Presentation Argentina Outlook 2Q19 - Microsoft · hike. but an increase could occur at the end of...

BBVA Research – Argentina Economic Outlook 2Q19 / 1

April 2019

Argentina Outlook

2Q19

Key messages

The weakness in global activity is prolonged and uncertainty continues. which has led to a reaction in the form of

economic policies, especially monetary ones, intended to soften the deceleration

In Argentina. domestic risks have intensified towards the end of 1Q19 due to the renewed volatility in the

exchange market and the rise in interest rates

As rates are likely to remain high throughout most of the year, we have revised our growth forecasts downwards

from -1% to -1.2% for 2019 maintaining the vision of positive inter-quarterly growth throughout the year although at

a lower rate

Inflation is not falling at the expected rate, probably due to the volatility of the exchange rate and the greater

indexation of the economy. We forecast inflation at 35% in December 2019 (vs. 30% in our previous estimate)

The exchange rate will depreciate in line with inflation to reach ARS 49/USD by the end of the year, with lower

tensions in 2Q19 due to the contribution of agricultural exports and sales by the Treasury. The key issue continues

to be the size that portfolio dollarization may reach if political uncertainty widens.

For whoever wins the elections, the management of the economy and access to financing in 2020 will require

continuing to fulfil the fiscal and monetary commitments agreed on with the IMF



Contents

01 International context

02 Argentina: 2019 will see key elections


01Global Environment


The moderation of growth has resulted in a shift of the monetary policy

of the US and the Eurozone. and new stimuli in China

Fed

Long pause in rate

hike. but an increase

could occur at the end

of the year.

Normalization

(reduction) of the

balance will end prior

to the date forecast

(September 2019)

Latin America and

other developing

economies

Margin for a looser

monetary policy

ECB

Delay in

monetary

normalization

Low rates for

greater periods

and greater

liquidity

(TLTROs)

Rate increases

are not

expected until

December

2020.

China

Additional monetary

stimulation: rate and

fund deposit cuts

Increase of public

deficit up to 2.8% in

2019

Tax cut (2% of GDP)


Protectionism: the agreement between the USA and China is delayed

while the EU begins to gain prominence as a focus of tensions

US

China European Union

Negotiations are

ongoing. so an

agreement is likely in

2Q19

USA threatens

higher tariffs on

EU vehicles

The EU hardens its tone against

China. seen as an “economic

competitor” and “systemic

rival”


Oil: supply adjustments provided support for prices in 1Q19

which nonetheless must be corrected downward

Oil: Brent prices(Dollars per barrel. end of period)

Production cuts have allowed an

increase in the price of oil (on average.

65 dollars per barrel in 1Q19)

The perspectives of lower prices are

maintained in the second half of 2019

and 2020. in line with the expected

slowdown in demand and the

expansion of supply in the USA .

We maintain the long-term equilibrium

level of $60 per barrel

Source: BBVA Research. based on INE data.

50

61

71

62

55

0

10

20

30

40

50

60

70

80

2016 2017 2018 2019 (f) 2020 (f)

Current Previous


Action by central banks and an absence of “accidents”

would enable the slowdown in world growth to be mild

More signs of global

deceleration

New stimulus

policies

01Protectionism:

a US-China agreement

remains probable. despite

the delay

02Brexit:

more uncertainty

over a greater

period of time

03Financial markets:

volatility limited

by the actions of

central banks

Assumption based on the evolution of the global environment without

“accidents”

04Oil

price moderation

after recent

upturn

Global growth gradually softens


2019 2020

1.7 2.3

Latam

Without “accidents” global growth will gradually slow

Up

Unchanged

DownSource: BBVA Research

2019 2020

1.0 2.5

Turquía

6.0 5.8

China

2019 2020

2019 2020

3.5 3.4

World

Eurozone

2019 2020

1.0 1.3

US

2019

2.52020

2.0

2019 2020

1.4 2.2

Mexico


Global risks: fear of an economic recession in the US and

the Eurozone continues despite greater support from central banks

Source: BBVA Research

Economic recession: high

Protectionism: high.

