February 21rst, 2019


Weekly report Nº 21: FMI and Guzman are aligned, for now (Spanish version here)

[Markets]  The IMF calls for bondholders to help to resolve the crisis. debt services capacity has worsened compared to July's 2019 (Pre PASO) debt sustainability analysis from "sustainable but not with high probability" to "unsustainable"Markets reacted to the announcement with the EMBI+ closing at its highest since December 16th and bonds with an implicit haircut of more than 55%.  

We think that the odds of a new far fetched agreement with the IMF are low, as there are no significant milestones until late 2021 when the loan will start coming due and would be positively surprised if an agreement is reached without requirements of fiscal consolidation or structural reform. However, the IMF statement was explicit in its support of an aggressive position with the bondholder, strengthening government stance in the negotiation.

The government issued two Badlar-adjusted ARS bills by private (LEBADs) placing ARS 3.6bn and finally performed an exchange for the AF20 with another Badlar bond maturing at 2021 by ARS 9bn. The FX premiums decreased during the week, and local companies placed offshore USD debt in ARS.

[Fiscal] 
 Despite the freezing of the indexation rule, further adjustments will be needed to avoid a worsening of the fiscal result. Downside risk to our 0.4% forecast for 2020. The electrical distributors have decreased their payment to the national wholesale electrical company (CAMMESA). There are some signs that the fiscal side has worsened at the beginning of 2020.

[Prices] 
 Current week inflation was 0.4% WoW (vs. 0.5% WoW previous week). Meanwhile, Core inflation decelerated to 0.5% (vs. 0.6% WoW previous week). As of February 20th, the general monthly inflation is 2.1% MoM and the core is 1.9% MoM. Downside risk to our 2.5% forecast for the month.

[Monetary] The Central bank cut again the interest rate and thus accumulates 2300Bp since the arrival of Pesce at the institution. Additionally, the institution set a maximum rate for credit card loans at 55% and reduced legal deposits.

[Markets]
 
The IMF calls for bondholders to help to resolve the crisis. In a statement, they concluded that the debt services capacity has worsened compared to July's 2019 (Pre PASO) debt sustainability analysis from "sustainable but not with high probability" to "unsustainable". Surprisingly, they round their opinion on the fact that fiscal surplus needed to manageable rollover risk and potential growth is not "economical nor politically feasible",  aligned with Minister Guzman rhetoric, as we commented in our Seido special report: Guzmanroufakis.

We think that the odds of a new far fetched agreement with the IMF are low, as there are no significant milestones until late 2021 when the loan will start coming due and would be positively surprised if an agreement is reached without requirements of fiscal consolidation or structural reform. However, the IMF statement was explicit in its support of an aggressive position with the bondholder, strengthening government stance in the negotiation.

Markets reacted to the announcement with an EMBI+ closing this Thursday at 2108bps, the highest since December 16th, 2019, and represent a +3.5% WoW. Without taking into account the bonds that participated in the 2005 exchange (these have more demanding CAC´s) the bonds price now have an implicit haircut of more than 55% for local law shorter bonds, while the short foreign law bonds are pricing a haircut of more than 45% and the larger ones are near a 40% decrease in their NPV. This gap can also be seen at the parities: while local law bonds have an average parity of 42.1%, the foreign law bonds are at 47.5%.
Implicit haircuts


Parities
The government issued two ARS bills adjusted by private badlar (LEBADs) placing ARS 3.6bn and finally performed an exchange for the AF20 with another badlar bond maturing at 2021 by ARS 9bn. The exchange was an improvement compared with the previously failed exchange mainly explained by allowing to exchange the AF20 at a technical value compared with the implicit haircut of the previous exchange. The AF20 exchange was originally going to be performed up to ARS 3.1bn but finally, they accepted ARS 9.0bn. The two issued ARS badlar matures on May 28th and August 28th of this year, the amount placed was ARS 2.6bn and ARS 1bn, with an effective rate of 43.0% and 44.5%, respectively. The exchange bond matures on August 2021, performed by ARS 9bn with an effective rate of 32.4%.

The government is delayed in his restructuring schedule – According to this, last week the economic team had to go further with the “Selection of Information Agents from the proposals received” and with the Signing of the Information Agent Hiring Letter.

