20181029-法国巴黎银行-Argentina__Slowdown_of_capital_flight__growing_uneasy_with_Leliqs_12页_1003kb

Argentina Economic Summary - October 29, 2018

Core Content Overview

This document provides an analysis of Argentina's economic situation, particularly focusing on capital flight, foreign asset formation, the USD demand, and the role of Leliqs (Local Liquidity Instruments) in the monetary system. The report is authored by BNP Paribas Emerging Markets strategists and outlines the current challenges and potential risks to the country's financial stability.

Main Points

• Capital Flight:

  • Capital flight remained high in September 2018, totaling USD 16.2bn on a 12-month rolling basis.
  • Despite a slowdown in September, the overall trend of capital flight has not reversed.
  • The financial account showed a negative gap of USD 30.6bn compared to 2017 if the IMF loan is netted out.

• Foreign Asset Formation:

  • Foreign asset purchases from the non-financial private sector reached a record high of USD 31.4bn in August 2018.
  • The monthly average since 2015 has been USD 1.49bn, indicating a persistent outflow trend.
  • Non-resident portfolio flows turned negative in April 2018, continuing with similar dynamics.

• USD Demand:

  • Net demand for US dollar notes was USD 1.2bn in September, with gross demand at USD 2.8bn.
  • The majority of USD demand (60%) came from individuals, with a significant portion (47%) requesting up to USD 10,000 per month.
  • The average USD demand per client was USD 2,740 in September, showing a large number of agents dollarizing their portfolios.

• International Reserves:

  • Gross international reserves (excluding IMF) were USD 48.2bn as of October 2018.
  • Net liquid reserves were estimated at ~USD 10bn, indicating a concerning trend of reserve depletion.
  • The reserve levels have been under pressure due to persistent capital flight and reliance on short-term debt.

• Leliqs and Quasi-Fiscal Deficit:

  • Leliqs (Local Liquidity Instruments) have grown rapidly, with a yield of 71%.
  • The quasi-fiscal deficit is expected to reach 3.5-6% of GDP in H1 2019 if money demand does not increase significantly.
  • The Leliqs to time and savings deposits ratio reached ~43% in October 2018, highlighting their central role in the monetary system.
  • Leliqs now represent ~78% of international reserves and 158.3% of net liquid reserves, indicating a high level of dependence.

• FX Market and Target Zones:

  • The current monetary system is considered appropriate, but the floating exchange rate regime lacks the necessary conditions for stability.
  • The four conditions for a floating exchange rate are not met: credibility of the monetary authority, use of ARS as a reserve currency, low hard currency public debt, and a dedollarized or bi-monetary system.
  • A less volatile FX rate is crucial for forward-looking inflation expectations.

• Economic Outlook:

  • The stabilization program requires a combination of positive external (portfolio inflows, current account turnaround) and internal (increase in business and consumer confidence) factors.
  • The report emphasizes the need for a significant increase in money demand to avoid further reliance on liability management by the BCRA (Central Bank of Argentina).

Key Risks

• Inflation and ARS Depreciation: A sharp acceleration in inflation and ARS depreciation could occur if money demand does not increase.
• Uncertainty from Elections: The upcoming Presidential elections may trigger a wave of re-dollarization, forcing the BCRA to print pesos in exchange for Leliqs.
• External Shocks: Any unexpected external shock or further decline in ARS demand could destabilize the current economic program.

Conclusion

The economic situation in Argentina remains fragile, with high levels of capital flight, record foreign asset formation, and a growing reliance on Leliqs. The monetary system, while appropriate, faces risks due to the unsustainable growth of Leliqs and the lack of a stable FX regime. The stabilization of the economy depends on a reversal in the trend of FX outflows and an increase in money demand, which are not currently evident. The report underscores the need for careful monitoring and proactive measures to manage the risks associated with the current financial dynamics.