04/12/2020

The shift needs greater political support

Monthly Report 04/12/2020
Argentina: Monthly Report
The shift needs greater political support
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The pragmatic turn is put to the test. The economic team tried to reinforce its pragmatic turn with further fiscal and monetary signs, but obstacles are putting confidence in the new direction to the test. The key to overcome these challenges seems more related to proving political viability than to making bolder economic announcements.

A high-stakes strategy. Activity continues to recover as restrictions are further eased, yet the rebound loses momentum. Ahead of coming quarters, authorities are betting on cyclical factors to stimulate activity rather than seeking to revive investment, a high-stakes strategy that risks deepening the macroeconomic imbalances and may ultimately force the government to recalibrate variables ahead of the election.  

The key will be to anchor expectations. Inflation accelerates despite the exchange rate peg, price controls and frozen utility prices; suggesting the underlying pressures we emphasized during the year are getting ever stronger. Inflation would remain elevated in coming months and we believe the key to avoid a disruptive path is to show strong signs of fiscal and monetary consolidation under the umbrella of an IMF deal to lower monetary financing in a sustainable manner. 

A golden opportunity to lower the fiscal deficit. The large primary deficit is at the heart of economic pressures, but it was fortunately caused by a transitory decline in revenues and emergency spending measures. This means the economic team has a golden oppor-tunity to lower the primary deficit easing pressure on debt and money financing.

And the suggested trades are... The economic shift is already priced in and Argentine assets will only start a genuine recovery once the government shows strong political support for a road of economic stabilization, tilting us to place dollar bets through our SBS Latam FCI regional fixed income fund. Moreover, on the back of our macro outlook we reiterate the value of our SBS Capital Plus FCI and SBS Renta Pesos FCI funds as ideal vehicles to hedge against inflation and exchange rate risk.
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