[Markets] On Tuesday, the treasury secretary Guzman held a press conference where he announced sending the “restructuring” bill to congress to continue with the formal process and not helping PBA province with its restructuring process. After Guzman’s speech, the EMBI+ closed this Thursday at 2001bps, +11% WoW and CCL at 83.6, +3.1% WoW. Buenos Aires extends the consensus deadline until January 31 due to the fact the BP21 holders did not reach the 75% consensus level. Last Monday the treasury held an exchange of Lecaps for Lebads (ARS T-bills indexed to the BADLAR rate plus a margin: +4% for 240 days and +5.5% for 335 days to maturity). On the following week, the treasury will have to disburse USD 508m and ARS 15bn.
[Exchange balance] In December, the External Assets Formation (FAE in Spanish) decreased practically to zero driven by the steep drop in expenses. What happens in the coming months with the FAE will depend on the Real Effective Exchange Rate (REER) and the gap. On the other hand, despite the increase in the number of people who purchased dollars, the net purchase of bills reached USD 0.3 bn. Finally, the REER continues to appreciate rapidly, while the Blue Swap Chip premium moves higher.
[Monetary] BCRA started offering Leliqs to 14 days and reduced the 1-day repo rate significantly. As a result, repo stock fell sharply. The BCRA maintained the reference rate. This was the first sign of moderation since the arrival of the new administration at the office.
[Fiscal] In 2019, the primary deficit ended up being 0.44% GNP, aligned with our estimations, getting to be the best result since 2011. This dynamic was not only achieved by a reduction in spending, but also by a continuous reduction in state revenues. On the one hand, we appreciate a clear deterioration of the income structure, where the tax and contributory part suffered a strong contraction. After a sharp reduction in spending, the current indexed structure hinders continuity in reducing spending. This indexed structure made it difficult to reduce spending in the last quarter of 2019. Finally, as expected, the current management made statements about the “exceptional” nature of some income, trying to discredit the current result. Given the result of 2019 as expected, by 2020 we estimate a primary deficit of -0.4% GDP, in line with that of 2019
[Activity] The Emae fell -1.7% MoM (-1.9% YoY), showing no encouraging signs about the near future. Without even signs of a recovery, this crisis continues to be the most extensive in recent years and we expect a clear recovery only since 2020 Q2. From the sectoral perspective, there is a general contraction, with a strong impulse from trade, industry, and construction.
[Markets]
On Tuesday, the treasury secretary Guzman held a press conference where he announced sending the “restructuring” bill to congress to continue with the formal process. The bill did not include any offers to the bondholders. In this way, we believe that the main point of this conference was to state the position of the National government about not helping financially to the Buenos Aires province to pay the amortization of the BP21 reaffirming its aggressive position toward the restructuration process. Other main points of the conference were:
- ARS debt service will be honored as the local market is showing “good conditions” for the roll over.
- As long as the restructuration process continues, both the nation and the province will keep performing the USD interests (“for the moment” stated the minister) as a sample of their good faith.
- Due to the national financial administration law, at least two out of the three following conditions will have to see an improvement: maturities profile, coupons or capital.
After Guzman’s speech, the EMBI+ closed this Thursday at 2001bps, +11% WoW and CCL at 83.6, +3.1% WoW.
Buenos Aires extends the consensus deadline until January 31 due to the fact the BP21 holders did not reach the 75% consensus level. The previous deadline was January 21st. While Kicillof is running out of time (if it does not pay, on January 6 default will be declared), the bondholder’s committee issued a statement saying that the province did not contact formally the investors, and asked for a consistent plan to justify the restructuring of the debt.
Last Monday the treasury held an exchange of Lecaps for Lebads (ARS T-bills indexed to the BADLAR rate plus a margin: +4% for 240 days and +5.5% for 335 days to maturity) – Thanks to this exchange the government was able to improve, although not significantly, the ARS debt service profile for 2020. In addition, it reduces the residual value of the debt in almost ARS 2bn. However, the exchanged Lecaps were the ones that had a higher share of public holding. We assume that the public sector Lecaps holdings were totally exchanged for Lebads, representing approximately 20% of the total. New net ARS t-bills debt profile – In USD millions
Next Monday there will be another exchange with similar terms.
On the following week the treasury will have to disburse USD 508m and ARS 15bn – On the other hands, last week it paid USD 120m and ARS 1.5mm
[Exchange balance]
In December, the External Assets Formation (FAE in Spanish) decreased to practically zero. The almost null result of the FAE was driven by the sharp drop in the outflows, particularly by the stop of net purchase of bills reached USD 0.2 bn, showing that capital controls are being effective and standing at similar levels to the previous one. Likewise, the FAE of the upcoming months will depend on the Real Effective Exchange Rate (REER) and the gap. This will be conditioned by the debt restructuring process. This is due to the fact that if the restructuring process does not take place quickly, it is likely that there will be a fall in the demand for Argentine assets (among them money), which will result in an expansion of the gap and upward pressure in the purchase of foreign exchange.
FAE – Inflows & Outflows
(Billions of USD)
On the other hand, despite the increase in the number of people who purchased dollars, the net purchase of bills reached USD 0.3 bn. This is related to the drop in expenses as a result of the quota of USD 200 and the new tax ‘P.A.I.S’ applied to the purchase of foreign currency without specific purposes.
