[Markets and debt] Global markets are being rattled by the combined shock of Coronavirus and the derail of Saudi Arabia and Russia’s oil negotiations, and global growth forecasts for 2020 are being quickly revised. Argentina is not decoupled from the global economy and these shocks pose significant risks to the economic outlook.
On the positive side, lower oil prices will reduce energy subsidies, helping on the fiscal front. On the negative side, the terms of trade shock and lower global growth will also hurt exports.
Meanwhile, the government has finally announced the restructuring of up to USD 68.8bn of foreign law debt, including those that were issued during the 2005-10 restructuring. For the moment, no negotiations for the local law debt are on the official pipeline.
We believe global shocks have an ambiguous effect on the debt renegotiation process, though we think that the net balance is negative. On the one hand, lower bond prices and overall financial uncertainty help the government’s position of “significant debt relief”. On the other, several risks sources appear: (a) parities below 40% might be more tempting for hard-liners “vulture funds”, which would make more difficult the activation of CACs; (b) systemic risk after the debt swap will remain high, and (c) the exit yield might be high enough (10% or higher) to delay access to the global credit market.
[Prices] Inflation surprised positively in February, in line with our estimate, dropping to 2.0% vs. 2.3% in January. The increase of seasonal prices (2.5% MoM) was compensated by tight control of regulated prices (0.7% MoM) while core inflation remained stable (2.4% MoM). For March, we expect inflation of 2.5% MoM.
Global markets are being rattled by the combined shock of Coronavirus pandemic and Saudi Arabia’s decision regarding oil production. Multilateral organizations (i.e. OECD and IMF) are marking down their 2020 growth forecasts while advocating for a quick and significant policy response. Central banks are in the spotlight but with little room to maneuver (policy rates near the zero lower bound), unconventional tools (QE) and targeted fiscal impulse might be needed to mitigate the negative impact of both shocks.
Meanwhile, financial markets operate under distress, with typical “flight to quality” dynamics. Emerging Markets currencies and stock markets are down (S&P dropped 17% WoW), risk and uncertainty are up (EMBI spreads widened, and VIX index is near the 2008’s global financial crisis record), and Emerging Markets outflows exceeded those seen during 2008 and 2013 -taper tantrum-, according to the IIF).
Argentina’s main trade partners currencies
November 2019 = 100
Argentina is not decoupled from the global economy and these shocks pose significan risks to the economic outlook. On the positive side, lower oil prices should reduce public subsidies to the energy sector, helping on the fiscal front. The overall impact will depend on whether the government implements minimum price policies (to sustain a dwindling production) or not if oil prices remain subdued.
On the negative side, the terms of trade shock and lower global growth will also hurt exports. Most commodity prices have dropped in so far 2020, with soybeans (Argentina’s top export product) decreasing by 9%. Economic disruptions due to the disease will hurt growth prospects (the IMF now forecasts global growth below last year’s 3% print), decreasing demand for Argentinean products. Focus should be put on the activity of relevant trade partners, like Brazil, China, the US, and the EU, which represent nearly half of 2019 exports.
Global financial stress also affected the local market. The official FX rate remained stable at ARS 62.8 (+0.6% WoW), with the Central Bank selling both at spot and forex market. The Blue Chip Swap, however, has increased to ARS 90.5 (+9.9% WoW), widening the premium to 44%, the highest since the reimposition of capital controls. Meanwhile, sovereign risk (EMBI spread) climbed to 3140bps on Thursday, 810bps higher than last week. This performance was in line with the rest of the EMs, although at different (higher) levels (Latam EMBI spread is at 512bps, having increased 141bps in the current week). This increases pressure on economic policy, already constrained by the debt problem.
EMBI Spread: Argentina vs. Latam
We believe the shocks have an ambiguous effect on debt renegotiation, though we think that the net balance is negative. On the one hand, lower bond prices and overall financial uncertainty helps the government’s position of “significant debt relief”. On the other hand, several risks appear: (a) parities belowe 40% might be more tempting for “vulture funds”, which would make harder the activation of CACs; (b) systemic risk after the debt swap will remain high; and (c) the exit yield might be high enough (10% or higher) to delay access to global credit market. This point is relevant, as the government should try to roll over maturing debt to avoid financial stress in the near future (net debt service in foreign currency totals USD 20.8bn for the rest of 2020 and USD 49.2bn for 2021-22 -of which USD 23.4bn are payments to the IMF).
Sovereign bonds parities
The government announced the restructuring of up to USD 68.8bn of foreign law debt. The decree 250/20 listed all the bonds that are subject to renegotiation, including those that were issued during the 2005-10 restructuring. For the moment, no negotiations for the local law debt are on the official pipeline. Regarding the original (optimistic) schedule for the renegotiation process, the government is using the Coronavirus outbreak as an excuse for likely delays. Public officials’ roadshow to explain the government’s offer to bondholders might be canceled, using videoconferences instead.
Argentina’s Public Debt composition
The private sector holds a majority of foreign law debt (USD 67.4bn, or 93% of total). Around USD 31.1bn or 43% of the debt authorized to be restructured in the decree are bonds that were included in the 2005-10 debt swaps (the public sector holds 17% of them). Our estimates are slightly above official figures (foreign law debt of USD 73bn vs USD 68.8bn).Foreign Law Premium
The foreign law premium is falling. In the midst of global financial turmoil and the announcement that the Treasury will only restructure (for the time being) foreign law bonds, the premium between foreign and local law bonds started to drop. It now stands at 18.2% for the Discount and 12.1% for the Par bonds. The Treasury issued two new local currency bills this week, for a total of ARS 16.3bn. The first was a fixed-rate bill with maturity on 05/13/2020, with an APR of 30.6% (issuance of ARS 6bn). The other was the reopening of the Lebad, maturing on 07/31/2020 and a price cut of ARS 995.02 per ARS 1,000 of original nominal value, which implies an APR of 38.9% (issuance of ARS 10.3bn).
The government announced that they will be launching a new exchange for the Dual bond and reprofiled bills. For the AF20 they will be offering a CER indexed bond +1.2% with maturity on 03/18/2022. For the bills S30S9, X30S9, V03O9, S11O9 (Lecaps, Lecer and Lelinks) they will offer a basket of two bonds: 25% of a discount bill with maturity on 06/06/2020 and 75% a CER indexed bill with maturity on 11/13/2020.
Inflation surprised positively (again) in February, dropping to 2.0% (vs. 2.3% in January). The increase of seasonal prices (2.5% MoM due to important hikes in Hotels and Restaurants – 3.1% MoM- and Clothing -2.4% MoM) was compensated by tight control of regulated prices (0.7% MoM) while core inflation remained stable (2.4% MoM both in January and February). Last month’s inflation print was below market consensus (BCRA’s REM: 2.5% MoM) but very similar to our estimates (1.9% MoM), decreasing for second month in a row. Thus, year-on-year inflation was 50.3% in February. For March, we expect an inflation of 2.5% MoM.
Monthly Inflation by items
- We highlight the increase of Food and Beverages (2.7% MoM), mostly explained by Fruits, Vegetables and Meat (6.7% MoM, 7.3% and 4.4%, respectively). There were also significant increases in Other Goods and Services (2.4%), Comunication (2.3%) and Recreation and Culture (2.2%).
- February inflation slowdown seems more genuine than January: almost a third of our monitored prices increased more than 2% MoM in February, compared to nearly half in January.
4-weeks monthly inflation