[Debt] Relevant creditors (those with enough holdings to complicate the exchange) signed a lock-up agreement and presented a counteroffer with an average NPV of USD 56 (at a 10% exit yield) and the difference with the government has narrowed to almost USD 3. Creditors also conceded some ground in legal matters and are now asking that eligible bonds with 2016 indentures (the “Macri bonds”) be exchanged for new instruments under amended 2016 indentures. It seems that the government might be willing to accept an arrangement of this sort. With both parties so close to each other, it seems that a satisfactory conclusion is near.
Differences seem small to become a deal-breaker. Besides some final negotiations, the government might be waiting to “sell” the news properly in order to reap political benefits and change (at least, temporarily) the agenda, burdened with the economic and sanitary problems of the Covid-19 shock.
[Activity] INDEC’s EMAE recovered 10% MoM in May, in line with our expectations and new data of June confirms another month of recovery. FIEL’s industrial production index dropped only 6.1% YoY in June vs -21.1% YoY in May, Construya index increased 1.7% YoY vs -34% YoY and cement sales fell 6.9% vs -32.9% YoY. July’s early data shows mixed signals. Mobility has stabilized but Industrial electricity demand is on the rise.
[Fiscal] Few surprised in June’s fiscal data. Primary and Total deficit was ARS 253bn and ARS 288bn respectively, in line with our expectations. Real income contraction deaccelerated (-20% in June vs -24% YoY in May) and also Real primary spending growth (45% vs 28% YoY), Social Spending (40% vs 46% YoY), Economic Subsidies (40% vs 106% YoY), and discretionary Transfers to Provinces (156% vs 343% YoY) are driving the growth in spending and, at the other extreme, the wage bill, capital spending, and other current spending all decreased in real terms (-17%, -45% and 8% YoY, respectively).
We estimate ARS 276bn for July primary, or ARS 295 adding interest payments (including those of obligations that cannot be restructured), or 1.1% GDP. For 2020 we maintain our primary deficit forecast at 7.8% GDP and overall balance of 9.6% GDP.
[Activity]
Official May’s activity data confirms our expectations. INDEC reported that economic activity increased 10% MoM (seasonally adjusted) in May, after the “free-fall” of April (-17,9% MoM). However, activity is still -20.6% below last year’s May level and is now down to 2006 levels. These figures were in line with our expectations.
New (unofficial) data confirms June’s marginal recovery. FIEL’s industrial production index dropped -6.1% YoY in June, up from the -21.1% YoY reported in May. Industrial electricity demand (a fairly good proxy of sectoral activity) also improved, with a printing of -17.8% YoY (vs -25% YoY in May). Construction also seems to have recovered, with the Construya index increasing 1.7% YoY (vs -34% YoY) and cement sales falling -6.9% (vs -32.9% YoY).
After some stability, mobility is slightly on the rise again. The tightening of the lockdown in Buenos Aires’ Metro Area (AMBA) and some provinces affected by the coronavirus reduced mobility, but not much. According to Google’s data, average mobility dropped as little as -5pp in AMBA and -2pp in other provinces. More recently, mobility returned to an upward trend and signals that economic activity might continue recovering. However, as the coronavirus infects more people, the “reopening calendar” could be abruptly interrupted by the authorities.
Anticipated July data suggest that the recovery continues, at least in some sectors. Industrial electricity demand is now falling at a rate of -11.3% YoY (30-day moving average), up from the -18% reported in late-June. Electricity demand seems to be a fairly good proxy of production (see graph below). This data, combined with that of the EMAE (see above), suggests that the economy bottomed out in April and continues on a slow and weak recovery path.
[Fiscal]
No surprises on June’s fiscal data. With several days of delay, the government released June’s fiscal data, reporting a primary deficit of ARS 253bn (or an overall balance of ARS 288bn), in line with our expectations. With higher economic activity, real income growth recovered slightly (-20% in June vs -24% YoY in May). Meanwhile, the real growth of primary spending decelerated somewhat but remains high (45% vs 28% YoY), driven by Covid-19 related policies. As a result, the gap between them is still wide (-48pp).
Primary spending increased substantially in June, but at a lower rate than in May. We highlight the real growth rates of Social Spending (40% vs 46% YoY), Economic Subsidies (40% vs 106% YoY), and discretionary Transfers to Provinces (156% vs 343% YoY). These items are at the core of fiscal policy, as they include cash transfers to households and firms (IFE and ATP programs), freezing of public services tariffs, and financial assistance to Provinces. At the other extreme, the wage bill, capital spending, and other current spending all decreased in real terms (-17%, -45% and 8% YoY, respectively).
The fiscal balance will continue to deteriorate. The cumulative primary balance was of 3.3% GDP in June, substantially worse than previous June’s printings. We estimate that July could end with a primary deficit of about ARS 276bn or 1% GDP. Adding interest payments (including those of obligations that cannot be restructured), the overall balance would be a deficit of ARS 295 or 1.1% GDP. For the entire 2020 we maintain our primary deficit forecast at 7.8% GDP (overall balance of 9.6% GDP), as a weak recovery of economic activity will keep income at relatively low levels and the post-lockdown scenario will imply political and social pressures to keep up with spending.
[Debt]
Bondholders formed a new group and presented a counteroffer. Relevant creditors (those with enough holdings to complicate the exchange) signed a lock-up agreement and asked the government for an additional effort. They presented a new proposal, which has an average NPV of USD 56 (at a 10% exit yield). The difference between this proposal and the government’s latest offer (NPV of USD 53) narrowed to almost USD 3. With both parties so close to each other, it seems that a satisfactory conclusion is near.
The bondholders’ latest proposal is pretty much the same as the government’s one. Creditors pretend an average coupon of 3.4%, against the 3.1% offered by the Treasury (actual average coupon is 6.3%). Moreover, the debt profile has slightly higher payments in the first 10 years. The cumulative cash flow debt relief totals USD 37.2bn until 2023 (compared to USD 38.5bn of the official offer), USD 33.2bn until 2030 (vs USD 36.4bn) and USD 17.8bn until 2050 (vs USD 20.2bn). Differences seem small to become a “deal breaker”.
Creditors also conceded some ground in legal matters. Previously, they pretended that all new instruments be issued under 2005 indentures, which would protect them from an abuse of newer indentures. After fierce opposition from the government, they are now asking that eligible bonds with 2016 indentures (the “Macri bonds”) be exchanged for new instruments under amended 2016 indentures. It seems that the government might be willing to accept an arrangement of this sort.
Considering the current situation, a deal seems pretty close. Besides some final negotiations, the government might be waiting to “sell” the news properly in order to reap political benefits and change (at least, temporarily) the agenda, burdened with the economic and sanitary problems of the Covid-19 shock. Compared to results reported in Asonuma & Trebesch (2015), a deal like the outlined above would be considered relatively fast (8 months vs a median of 37 for post-default exchanges) but with a haircut in line with other exchanges (about 35-38% vs a median of 43%).
