the right foot in fiscal terms and this led the government to reduce pensions and look for additional revenues. The fiscal path presented by authorities does not look very encouraging ahead of debt negotiations, though we consider debt sustainability will be more reliant on reserve accumulation than on fiscal consolidation.

And the suggested trades are... The latest signs suggest the initial restructuring offer could be worse than markets are pricing. Therefore, we wait for further information before going long sovereign dollar bonds and rather bet on high quality corporate debt such as Vista, Aluar and Irsa. Moreover, we are cautious on peso positioning amid monetary easing and difficulties to roll-over peso debt, and like to keep low exposure combining TB21,TX21 and our Frankilin Templeton SBS Argentina FI LC FCI. Finally, among equities we take long-term bets on TXAR and LOMA.
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