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Summary of the LATIN AMERICA STRATEGY Document

Core Content

This document outlines the financial outlook and investment strategy for Argentina, Brazil, Mexico, and Colombia, with a focus on the risks and opportunities in the region, particularly in Argentina. The analysis includes public debt dynamics, provincial debt, and the implications of currency performance on the debt-to-GDP ratio. It also presents a specific investment strategy involving Credit Default Swaps (CDS) as a hedge against potential financial instability.

Main Concerns and Key Points

• Argentinean Financial Scenario: The document expresses concern over the current financial situation in Argentina, highlighting the challenges of public debt management, especially in the context of an upcoming presidential election.
• Debt Dynamics: The automatic debt dynamics formula is used to evaluate the sustainability of the debt path. It considers factors like real interest rates, real GDP growth, and exchange rate movements.
• High Hard Currency Debt: A significant portion of Argentina's public debt is in USD, which makes the country vulnerable to ARS depreciation and increases the cost of debt servicing.
• Provincial Debt: Provincial debt levels are heterogeneous, with some provinces having a debt-to-revenue ratio as high as 70%. The IMF projects that provincial debt will increase to 7.3% of GDP by 2022, raising concerns about fiscal sustainability.
• FX and Capital Flows: FX outflows from locals are a concern, and the document suggests that the situation may worsen due to the upcoming elections and global financial conditions.

Strategy and Implications

• Proposed Strategy:
  • Buy Argentina 5y CDS at 428bp with an allocation of USD 20mn (~USD 8k DV01).
  • Sell protection in a basket of Brazil, Mexico, and Colombia 5y CDS at 211bp, 113bp, and 102bp, respectively.
  • Allocation: USD 20mn (~USD 8-9k DV01) each country.
  • Carry: ~0bp/month.
  • Target: USD 500k.
  • Stop-loss: USD 400k.
• Rationale: The strategy is carry neutral and aims to prepare for any potential adjustment in the cost of protection for Argentina. It was previously effective in Q3 2017-Q1 2018.

Debt Maturities and Interest Payments

• 2018 Maturities:
  • Capital and interest payments are expected to be high, especially in September and October 2018.
• 2019 Maturities:
  • The most critical months are March, April, and May 2019, with a high concentration of hard currency debt and maturities with the private sector.
• Total Debt Until Q4 2019:
  • The total debt is estimated at USD 97.968bn, with USD 48.782bn in hard currency.
• Letes and Lebacs:
  • The stock of Letes is USD 18.2bn, with USD 6.0bn maturing in the next 60 days.
  • Lebacs are USD 35.4bn, with 83.1% maturing in August and September 2018.

Risk and Market Outlook

• Risk Assessment: The strategy involves selling USD 26k DV01 in Brazil, Mexico, and Colombia's CDSs against buying USD 8k DV01 in Argentina's CDS.
• Roll-Down: The roll-down runs in favor of the strategy, especially for Brazil, Mexico, and Colombia.
• Exchange Rate Impact: The depreciation of ARS is expected to increase the burden on public debt, making it more challenging to manage the debt-to-GDP ratio.
• Fiscal Deficit: The consolidated nominal deficit is expected to remain above 7% of GDP in 2019.

Legal and Disclaimer Information

• Non-Independent Research: The document is non-independent research and may be subject to conflicts of interest.
• Marketing Communication: It is considered a marketing communication under MiFID II and not investment research.
• Disclaimer: The information and opinions are based on public sources and may not be accurate or complete. BNPP does not provide investment, financial, legal, or tax advice and disclaims any liability for reliance on the content.

Conclusion

The document provides a detailed analysis of Argentina's financial situation and proposes a carry-neutral strategy to hedge against potential financial adjustments. It highlights the importance of managing public and provincial debt, the impact of currency depreciation, and the risks associated with the upcoming election year. The strategy is based on historical performance and current debt maturities.