[PBA] On Tuesday, the province of Buenos Aires issued a statement asking for an agreement with the bondholders of the NY bond law BP21 to postpone bond amortization payment of US 250m from January 26th to 1st May of the same year. Likewise, According to the latest data available, the province has not an economic fundamental problem, as the issue that the Provincial Government faces is about liquidity and not solvency. Finally, Chubut is also looking forward to restructuring its debt.
[Markets] Treasury will face net maturities for approximately USD 120m and ARS 1500m next week. Keeping March 31th as the deadline, the Treasury polls restructuring proposals through the banks. In the middle of the Buenos Aires debt resolution, the Blue Swap Chip reached $82.5
[Monetary] The Central Bank cuts reference rate. Net reserves stood at USD 14bn. The record is slightly higher than a month ago. The stock of repo of the Central Bank increased ARS 330bn in the previous month while the Leliq stock did it only by ARS 90bn. There were also new regulations regarding capital controls and interest rate of deposit.
[Fiscal] Given the continuity of the export taxes dynamics at the end of 2019, the primary deficit for 2020 is increased by -0.4%. On the other hand, this week began to show signs of “creative accounting” in public accounts, meaning a possible savings of 0.2% GDP of primary deficit considering this new methodology.
On Tuesday, the province of Buenos Aires issued a statement asking for an agreement with the bondholders of the NY bond law BP21 to postpone bond amortization payment of US 250m from January 26th to 1st May of the same year. In order to be able to change the payment conditions, it must achieve an agreement of at least 75% of the bondholders. Previously, the secretary of the Treasury, Martin Guzman, had announced that the National Government will not transfer funds for the province. However, we believe that it is a strategy to cause a more real threat of non-payment. The bond has Cross default clauses so it will initiate legal actions in other bonds if it does not pay. It has ten days to pay after January 26th if not, it will declare default.
It is feasible that PBA will not achieve the 75% of bondholders agreement. Nevertheless, we believe that it will finally pay. A default event in the province will make the restructuration of the debt of the province and of the National Government more difficult for law issues and for the deterioration of the economic situation as the expectations of a successful agreement could decrease significantly.
According to the latest data available, the province has not an economic fundamental problem, as the issue that the Provincial Government faces is about liquidity and not solvency. The primary fiscal result is better than the average of the rest of the provinces and it has also improved more in the last years. In 2019 Q2 it was observed a primary result of 4.8% as a share of total incomes. Debt in USD has remained virtually flat at approximately USD 11bn. However, as a result of the Real Effective Exchange Rate depreciation it increased but, in the previous quarter it has stabilized at roughly 9.2% of gross domestic product and 75% of total incomes. In this way, interest payments as a share of revenues is above the rest of the provinces at 8% but it is lower than the National Government that is at 17%.
This aggressive move is in line with a restructuring process that needs to be fast in the province of Buenos Aires and in the National Government. This last one will not be able to continue with the debt negotiation far long after the second semester. On January 17th it has USD 14bn of net reserves and we believe that the Central bank will be able to purchase at least USD 6 bn more. Considering an 80% of refinancing of the debt in ARS, IFIS (without considering Paris Club) and a re re re-profiling of USD bills, it will have to face debt services by approximately USD 15bn, lower than the net reserves plus the purchases. And as it can be seen in the market section of this report, fear of debt renegotiation could change considerably the market behavior and, as a consequence, stress more the situation in the FX market.
Primary result evolution (2q2017 vs 2q2019, bubble size: Interest/primary income)
Chubut is also looking forward to restructuring its debt. As well as Buenos Aires, Chubut announced that is seeking to reprofiled for four years and reduce the interest of the PUL26, a bond with NY law. Chubut does not have so significant financial necessity by the bonds services as Buenos Aires. However, its fiscal situation is worrisome with a primary fiscal deficit as a share of income of -1.2% at 2019 Q2 compared to the surplus of the province of Buenos Aires of 4.8%.
In the middle of the Buenos Aires debt resolution, the Blue Swap Chip reached $82.5 – The Blue Swap Chip Premium increased 4pp compared to the previous week and it is at 36.5% with an upward risk for next month due to the expectation of a decrease in money demand.
Blue Swap Chip Premium (GGAL)
% of total
Treasury will face net maturities for approximately USD 120m and ARS 1500m next week – On the other hand, last week it had to disburse approximately USD 600m.
Keeping March 31th as the deadline, the Treasury polls restructuring proposals through the banks – Without much time left, the government asked the banks to act as intermediaries to reach their clients the restructuring proposals.
The Central Bank cuts reference rate. On Thursday the BCRA reduce by 200bps its leliq rate that is now at 50% and accumulates a decrease of 13% since the arrival of Pesce at the institution. On January 15th, Private Badlar also stood at 36.3% and, as a consequence, the spread between the two rates decreased to 15.7% from 16.8% the previous week.
Nominal Interest rates
Net reserves stood at USD 14bn. The record is slightly higher than a month ago. In the past 30 days, it has purchased USD 1.3bn helped by the capital controls and seasonal agro sales. The decreases in net reserves were explained by debt services payments of the National government.
Gross and net reserves
The stock of repo of the Central Bank increased ARS 330bn in the previous month while the Leliq stock did it only by ARS 90bn. This behavior has happened since August and has intensified since the arrival of Pesce at the Central Bank. Repo pays a lower nominal rate (43.75%) compared to leliqs rate (50%) so it affects the remuneration of the bank’s assets and increase the more expansive monetary policy.
There were also new regulations regarding capital controls and interest rate of deposit:The Central Bank allowed transferring abroad by dividends 30% of what they enter to the country since yesterday. In the past the dividends were only allow by the authorization of the Central Bank.It allowed the possibility for individuals to invest in a term deposit indexed at UVA (inflation index) plus a 1% of interest rate at 90 days that after 30 days can be shifted to a fixed rate of 70% of the leliq rate. The institution is trying to make more attractive term deposits. However, the measure will imply higher costs for banks that could affect financial intermediation.
Given the continuity of the dynamics of the DEX at the end of 2019, the primary deficit for 2020 increased by -0.4%. In this way, we estimate that the advancement of DJVEs for fear of the increase in export taxes took away income by 2020 by 0.8% GDP (vs. 0.5% we estimated earlier). In this way, an additional 0.3% is added to the endogenous deficit
Endogenous 2020 deficit
2020 deficit after solidarity law
On the other hand, other measures began to be implemented in the form of “creative accounting”. During this week it was announced that investments categorized as “priority” from 2020 will no longer appear as primary expenditure. In this way, a saving of 0.2% GDP is estimated within the new methodology, but our projection is maintained considering the previous measurement methodology.