Withdrawal of the Fed: significantly less than

three months ago

Economic recession: growing

• Brexit:

• Italy:

• Increase of eurosceptic forces in Parliament

Protectionism: growing

ECB exit risk: significantly lower than three months ago

Disorderly deleveraging: relatively greater than three

months ago

Protectionism: high.

US.

EZ

-S

ho

rt-t

erm

pro

bab

ilit

y +

- Severity +

CHN

Financial vulnerabilities may amplify the severity of risks


02Argentina: 2019 will continue

in electoral mode


Despite strict compliance with monetary targets.

volatility returned to the foreign exchange market

Source: INDEC, BCRA and BBVA Research

Peso/dollar exchange rates and ranges in

non-intervention zone(ARS/USD)

The high inflation of February (3.8% MoM) raises doubts

regarding the capacity of the monetary program to

quickly reduce inflation and improve consumption

recovery prospects

The BCRA is attempting to recover credibility by

increasing outperformance of monetary base targets

and further tightening monetary policy after the

abrupt Leliq rate drop in February

Monetary Base targets(AR$ billion)

Source: BCRA and BBVA Research

2730333639424548515457

2730333639424548515457

jun

.-18

jul.-1

8

ag

o.-

18

sep.-

18

oct.-1

8

no

v.-1

8

dic

.-1

8

en

e.-

19

feb

.-19

ma

r.-1

9

ab

r.-1

9FX rate CB lower bound CB upper bound

1,150

1,200

1,250

1,300

1,350

1,400

1,450

30

/se

p/1

8

15

/oct/18

30

/oct/18

14

/nov/1

8

29

/nov/1

8

14

/dic

/18

29

/dic

/18

13

/ene

/19

28

/ene

/19

12

/fe

b/1

9

27

/fe

b/1

9

14

/mar/

19

29

/mar/

19

daily data 20d averageOriginal target Revised target


An inflationary inertia that is difficult to tame casts

doubts on the credibility of the Central Bank


Central Bank survey inflation expectations(% change YoY)

Inflation expectations increased as the extremely tight monetary

policy seems insufficient to reduce inertia quickly in a context

of continuous adjustment of utility rates and greater indexation

in the economy (pensions and to a lesser extent, wages)

Inflation will continue close to 4% MoM in March and April due

to tariff adjustments and a core inflation impacted by food

prices. Considering monetary policy lags, inflation is expected

to fall to 1.9% MoM in 2H19, but will end the year at 35% YoY

Contribution to inflation by component:(Incidence and % change MoM)

0

10

20

30

40

2019 2020

Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

+ 21.7pp

+ 13.0pp

0%

1%

2%

3%

4%

5%

6%

7%

Jan-1

8

Fe

b-1

8

Ma

r-1

8

Apr-

18

Ma

y-18

Jun-1

8

Jul-1

8

Aug

-18

Sep

-18

Oct-

18

Nov-1

8

Dec-1

8

Jan-1

9

Fe

b-1

9

Ma

r-1

9

Apr-

19

Ma

y-19

Jun-1

9

Jul-1

9

Aug

-19

Sep

-19

Oct-

19

Nov-1

9

Dec-1

9

Seasonal Regulated Core CPI

Source: INDEC and BBVA Research


Demand for money at minimum levels and

a persistent monetary hangover

Source: INDEC, BCRA and BBVA Research

Growth of monetary aggregates(% YoY change)

Demand for pesos % of GDP(average last 4 quarters)

After the 2018 run on the currency, the demand for

pesos remains at historical lows and is unlikely to

recover quickly in a context of political uncertainty

and exchange rate volatility

After the elimination of the main money creation factors, the

Monetary Base contracted 8% since the end of 2018 but is still

growing 30% YoY due to the expansion resulting from the

dismantling of Lebac bills in 2H18

Source: BCRA and BBVA Research.

