02/10/2020

At an inflection point

Monthly Report 02/10/2020
Argentina: Monthly Report
At an inflection point
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The debt restructuring lost into oblivion. The optimism that followed the successful debt restructuring vanished, as exchange rate pressures are back at the spotlight. The 2021 Budget was far from causing a shift in expectations while the mid-September measures failed to stabilize reserves, leading authorities into making new announcements yesterday. The latest measures are a step in the right direction showing a different approach, though the economic stabilization will demand some signs of moderation for both fiscal and monetary policy.

The recovery is slower but still on track. As we expected, economic activity entered a much slower recovery phase in the 2H20. The latest official data showed very moderate monthly growth in July while private indicators and sector data suggest the rebound would have extended into September, though there are some clouds in the horizon.

Monetary financing has its limits. The monetary excess started to create inflation pressures despite widespread price controls and the exchange rate anchor. Against this challenging backdrop, next year’s financing program relies heavily on monetary financing, raising risks.

The fiscal strategy needs to be revised. The crisis calls for fiscal support to aggregate demand, but fiscal policy cannot play that role if the only source of financing is money printing. In this adverse context, a faster fiscal consolidation effort might prove to be the most powerful stabilization tool the government can show, allowing to ease the high inflation and devaluation expectations that are hurting the economy.

And the suggested trades are... Asset prices are clearly depressed, and any positive surprise could leave very significant returns. We like dollar bonds (GD30 and GD35) as their implied default probabilities seem very high, while we also place bets on equities through our SBS Acciones Argentina FCI fund, seeking to capture a very attractive entry point for mid-term investors. Moreover, the latest policy changes support demand for funds such as our SBS Capital Plus FCI that combine local currency bonds with an FX hedge through futures.
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