New year, same challanges

Monthly Report 08/01/2021
Argentina: Monthly Report
New year, same challanges
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All eyes on the election. At the start of the electoral race, the government aims at boosting demand to stimulate activity, a strategy that implies deepening the imbalances from an unfavorable starting point and risks having to be recalibrated ahead of the election.

A classic of every odd year. Activity continued to recover in October-November as restrictions were further eased and consumption patterns continue to gradually normalize. The pre-electoral stimulus would generate a cyclical improvement, making room for the government to show high annual growth figures on the back of a high carryover effect from 2020.

Inflation continues to accelerate. Inflation accelerates consistently with monetary issuance gaining weight as activity normalizes, precautionary money demand eases, negative real rates consolidate, and the FX anchor loses its grip on inflation expectations. The current trend would extend into 1H21 and the key to achieve the desired disinflation will be to outline a consistent intertemporal fiscal path to substantially reduce monetary financing from the BCRA and anchor expectations.

A fiscal objective that pressures upon the financing program. The latest fiscal data showed an improvement in recent months, though the 4.5% of GDP primary deficit goal adds pressure on the financing program, as it forces higher monetary and debt financing. There is some room for a substantially lower deficit, though this road might clash with the electoral objectives.

And the suggested trades are... The pragmatic turn the economic team staged since October needs stronger signs of political support to fuel a genuine recovery for Argentine assets, which is why we rather place dollar bets through our SBS Latam FCI fund aiming to profit from the remarkable improvement in global financial conditions. Moreover, inflation continues to accelerate and short-term inflation expectations remain high, creating an ideal scenario for inflation linkers through our SBS Renta Pesos FCI fund.
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