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Summary of Argentina Monetary/Debt Monitor and FX Market Report (March 2018)

Core Content Overview

This report provides an analysis of Argentina's monetary and debt dynamics, focusing on the recent trends in deposits, credit, international reserves, and the FX market. It also includes insights into the sovereign issuance in 2018 and a comparison with Latin American peers.

Key Economic Indicators

Deposits and Credit

• Private USD-denominated deposits have remained broadly flat since the start of the year, while private ARS deposits have continued to grow but at a rate below inflation.
• Total deposits (ARS) increased by 2.8% in February 2018, with ARS deposits growing by 10.9%.
• Credit to the private sector has grown at a rate of over 2% month-over-month, with ARS credit increasing by 45.6% year-over-year and outpacing the growth of local currency deposits (22.4% y/y).
• USD deposits have shown a sharp deceleration, decreasing by -20.7% m/m, largely due to the National Treasury selling USD proceeds from hard currency issuance.

Lebac Curve and Interest Rates

• The Lebac curve remains inverted following the central bank's change in inflation targets.
• The outstanding stock of Lebacs is around USD 60.5bn, with the 35-day Lebac rate at 26.75%.
• The seven-day repo rate was lowered to 27.25%, but the Lebac market remains more significant than short-term repo instruments.

International Reserves

• Gross international reserves increased by USD 7.1bn to USD 62.1bn since the beginning of 2018.
• The increase is primarily due to USD sales from the National Treasury to the BCRA, totaling USD 8bn so far this year (USD 5bn in February alone).
• Net international reserves reached USD 49.5bn, surpassing the IMF's reserve adequacy level for the first time since 2012.
• M2/reserves and monetary base/international reserve ratios are continuing their downward trend.

FX Market Dynamics

• Foreign asset purchases by the non-financial private sector in January 2018 reached USD 3.1bn, the highest in the series since December 2015.
• The 12-month cumulative USD purchase by the sector increased to USD 23.3bn.
• Direct USD bill purchases were USD 1.6bn, while foreign asset transfers amounted to USD 1.5bn.
• The demand for USD is not sustainable and should be closely monitored.
• Seasonal factors are influencing the FX demand, particularly in the service account for travel expenses, which was negative USD 1.4bn in January.

Sovereign Issuance

• The Argentine government has raised USD 16.3bn through various issuances so far in 2018.
• The government's total financing needs for 2018 are estimated at USD 30bn.
• Key issuances include:
  • Argentina 2023: USD 1.75bn on 11 January
  • Argentina 2028: USD 4.25bn on 11 January
  • Argentina 2048: USD 3.00bn on 11 January
  • Letes USD: USD 0.25bn and USD 0.36bn on 12 and 26 January
  • Argentina 2019 (trigger clause): ARS 70.48bn (USD 3.58bn) on 7 February
  • Letes USD: USD 0.20bn and USD 0.30bn on 7 and 21 February
  • Argentina 2020 (trigger clause): ARS 30.0bn (USD 1.49bn) on 28 February
  • Boncer 2023: ARS 28.3bn (USD 1.45bn) on 28 February

Comparison with Peers

• Argentina's external debt is significantly higher compared to its international reserves, making it the most vulnerable country in Latin America.
• The current account deficit is projected to be over 4.5% of GDP in 2018, and it is increasingly being financed by portfolio investments (6.1% of GDP).
• Brazil is presented as a comparative case, with a much lower current account deficit and more diversified external funding sources.

Main Concerns and Recommendations

• The unsustainable demand for USD remains a key concern, as it may lead to further pressure on the FX market.
• The optionality in the new ARS-securities suggests that conventional financing sources are drying up.
• Investors are advised to go long protection (via 5y CDS) in comparison to Colombia, Mexico, and Brazil, targeting an additional widening to +50bp.

Legal Disclaimer

• This document is a marketing communication and not independent research.
• It is intended for Professional Clients and Eligible Counterparties under MiFID II.
• The information and opinions are based on public sources and are not guaranteed for accuracy or completeness.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed in the report.
• The indicated prices and terms are not binding and are subject to change.
• The performance data is based on back-testing and is not indicative of future results.

Conclusion

Argentina's financial landscape in early 2018 is marked by a decline in USD deposits, inverted Lebac curve, and increased international reserves. While the government has issued a significant portion of the expected supply for the year, the continued demand for USD and reliance on portfolio investments raise concerns about sustainability and vulnerability. The report recommends protection strategies and highlights the importance of monitoring FX dynamics and external debt levels.