The Big Idea
Argentina | Market stress
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The latest stress in Argentina is a reminder of the importance of a coherent economic program backed by the International Monetary Fund after elections. It leaves the country’s sovereign debt with positive convexity. Eurobond prices remain trapped in a narrow range and highly sensitive to the IMF option. There are obstacles: difficult logistics, a tight timeframe, reluctant Kirchnerismo always the main hurdle against pragmatism. But the latest balance-of-payments stress and overall domestic financial market stress may serve as a catalyst. Province of Buenos Aires debt is a leveraged play on this.
The window for market interventionism should become increasingly narrow with rising foreign exchange pressures and macro imbalances throughout the course of the year. The sensitivity of the local markets to the IMF option should reinforce Kirchnerismo pragmatism after elections later this year. This remains one of the arguments for an overweight recommendation for the Province of Buenos Aires as leveraged trade on the positive convexity; it also is a higher carry spread product relative to the sovereign.
The data watch continues to focus on how authorities manage the balance of payments stress. The foreign exchange reserve accumulation earlier this year has since reversed after a small $3.2 billion accumulation through July. The weak policy framework under Kirchnerismo encourages capital outflows and discourages capital inflows and hence increases the foreign exchange sensitivity to seasonal exports or one-off US dollar outflows. The deceleration in US dollar purchases has been unable to finance the IMF payments this month, triggering a subsequent $375 million decline in foreign exchange reserves. There is less firepower to directly manipulate the blue-chip foreign exchange rate, and that explains the higher regulatory intervention. There should soon be a windfall of the $4.3 billion IMF SDR allocation that will finance the IMF debt repayments through year end.
This should provide a buffer through year-end for the cumulative $4.2 billion payments but not much more room to maneuver if we assume a low level of foreign exchange reserves. The cumulative IMF payments reach an onerous $8.1 billion through the end of March 2022 and leaves a narrow window to finalize IMF negotiations after year-end elections. The net liquid foreign exchange reserves, excluding gold and SDR, have only recovered to $1.7 billion through July 31 against a $2.7 billion peak on July 23. The seasonal agricultural exports should start to recede next month with the central bank only able to rebuild $1.7 billion in liquidity despite supportive high commodity prices.
Meanwhile, the macro imbalances remain vulnerable to further stress. The difference between the blue-chip foreign exchange rate and the official rate remains at a wide 84% margin after the recent regulations. It reflects stubborn inflation and high structural US dollar demand. The latent inflationary pressures continue with recent weak auctions and increasing dependence on the central bank for deficit financing. There has been a surge in transfers of central bank “foreign exchange profits” that substitutes the direct loans but effectively represents deficit monetization for election-related fiscal stimulus. The inflation repression only worsens with a slower monthly foreign exchange adjustment and an increasing subsidy burden on marginal tariff hikes. If the Fernandez administration assumes tough negotiating tactics, then the market backlash could quickly force a more conciliatory reversal. The foreign exchange pressures are typically more acute given a history of year end maxi-devaluations. The declining policy flexibility and increasing macro imbalances should force a more pragmatic stance for the Fernandez administration that lowers the deal risk of an IMF program and reaffirms a view of positive convexity for the sovereign and quasi-sovereigns.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.