20180306-法国巴黎银行-Argentina_FX__No_game_changers_in_sight_9页_352kb

EM/LATAM STRATEGY Summary

Core Content

This document is a strategic analysis from BNP Paribas regarding the Argentine peso (ARS) and broader Latin American FX and interest rate (IR) markets. It outlines the current economic and financial challenges facing Argentina and provides a cautious outlook on its currency and market conditions.

Key Insights and Main Points

1. ARS Performance and Outlook

• The Argentine peso has been under significant pressure since December 2017, performing poorly compared to both emerging market (EM) and developed market (DM) currencies.
• The ARS is unanchored, meaning its value is not tied to fundamental economic indicators and is more influenced by speculative or structural factors.
• FX intervention may help smooth depreciation, but it is unlikely to prevent further weakening.
• USDARS is expected to trade at 22.50 by Q4 2018, with a negative bias due to persistent economic imbalances.

2. Fiscal and Monetary Challenges

• The consolidated fiscal deficit has become a major source of economic instability.
• The fiscal deficit is now around 8.5% of GDP (up from 7.9% at the end of 2016), driven by the quasi-fiscal deficit of the Central Bank (due to Lebacs) and provincial deficits (not included in official data).
• The current account deficit reached 4.4% of GDP in Q3 2017, with low FDI participation and high dependence on portfolio flows.
• Argentina has the highest twin deficits in the region, combining fiscal and current account imbalances, which increases idiosyncratic risk.

3. Monetary Policy and Inflation Dynamics

• The Central Bank of Argentina (BCRA) has lost credibility due to changes in the inflation target, which have led to premiums on local currency instruments.
• The sensitivity of inflation to Lebac rates has been nil, indicating fiscal dominance over monetary policy.
• If the central bank raises interest rates, the nominal fiscal deficit will worsen, increasing corporate borrowing costs and damaging ARS-denominated assets.
• If rates are not raised, inflation expectations and peso depreciation are likely to continue.

4. Structural Risks and Investment Strategy

• The report recommends avoiding structural Argentina risk.
• 5-year CDS protection against a basket of Latin American countries (Brazil, Mexico, and Colombia) is advised, with a P&L of +15bp so far.
• This strategy is not a direct recommendation for ARS but is a hedging tool in case of exaggerated movements in either direction.

5. External Factors and Agricultural Impact

• Agricultural exports are suffering due to deteriorating climatic conditions, which may affect USD inflows expected in Q2 2018.
• Global financial conditions are tightening, which could lead to new FX depreciation rounds, but Argentina is expected to delink from global dynamics due to its high twin deficits.

Key Information

• Authors: Gabriel Gersztein, Gustavo Mendonca, Samuel Castro
• Company: Banco BNP Paribas Brasil S.A.
• Currency Focus: Argentine peso (ARS)
• Timeframe: Analysis up to Q4 2018
• Key Metrics:
  • ARS depreciation: 17% since December 2017
  • Fiscal deficit: 8.5% of GDP
  • Current account deficit: 4.4% of GDP
• Recommended Strategy: Long protection via 5y CDS against a basket of Latin American countries

Conclusion

The report concludes that Argentina's economic fundamentals are weak, and the ARS is unlikely to stabilize in the short term. The BCRA's credibility has been eroded, and fiscal dominance continues to drive inflation and currency depreciation. FX intervention may provide temporary relief but is not expected to reverse the trend. The twin deficits make Argentina more vulnerable to idiosyncratic risks, and the strategic recommendation remains to avoid structural Argentina exposure and seek protection through CDS instruments.