2%

4%

6%

8%

10%

12%

14%

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

1Q

15

4Q

15

3Q

16

2Q

17

1Q

18

4Q

18

Monetary circulation outside the financial system

Private M2 in pesos

0%

10%

20%

30%

40%

50%

dic

-17

en

e-1

8

feb

-18

ma

r-1

8

ab

r-18

ma

y-18

jun

-18

jul-

18

ag

o-1

8

sep-1

8

oct-

18

no

v-18

dic

-18

en

e-1

9

feb

-19

ma

r-1

9

Monetary circulation outside the financial system

Monetary base

Private M2

Private M3


… has led to a reinforcement of tight monetary policies

The BCRA announced that it would reduce

the Monetary Base expansion to 0% in 2H19

(previously 1% MoM) and reduced the slope

of non-intervention zone bands from 2%

MoM to 1.75% MoM

Limiting CB purchase of foreign currency to

USD 50 million per day in March and April,

maximum at 2% of the Monetary Base

Absorption via Leliq intensified with 2 daily

bidding sessions and improving the ratio for

repo rates, which caused interest rates to

increase to 68% at the end of March 2019

The BCRA set a 62.5% floor on the Leliq's

rate for April. We estimate that interest rates

will remain high throughout Q2 and Q3 and

will only be reduced in the last quarter to

40% YoY

Source: BCRA, INDEC and BBVA Research

Interest rates and inflation (%)

0

10

20

30

40

50

60

70

80

Dec-1

5

Ma

r-1

6

Jun-1

6

Sep

-16

Dec-1

6

Ma

r-1

7

Jun-1

7

Sep

-17

Dec-1

7

Ma

r-1

8

Jun-1

8

Sep

-18

Dec-1

8

Ma

r-1

9

Jun-1

9

Sep

-19

Dec-1

9

Inflation yoy Badlar rate Policy/ Leliq rate


GDP will contract by 1.2% in 2019 due to a weaker quarterly growth

in the face of extremely tight monetary policy

Quarterly GDP growth- previous and

current estimates(Seasonally adjusted % QoQ change

and original series YoY change)


-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

q/q prev. q/q current y/y prev. y/y current

GDP fell 1.2% s.a. QoQ in 4T18 (BBVA

Research (e) -1.4%). leaving a slightly lower

than forecasted statistical drag for 2019

However, quarterly growth, although

positive, will be weaker in Q2 and Q3 due

to high interest rates and greater exchange

rate volatility

Unemployment will gradually increase to

11 % in 2Q19, which may result in

moderation of wage demands. Considering

the acceleration of inflation in the first four

months of the year. it is difficult to assume

that there will be an average real wage

recovery in 2019

In light of the weakness of domestic

demand, the external sector will contribute

positively to growth by 5.4 pp. in 2019


Insufficient revenue growth leads to greater adjustment in spending

maintaining the annual zero primary deficit target

Source: IMF and BBVA Research

Economic subsidies(% GDP)

Income and expenses, previous and revised(% GDP)

Lower collection of export taxes will be compensated by a

reduction in capital expenditures and in part by automatic

adjustments in Co-participation transfers to provinces and

spending on pensions (due to the acceleration of inflation)

The current administration will achieve a 60% reduction in economic

subsidies in terms of GDP, but after the last devaluation and the

acceleration of inflation, the margin for adjustment through

additional utility rates increases has fallen

Source: ASAP. Ministry of the Treasury. INDEC. and BBVA Research

Budget II Review IMF III Review IMF

TOTAL REVENUE 28.4 28.1 26.4

Taxes 19.7 19.8 18.2

VAT 7.8 7.6 7.4

Export taxes 2.4 2.5 1.7

Import taxes 1.0 0.8 0.7

Other taxes 8.5 8.9 8.4

Social security 6.6 6.3 6.0

Non-tax revenue 2.1 2.0 2.2

PRIMARY SPENDING 28.4 28.1 26.4

Wages 3.6 3.6 3.3

Goods and services 0.9 0.8 0.8

Pensions 9.7 9.6 9.2

Social spending 2.6 2.6 2.3

Economic subsidies 1.6 1.5 1.4

Capital spending 0.9 0.9 0.8

Other 0.3 0.3 0.2

Transfers to provinces 8.8 8.8 8.4

PRIMARY RESULT 0.0 0.0 0.0

2019

3.9

3.43.5

2.11.9

1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2014 2015 2016 2017 2018 2019 est.


