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Summary of the LATIN AMERICA STRATEGY Document

Core Content Overview

This document provides an analysis of the economic and financial situation in Argentina, focusing on capital flight, foreign exchange (FX) market dynamics, sovereign debt issuance, and the overall macroeconomic outlook. It also outlines the current FX strategy and forecasts for the Argentine peso (ARS) and USDARS (USD per ARS) for the coming quarters. The report is authored by BNP Paribas Brasil S.A. and includes insights from its strategists and economists.

Key Economic and Financial Indicators

Capital Flight

• Capital flight has not shown signs of deceleration.
• Total capital flight until April 2018 reached USD 7.4bn (record high for the first four months of the year) and USD 19.8bn on a 12-month rolling basis.
• Non-resident portfolio inflows turned negative for the first time since President Macri took office.
• The non-financial private sector has increased its 12-month cumulative USD purchases to USD 25.5bn.
• Capital flight is largely financed by foreign asset inflows, including FDI and portfolio inflows.

FX Market Dynamics

• BCRA's FX intervention in the spot market has totaled USD 9.92bn this year (excluding public banks and the permanent USD 5bn offer).
• Gross international reserves are now below USD 51bn, which is ~19% below the peak of March 7.
• The ARS is viewed as a transactional currency, not a store of value, leading to low elasticity of USD demand to domestic interest rates.
• USDARS is expected to trade at 28.5 by Q4 2018 and 31.0 by Q4 2019, with a worst-case scenario of 33.2 and 39.3 respectively.

Sovereign Debt Issuance

• The Argentine government has raised USD 31.4bn through various issuances so far in 2018.
• The total financing needs for 2018 were estimated at USD 30.1bn, aligning with the government's issuance.
• Debt maturity profile shows USD 28bn of annual debt maturing until 2023.
• Hard currency debt accounts for 68.5% of the central government debt, equivalent to 38.7% of GDP.
• Provincial debt totaled USD 33.8bn as of December 2017, with Buenos Aires accounting for 40% of the total.

Main Views and Strategy

Economic Outlook

• GDP contraction is expected in Q2 and Q3 of 2018, with a flat outlook for 2019.
• Inflation is forecasted to rise to 28% in 2018 and 20% in 2019.
• The political landscape has deteriorated, increasing uncertainty around the 2019 presidential election.

Strategy

• BNP Paribas remains flat on Argentine local currency assets, having been short since Q3 2017.
• Long protection via CDS is maintained.
• The firm is biased towards the bearish view for local currency instruments due to economic and political challenges.
• USDARS is adjusted upwards, reflecting the expectation of a sharp depreciation.

Fiscal Challenges

• The consolidated fiscal deficit is now 8.85% of GDP.
• Despite efforts to accelerate fiscal consolidation, the financial deficit is expected to increase due to high real interest rates and zero GDP growth.
• Quasi-fiscal deficit (BCRA) is projected to reach 3% of GDP.
• Subsidies have been reduced by 0.9% of GDP, but higher energy prices and ARS depreciation may necessitate additional tariff adjustments.
• The original 2018 budget projected 1.6% of GDP in subsidies, but with the ARS at USD 25, the adjustment could be 25% higher than planned.

Legal and Compliance Notice

• The document is a marketing communication, not investment research, and is non-independent under MiFID II.
• It does not constitute an offer to sell or purchase any financial instrument.
• BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
• Options and ETFs mentioned are complex and require proper risk disclosure.
• The document is confidential and may not be reproduced or distributed without prior written consent.

Conclusion

The report highlights the unsustainable capital outflows, debt overhang, and economic contraction in Argentina. It emphasizes the need for fiscal adjustment, the impact of political uncertainty, and the bearish outlook on the local currency. The FX strategy remains cautious, with a focus on long protection via CDS and upward adjustments in USDARS forecasts.