20180823-法国巴黎银行-LATIN_AMERICA_STRATEGY__Argentina_FX___flows__Capital_flight_accelerates__reserves_still_dropping_11页_465kb

Summary of the Latin America Strategy Document

Core Content

This document provides an analysis of Argentina's foreign exchange (FX) market and capital flows as of July 2018, highlighting concerns about the sustainability of USD demand and the impact on international reserves and the economy. It outlines BNPP's strategic views on the Argentine peso (ARS) and the implications for investors.

Key Financial Indicators

• Foreign Asset Purchases (FAP): Increased in July 2018 to USD 3.3bn, up from USD 3.0bn in June and USD 2.4bn in July 2017. On a 12-month rolling basis, FAP reached USD 31.1bn, which is about 6% of GDP.
• Capital Flight: Totaled USD 13.1bn in July 2018, up from USD 5.2bn a year ago. On a 12-month basis, it reached USD 23.3bn.
• Net Demand for USD Notes: In July 2018, it totaled USD 2.3bn (gross demand USD 3.7bn), with 1,350,000 clients involved.
• International Reserves (ex-IMF): Dropped to USD 40.1bn from USD 44.9bn in June 2018, indicating a significant decline.

Main Views and Analysis

• Capital Flight Concerns: Capital flight has been accelerating, and the trend remains concerning. BNPP believes the outflow is unsustainable and could lead to further depreciation of the ARS.
• Non-Resident Portfolio Flows: Continued to be negative in July 2018, with outflows of USD 1.83bn and inflows of USD 0.76bn, resulting in a net outflow of USD 1.07bn.
• FX Outflows: The FX outflows from the local financial and non-financial sectors have remained high, with the financial account showing a negative gap of USD 19.6bn compared to 2017.
• Inflation and Money Demand: Persistent high inflation and declining money demand are expected to continue, with the local currency (ARS) being a transactional tool rather than a store of value.
• Recommendation: BNPP recommends maintaining a short position on ARS and buying protection, which has so far generated a profit of +172bp. The firm has entered into a long protection trade (5y CDS at 428bp) as a proxy for sovereign and USD-denominated debt.
• Trade Balance: The commercial flow remains below 2016 and 2017 levels, indicating a need for Argentina to turn the trade balance into a positive one.

Key Trends and Observations

• USD Demand Dynamics: The majority of USD demand comes from the non-financial private sector, with up to USD 10k per client accounting for 47% of total demand in July 2018.
• FX Market Volatility: The ARS has shown significant weekly volatility, which may affect the effectiveness of carry strategies.
• Capital Controls: The end of capital controls has led to increased USD demand and capital flight, with FDI and financial inflows totaling USD 5.7bn and USD 26.1bn respectively.
• IMF Loan Impact: The financial account has shown a negative gap of USD 19.6bn compared to 2017, indicating the need for more inflows or a reduction in outflows to stabilize the economy.

Strategic Outlook

• Bearish on ARS: BNPP remains bearish on the ARS, suggesting further depreciation is likely.
• Scenario Analysis: The firm is closely monitoring the evolution of USD demand, capital flight, and FX outflows to adjust its scenarios for Argentina.
• Market Positioning: BNPP has adjusted its allocation to the protection trade due to its performance, but the conviction remains strong.

Legal and Compliance Information

• Non-Independent Research: This document is non-independent research and may be subject to conflicts of interest.
• Marketing Communication: It is considered a marketing communication and not investment research for the purposes of MiFID II.
• Confidentiality: The document is provided on a strictly confidential basis and may not be copied, reproduced, or distributed without prior written consent.
• Regulatory Compliance: It contains important disclosures regarding options, ETFs, and securities not registered under US Securities Laws, emphasizing the risks involved.

Conclusion

The document underscores the ongoing challenges in Argentina's FX market, with a focus on the unsustainable trends in USD demand and capital flight. BNPP's strategy remains bearish on the ARS, with a strong recommendation for buying protection and maintaining short positions. The firm is closely monitoring key indicators such as international reserves, FX outflows, and the impact of high inflation on the economy.