Higher than expected roll-over rates reduce

financial needs for the rest of 2019

2019-20 Financing Programme(USD millions)

Source: Ministry of Finance and BBVA Research

High renewal level for LECAPs in 1Q19 and

the fact that part of maturities have been

transferred to 2020 reduce the need for

Letes/Lecap roll-over to 35% in the rest of 2019

100% renewal of LETES but since they expire

within the year the renewal requirement

remains at 45%

The composition of the expenditure by currency

allows the combined average required rollover

rate for LETES/LECAP to be reduced to 40%

Intra-public sector financing will be zero for

the year, despite net cancellations in 1Q19

An average roll over rate of 67% this year

means that in 2020 no new debt would need

to be issued, only a total renewal of all

maturities (35% denominated in dollars)

2019 2020

Primary deficit 0.0 -5.2

Plan gas payments 0.6 0.6

Interest on private sector debt 11.6 15.2

Amortizations of debt held by private sector 30.8 26.2

IFIs (non-IMF) 3.0 3.0

Dollar denominated bonds 3.9 4.0

Peso denominated bonds 1.7 7.5

Repo 2.9 2.2

Letes in dollars 9.9 4.5

Lecap and Lecer in pesos 9.4 5.0

FINANCIAL NEEDS 43.0 36.8

Initial balance 4.7 0.6

Rollover of intra public sector debt 1Q 3.8 0

IMF 22.5 5.9

IFIs 4.3 3

Private sector financing 8.3 27.3

Rollover international markets 0 0

Rollover domestic markets 0 11.1

Repo 0.5 1.5

Letes in dollars 4.5 4.5

Lecap and Lecer in pesos 3.3 5

New issuances in domestic markets 0 5.2

SOURCES 43.6 36.8

Sources - Needs 0.6 0.0

ROLLOVER Letes in dollars 45% 100%

ROLLOVER Lecap and Lecer in pesos 35% 100%


Exchange market: high volatility but finishing

in line with inflation

Source: BCRA, CEC-CIARA and BBVA Research

FX rate, export settlements and BCRA

intervention (USD Million y ARS/USD)

Real multilateral exchange rate index (REER)(base Nov. 2015 = 1)

The record harvest of corn and soybeans will add USD 4.5 million to

exports in 2Q19. In turn, sales of USD 60M in Treasury dollars per day

starting in April will contribute 3 billion to the supply of foreign

currency in 2Q19 and USD 9.6 billion for the year

The real exchange rate will remain close to

the lower band but slightly depreciated with

respect to the IMF's equilibrium estimates (16%)

and the long-term averages (7%)

18

21

24

27

30

33

36

39

42

45

48

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-1

8F

eb-1

8M

ar-

18

Apr-

18

Ma

y-18

Jun-1

8Jul-1

8A

ug

-18

Sep

-18

Oct-

18

Nov-1

8D

ec-1

8Jan-1

9F

eb-1

9M

ar-

19

Apr-

19

Ma

y-19

Jun-1

9Jul-1

9A

ug

-19

Sep

-19

Oct-

19

Nov-1

9D

ec-1

9Grain exports CB sales Treasury sales FX rate

1.00

1.25

1.50

1.75

2.00

2.25

1.00

1.25

1.50

1.75

2.00

2.25

Dec-1

4

Apr-

15

Aug

-15

Dec-1

5

Apr-

16

Aug

-16

Dec-1

6

Apr-

17

Aug

-17

Dec-1

7

Apr-

18

Aug

-18

Dec-1

8

Apr-

19

Aug

-19

Dec-1

9

REER REER lower range REER Upper range

Long-run average= 1,45

Source: BCRA, Haver, INDEC and BBVA Research


Dollarization of deposits (% of the total)