FAE disaggregated
(Millions of USD)
The Real Effective Exchange Rate continues to appreciate rapidly, while the Blue Swap Chip premium moves higher. The REER appreciated 4% since the arrival of the new government due to maintaining a fixed official ER and monthly inflation of the order of 4%. On the other hand, the exchange premium reaches levels of the 2012 capital control, of around 39% (last data available 23-01-2020). It is expected that as an official policy they maintain the official ER as a nominal anchor for at least the period of the restructuring process and therefore it is possible that the exchange rate continues appreciating.
REER – REER Blue Swap Chip
[Activity]
The Emae fell -1.7% MoM (-1.9% YoY), showing no encouraging signs for the near future. For 2019, we estimated a -2.3% and -1% drop by 2020. In this way, the index continues to maintain an average level close to the rest of 2019 and would indicate a slightly negative trend at the end of 2019.
Without even signs of a recovery, the crisis continues to be the most extensive in recent years and we expect a clear recovery only since 2020 Q2. High-frequency data continues showing no signs of a recovery in the month of December reason why we should wait for 2020 data and the result of the debt negotiation to observe a change in trend. The speed and composition of this recovery will be closely linked to external dynamics and the price and salary agreement.
From the sectoral perspective, there is a general contraction, with a strong impulse from trade, industry and construction. Both cement shipments (-1.7% MoM), and Steel production (-4.9% MoM) continue to show negative signs in the month of December, indicating the continuity of this sector dynamic. On the other hand, construction confirms again its negative trend with a great weight on private employment in recent months.
[Monetary]
BCRA started offering Leliqs to 14 days and reduced the 1-day repo rate significantly. The repo rate now will be only 50% of the reference rate compared with the previous 88%. In this way, the repo rate was reduced from 43.75% to 25%. This was a sharp change in banks’ portfolios where represented more than half of their BCRA remunerated holdings. With this move, the Central Bank tries to extend the maturities of its instrument closer as the term-deposits. Finally, instead of having two auctions per day for Leliqs, there will be only two per week, on Tuesday and Thursday.
As a result, repo stock fell sharply. On January 21, the repo stock was at ARS 190bn from ARS 769bn a week ago, while leliq increased to ARS 1.289bn from ARS 774bn in the same period.
Stock of remunerated liabilities of the Central Bank
The BCRA maintained the reference rate. This was the first sign of moderation since the arrival of the new administration at the office. After the decreased of 13% of the reference rate since the arrival of the new administration, on Thursday the Central Bank decided to maintain the reference rate at 50%. Meanwhile, on January 22, Private Badlar stood at 35% compared with 36.2% a week ago.
Leliq rate vs private badlar
[Fiscal]
In 2019, the primary deficit ended up being 0.44% GNP, aligned with our estimations, getting to be the best result since 2011. This number implies an “accomplishment” of the fiscal target from the previous agreement with the IMF. On the other hand, the financial deficit stands at 3.8% being the lowest since 2013.
Evolution of fiscal result
This dynamic was not only achieved by a reduction in spending, but also by a continuous reduction in state revenues. If we analyze the dynamics of expenses since 2016 they have been reduced by 5.5% GDP. On the other hand, revenues suffered a 1.8% reduction in GDP.
Primary income (%GDP)
Primary expenditure (%GDP)
On the one hand, we observe a clear deterioration of the income structure, where the tax and contributory part suffered a strong contraction. This dynamic partly explains the increase in taxes promoted by the national government through the “solidarity” law, trying to marginally improve the income structure.
Primary income composition (12m avg, % of total)
After a sharp reduction in spending, the current indexed structure hinders continuity in reducing spending. This new indexed composition will affect the performance of expenditure from 2020 onwards unless adjustments are made to mobility and the subsidy structure.
Primary expenditure composition (12m avg, % of total)
This indexed structure made it difficult to reduce spending in the last quarter of 2019. As of September, social benefits ceased to have a contractual weight on spending, making fiscal consolidation difficult. Against this the national government decided to face a sharp reduction in the rest of the expenditure, including public works and operating expenses. As for subsidies (1.5% GDP in 2019), it was below expected and contributed to the increase in floating debt.
Primary expenditure YoY evolution
Finally, as expected, the current management made statements about the “exceptional” nature of some income, trying to discredit the current result. The main income called “extraordinary” is made up of the capital income of the FGS, the sale of power plants and the sale of the national lottery. As for FGS revenues, it was agreed in 2018 for a maximum amount of 0.4% GDP for 20 years and although it is not a current income it was agreed to count “on the line”, which implies that in 2020 it will also be an income Primary of the current administration. On the other hand, the sale of power plants and national lottery was offset by higher expenses (year-end bonus and contributions). Finally, it should be noted that the floating debt remained at 1.3% GDP (same level of 2018), exceeding the goal set with the IMF.
Given the result of 2019 as expected, by 2020 we estimate a primary deficit of -0.4% GDP, in line with that of 2019. In this way, the national government may show signs of an intention to continue with fiscal consolidation and face a better debt renegotiation.
Endogenous primary deficit
2020 primary deficit
[Annex]
