03/07/2020

The clock is ticking

Monthly Report 03/07/2020
Argentina: Monthly Report
The clock is ticking
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Time for something new. Activity has collapsed, debt negotiations remain unresolved, the fiscal gap is growing at tremendous pace and money printing is the only source of net financing. The economic outlook is subject to sizable risks and the lack of program freezes investment, limiting the potential recovery to a mere cyclical rebound. Argentina clearly needs a new plan, but will the government make a U-turn? 

The government at a crossroads. Activity took a historic nosedive in the first month of confinement. Even as numbers showed some improvement in May, everything points to a very gradual recovery during the second semester. Authorities need to come up with a plan to resume production without taking excessive risks on the sanitary front, though this “magical” solution has not yet presented itself. 

The historic depression as an unexpected ally. High frequency inflation continues to confirm that the impact of the depression outweighs the effects of the outstanding monetary expansion. Yet, monetary pressures are sizable anticipating a sharp inflation acceleration in 2H20, calling for a stabilization plan than can at least mitigate some of the damage. 

The budget deficit soars amid the crisis and printing presses are running at full speed. The budget deficit is growing at great pace as tax revenues plummet and social spending escalates, with fiscal figures from April and May resembling those of December. Debt negotiations remain unresolved and domestic financing is barely enough to roll-over peso maturities, leaving money printing as the main source of financing. 

And the suggested trades are... The economic Outlook is subject to sizable risks, tilting us into taking a somewhat more defensive stance and raise dollarization levels. We like our SBS Renta Mixta FCI fund to bet on EM spread compression and believe our SBS Renta Pesos FCI and SBS Capital Plus FCI funds are very attractive portfolios designed to capture our views on the FX and money markets.
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