20181213-法国巴黎银行-Argentina__Bearish_view_and_long_protection_strategy_reinforced_14页_554kb

Argentina: Bearish View and Long Protection Strategy Reinforced

Core Content

This report from Banco BNP Paribas Brasil S.A. provides an in-depth analysis of Argentina's monetary and fiscal dynamics as of December 2018. The focus is on the challenges and risks associated with the country's monetary policy, fiscal management, and upcoming debt maturities in the context of the presidential election in October 2019.

Main Points

Monetary Dynamics

• Monetary Base Target: Argentina shifted its monetary policy from an inflation target to a monetary base target, aiming for zero growth in the monetary base.
• M3 Growth: Despite the zero growth in monetary base, M3 (a broader monetary aggregate) has shown rapid growth, rising 56% year-over-year.
• M3 Misallocation: The growth in M3 is primarily due to an increase in time deposits, which are being invested in Leliqs (short-term government deposits), rather than being lent to the private sector.
• Systemic Risk: This misallocation is creating systemic risks, especially with the potential for sudden reversal or dollarization of ARS deposits ahead of the 2019 elections.
• Remunerated Reserves (Leliqs): Banks are using Leliqs to meet reserve requirements, leading to a rise in remunerated reserves from 7% to 30% of total deposits since July 2018.

Fiscal Front

• Fiscal Improvements: The primary fiscal balance has shown improvement, but this is largely due to property income and capital revenues, which are not sustainable.

• Quasi-Fiscal Deficit: The quasi-fiscal deficit, not officially reported, is estimated at ~2.5% of GDP, and the government may continue financing the Treasury with increasing deficits.

• Treasury Revenue Sources:

  • Time deposits from public banks, which are invested in Leliqs.
  • Profits from state-owned Banco Nación.
  • Revenue from the FGS (sustainability fund) due to specific policies and deposits.

• Primary Deficit Adjustment: When property income is subtracted, the improvement in the primary fiscal balance is only ~9%, not the previously reported 33%.

Debt Maturities and Risks

• Critical Debt Maturities:
  • December 2018: USD8.4bn
  • March 2019: USD3.3bn
  • April 2019: USD4.9bn
  • May 2019: USD4.6bn
• Total Debt Maturities in 2019: USD55.6bn, of which USD35.4bn is in USD.
• Roll-over Challenges: The government and IMF expect a minimum 60% roll-over ratio, but risks include a low roll-over ratio and higher investor premiums, which could exacerbate the quasi-fiscal deficit.
• Interest Payments: Until Q4 2019, interest payments alone are expected to reach USD12.1bn, with 70% related to hard currency debt.

Leliqs Monitor

• Leliqs as a Liability: Leliqs have surged to ~126.8% of Argentina's international reserves.
• Uncertainty Ahead: The upcoming presidential election introduces uncertainty, with potential re-dollarization of deposits.
• Impact on ARS: A sudden capital flight could lead to a depreciation of the ARS, increasing inflationary risks and liquidity concerns.

Key Information

• Monetary Aggregates: M0, M1, M2, and M3 are key indicators, with M3 showing unsustainable growth.
• Leliqs and Reserve Requirements: Banks are using Leliqs to meet reserve requirements, leading to a rise in remunerated reserves.
• Fiscal and Monetary Interactions: The government's fiscal gains from Leliqs mask a weaker primary fiscal result.
• Debt Composition: In Q2 2018, 74.6% of central government debt was in hard currency, and the debt-to-GDP ratio is expected to exceed 80% by Q4 2018.
• Investor Behavior: The potential for re-dollarization of deposits poses a significant risk to the monetary system.

Conclusion

The report reinforces a bearish outlook on Argentina's economic situation and suggests a long protection strategy, such as 5-year CDS. The combination of monetary misallocation, fiscal pressures, and upcoming debt maturities creates a volatile environment, with the risk of financial instability increasing as the presidential election approaches. Investors are advised to be cautious and consider protective measures due to the high uncertainty and potential for systemic risk.