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Summary of the LATIN AMERICA STRATEGY Document

Core Content

This document provides an analysis of the current state of the Argentinean foreign exchange (FX) market and capital flows, with a focus on the depreciation of the Argentine Peso (ARS) and the implications for the economy and financial markets.

Key Points

• FX Outflows and Capital Flight:

  • Capital flight in Argentina has accelerated, reaching USD 9.8bn in May 2018 on a 12-month rolling basis, up from USD 6bn a year ago.
  • Foreign asset purchases (financial and non-financial sectors) totaled USD 4.7bn in May, with a 12-month cumulative USD purchase of USD 30.8bn.
  • Non-resident portfolio flows remained negative in May, with net outflows of USD 2.3bn and inflows of USD 0.9bn, resulting in a net outflow of USD 1.4bn.
  • On a 3-month rolling basis, outflows reached USD 5.5bn, the highest since 2002.

• ARS Depreciation Dynamics:

  • The depreciation of the ARS is seen as a positive development as it facilitates the liquefaction of local currency liabilities.
  • Lebacs (local currency debt) in US dollars are now USD 25bn below the peak of early 2018.
  • The ratio of M2 to international reserves and Lebacs to international reserves is declining, indicating a reduction in reliance on foreign assets.

• Current Account and Economic Indicators:

  • Current account data for Q1 2018 was below expectations, contributing to external imbalances.
  • The monthly GDP proxy (EMAE) for April 2018 was a surprise decline of -0.9% yoy, against the consensus of +2.1%.
  • External funding capacity reached USD 33.8bn negative on a 12-month rolling basis, equivalent to 5.3% of GDP.

• Capital Controls and FX Interventions:

  • The Bank of Argentina (BCRA) has intervened in the FX spot market with USD 11.1bn in total so far in 2018.
  • Gross international reserves (excluding IMF) stood at USD 48.1bn, or ~23% below the peak of March 7, 2018.
  • Net international reserves (excluding IMF) were USD 35.9bn as of June 19, 2018.

• Market Implications:

  • The strategy team remains skeptical about Argentine assets and is not changing their stance until there is a clear shift in FX outflow trends.
  • The team is flat on local currency assets and leans towards a bearish outlook due to ongoing economic and political challenges.
  • The IMF deal is viewed as a positive development, but not a magic solution. Structural fiscal consolidation and reducing external vulnerabilities are still required.

Key Information

• Capital Flight:

  • Reached USD 9.8bn in May 2018 on a 12-month basis.
  • The demand for US dollar notes increased significantly, with USD 3.4bn in net demand in May, distributed among 1,080,000 clients.

• Foreign Asset Formation:

  • The non-financial private sector's foreign asset formation reached a record high of USD 4.616bn in May.
  • The ratio of USD demand per client increased to USD 4.6k, or 40% above April levels.

• IMF Deal and Economic Outlook:

  • The IMF deal is a positive step but is not expected to resolve long-term imbalances.
  • The team believes that the combination of external imbalances and negative growth justifies a new round of ARS depreciation.

• Charts and Data:

  • Charts 1-6 and 19-20 highlight the dynamics of FX flows, capital flight, and the liquefaction of ARS liabilities.
  • Table 1 and Table 2 provide a detailed breakdown of foreign asset formation, capital flight, and external funding capacity.

Strategy Implications

• The strategy team is flat on Argentine local currency assets.
• They are biased towards a bearish view due to the challenging economic and political environment.
• The team is closely monitoring FX outflows and domestic demand for USD to determine future market movements.

Legal and Regulatory Information

• This document is a marketing communication and not investment research.
• It is intended for Relevant Persons as defined by MiFID II.
• The document may contain Research under MiFID II unbundling rules, but only for those who have signed up to BNPP Global Markets Research packages.
• No investment advice is provided, and all information is for informational purposes only.
• BNPP may have conflicts of interest due to its involvement in investment banking and other services related to the securities discussed.
• Options and ETFs mentioned are subject to specific disclosures and are not suitable for all investors.
• The document may contain back-tested performance data, which is for illustrative purposes only and not indicative of future results.

Conclusion

The report outlines a continued bearish outlook for Argentine assets, emphasizing the need for structural changes and a shift in FX outflow trends. The depreciation of the ARS is seen as a positive for liquidity and reducing local currency liabilities, but the broader economic and political environment remains a concern. The team remains cautious and is closely monitoring the situation for potential changes in market dynamics.