Schedule for February 2nd fortnight – Although it still has to catch up with the estimated calendar, it still has more items for the rest of the month. These are:
  • Selection of Distribution Agents and/or Financial advisors from the proposals received, and the signing of the hiring letter from these.
  • Beginning of a 10-day period of meetings and views exchange with external public debt holders. According to this item, Guzman is traveling to the G20 meeting in Saudi Arabia.
  • Elaboration of a report based on the comments of public external debt holders.
 
The FX premiums decreased during the week, and local companies placed offshore USD debt in ARS - Vista Oil & Gas issued USD 50m at an APR of 3.5% with maturity in February 2024. The high demand for this bond was because it could be subscribed with ARS at the official exchange rate (61.7) but the payment will be in USD, therefore avoiding the blue swap chip premium. This helped to lower the premium given that investors sold dollars in the stock or bond market and with those ARS subscribed to the bond. The blue swap chip closed this Wednesday at ARS 81.2 vs. 61.7 of the official exchange rate, with an implicit premium of 31.6%, way lower than the 38.8% premium on Monday, before the Vista issuance.

 
Blue Swap Chip Premium
 
[Fiscal]
 
Despite the modification in the indexation rule, further adjustments will be needed to avoid a worsening in the fiscal result -

We estimate that the social security announcement made last week (fix ARS 1500 plus 2.3%) implies a saving of 0.17% of GDP, under the assumption that this adjustment is repeated in June.

This puts a downward risk to our primary deficit forecast (0.4%), as it is grounded by a 0.7% adjustment assumption in the pension system that now looks unfeasible. If the government misses the June adjustment and restarts the indexation in September, the total saving goes up to 0.4% of GDP.

 

 
The electrical distributors have decreased their payment to the national electrical company that sells electricity to them. After the economic emergency bill freezing of electrical tariffs, the provincial energy distributors are having trouble dealing with the measure decreasing CAMMESA's rate collection to 70% from 96%. Additionally, the electricity subsidies covered by this entity have reached 40% in December and there were no further tariffs increases.

Energy subsidies 
There are some signs that the fiscal side continues to deteriorate:
  • The Central bank continues to financially assist the treasury. On February 13th transferred ARS 27bn to the treasury accumulating ARS 42bn.
  •  
  • There were no significant payments of ARS debt at the beginning of the year. However, between March and April, it will be facing significant ARS maturities, totalizing around ARS 310bn with both local currency bills and bonds, including the A2M2 and the TC20.
  •  
  • Tax export statements continue at historically low levels affecting export tax revenue. After the sharp increase at the end of the last year when it was expected an increase in tax exports that finally happened, In January agro-exports statements were at a low level similar to September 2018, November 2015 or December 2013. In this way, January export taxes had the lowest YoY variation since August 2018. The export statements affect revenues by export taxes that are used to calculate the payment that the agro exporters perform to the national government. Tax from exports in January had a sharp reduction compared to December and we expect this trend to continue in February and at least up to April will be at low levels.
Agro-exports statements
[Prices]
 
Current week preliminary inflation was 0.4% WoW (vs. 0.5% WoW previous week). Meanwhile, Core inflation decelerated to 0.5% (vs. 0.6% WoW previous week). As of February 20th, the general monthly inflation is 2.1% MoM and the core is 1.9% MoM.
 
We reduce our forecast for February to 2.2%.
 
4-weeks monthly inflation


[Monetary]
 
The Central bank cut again the interest rate and thus accumulates BP2300 since the arrival of Pesce at the institution. This week, the institution reduced by BP 400 bps to 40% its reference rate. The BCRA confirms an expansive monetary policy in the middle of debt negotiations.
 
Reference and deposit private market rate
 
 
In another measure of expansive monetary policy, the institution sets a maximum rate for credit card loans at 55% and reduced legal deposits. The measure is for banking and non-banking credit cards. In a statement the entity explained that the measure is implemented in a context of a decrease in the reference rate and deceleration of the inflation rate trying to recover private credit. Additionally, freeze banks fees for 180 days. For the banks being able to deal with this measure, the Central Bank reduced legal deposits for institutions that participate in the financing program “ahora 12” up to 35% of those loans (from 20% before) and up to 4% of the total legal deposits (from 1.5% before).
[Annex]
.
Net USD debt service left for the rest of the year - USD bn


Net ARS debt service left for the rest of the year - USD bn

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