20181204-法国巴黎银行-Argentina__The_problem_of_the_Leliqs_and_financial_outflows_12页_1010kb

Argentina: The Problem of the Leliqs and Financial Outflows

Core Content Summary

This document provides an analysis of Argentina's economic and financial situation as of October 2018, with a focus on the challenges posed by the Leliqs (Ley de Emergencia Liquidez) and capital flight dynamics. It is authored by BNP Paribas Emerging Markets and Latin America strategists and outlines key observations, concerns, and strategic recommendations for investors.

Key Observations

• Capital Flight and Foreign Asset Formation:

  • Foreign asset purchases by locals (both financial and non-financial sectors) remained high in October 2018, totaling USD1.7bn.
  • On a 12-month rolling basis, foreign asset formation reached USD31.4bn, representing ~6.5% of GDP.
  • Capital flight YTD stood at USD18.5bn, with a 12-month cumulative total of USD22.3bn, showing no signs of reversal despite high ARS depreciation and domestic real interest rates.
  • Non-resident net portfolio flows were negative in October, at USD-0.831bn, with outflows at USD1.6bn and inflows at USD0.765bn.

• International Reserves:

  • Gross international reserves totaled USD51bn, including the swap with China, IMF loan, and private sector US dollar deposits.
  • Net liquid international reserves were estimated at ~USD8bn, indicating a concerning trend.
  • The ratio of Leliqs to time and saving deposits reached ~51.5%, and Leliqs represented ~105% of international reserves (excluding deposits and IMF).

• Leliqs Dynamics:

  • Leliqs, which yield 61%, are growing at an unsustainable rate.
  • The quasi-fiscal deficit is expected to reach 3.0–3.5% of GDP in H1 2019, depending on money demand assumptions.
  • The monetary base is considered a limited target, and the rapid expansion of M3 is a major concern, as it does not reflect economic growth or credit expansion.
  • The Leliqs mechanism is underpinned by depositors holding money in time deposits and t+1 funds, which could be at risk due to the high interest rate and upcoming presidential elections.

• FX Market Dynamics:

  • The ARS appreciated, with spot prices trading ~1% above the lower non-intervention FX zone.
  • The 1-month NDF rate was at 38.50, with a ~2.3% divergence from the upper band.
  • A tactical short ARS position is recommended, with a USD5mn allocation and a target p&l of +5%.

Main Concerns

• Sustainability of Capital Flight and Leliqs:

  • Capital flight and foreign asset formation from the non-financial private sector remain at record highs.
  • The quasi-fiscal deficit is likely to grow, creating financial risks for the central bank (BCRA).

• Monetary Expansion vs. Economic Performance:

  • M3 has expanded at unsustainable levels, while GDP is in negative territory and credit growth is weak.
  • This indicates a misalignment between monetary expansion and real economic activity.

• Political Uncertainty and Re-dollarization Risk:

  • The upcoming presidential elections may trigger a wave of re-dollarization, increasing the demand for US dollars and potentially forcing BCRA to issue more pesos in exchange for Leliqs.

• FX Market Outlook:

  • The current FX environment suggests a potential for ARS depreciation, making a short position attractive.
  • The strategy involves using USDARS NDFs to hedge against further depreciation.

Strategic Recommendations

• Tactical Short Position in ARS:

  • Recommend a short position in ARS using 1-month NDFs at 38.50.
  • Allocation: USD5mn.
  • Target: +5% p&l.

• Client Protection:

  • Advised to maintain long protection via 5y CDS (Credit Default Swaps) for the ARS.

• Monitoring the Leliqs System:

  • The Leliqs system is under scrutiny due to its potential to create financial instability.
  • A liability management exercise by BCRA may be necessary if the trend continues.

Key Figures and Data

• Capital Flight (USD):

  • YTD: USD18.5bn
  • 12-month rolling: USD22.3bn (up from USD22.9bn in September and USD9bn a year ago)

• Foreign Asset Formation (Non-fin private sector):

  • October 2018: USD1.163bn
  • 12-month rolling: USD31.4bn

• Leliqs Yield:

  • 61% as of October 2018.

• M3 Growth:

  • Growing at an unsustainable rate, linked to Leliqs stock.

• NDF Implied USDARS Rate (1-month):

  • 38.50, with ~2.3% divergence from the upper FX band.

Conclusion

The report highlights the persistent challenges in Argentina's financial system, particularly the unsustainable growth of Leliqs and capital flight. While the ARS has appreciated slightly, the underlying trends suggest continued pressure on the currency and a need for vigilance. A tactical short position in ARS is proposed, supported by the current FX environment and the expectation of further depreciation. The situation remains fragile and dependent on external and internal factors, including portfolio inflows, trade balance, and political stability.