Electoral uncertainty, the persistence of inflation and the

perception that the capacity for BCRA intervention in the FX

market is limited reinforce negative expectations, making it

difficult to lower inflation and reduce fiscal spending

Appetite for assets in pesos and for Argentine assets in

general will remain low maintaining negative country

differentiation due to doubts regarding economic

stabilization and the electoral cycle


Confidence indexes, inflation and exchange

rate(Base 100 = Oct. 18)

Source: INDEC, BCRA, Di Tella University and BBVA Research.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

Dec-1

5

Dec-1

6

Dec-1

7

Dec-1

8

Dec-1

9

FX restrictions market

End of convertibility

system

Restrictions in FX market

Tax amnesty

2018 devaluation

But FX volatility fuels uncertainty... and the demand

for dollars

90

100

110

120

Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

Consumer Confidence Index Gov. Confidence Index

FX CPI


However, the potential for damage is much

lower than in 2018

Dollarization in the financial system(USD million)

After the dismantling of Lebac bills in 2018, assets in

pesos that could potentially be dollarized are half the

amount that they were in 2018, while net reserves are

45% higher than in the previous year

Despite a strong increase in 4Q18, fixed terms deposits in

pesos now amount to the same amount that dollar-denominated

deposits in the financial system, although they have not fallen in

nominal pesos. The ratio of private loans/deposits is now 72%


Assets in pesos vs. International reserves(USD million)

Source: Finance Minstry , BCRA and BBVA Research

0

20,000

40,000

60,000

80,000

Dec-1

7

Jan-1

8

Fe

b-1

8

Ma

r-1

8

Apr-

18

Ma

y-18

Jun-1

8

Jul-1

8

Aug

-18

Sep

-18

Oct-

18

Nov-1

8

Dec-1

8

Jan-1

9

Fe

b-1

9

Ma

r-1

9

Term deposits in pesos Private sector deposits in dollars

Private sector loans in pesos

0

10,000

20,000

30,000

40,000

50,000

60,000

Dic-17 Mar-19

Net reserves Lebac not held by financial system

Letes/Lecap in pesos Increase in term deposits in pesos


The 2019 current account deficit will fall to USD 9.5 billion, one

third of 2018's, reducing Argentina's external vulnerability


Exports, imports and goods and services balance (USD millions)

Reserve ratios (USD Millions)

Exports will increase significantly in 2Q and 3Q19 due to

the improvement of USD 4.500 M in agricultural production

and to a lesser extent demand from Brazil while imports of

both goods and services will continue to fall

Reserves will increase both due to the trade surplus as well as

the lower capital outflows with contributions from a new swap

with China, enough to cover all short-term debt maturities and

110% of existing pesos

Source: INDEC, Treasury, BCRA and BBVA Research

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2015 2016 2017 2018 2019 e

International Reserves 3 months imports

20% of Private M3 100% short tem debt

-5,500

-500

4,500

9,500

14,500

19,500

24,500

1Q

-18

2Q

-18

3Q

-18

4Q

-18

1Q

-19

2Q

-19

3Q

-19

4Q

-19

1Q

-20

2Q

-20

3Q

-20

4Q

-20

Exports Imports Trade Balance


Gradual external and fiscal adjustment

reduces the debt burden … slowly

External Sector(%)

Fiscal Sector(%)

Public Debt as % of GDP(%)

International reserves/GDP(%)

Source: INDEC, Finance Ministry, BCRA and BBVA Research

-8

-6

-4

-2

0

2

4

6

2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)

Primary fiscal balance/GDP Total fiscal balance/GDP

-10

-5

0

5

10

15

20

25

2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)

Current account/GDP Exports/GDP Imports/GDP

0

20

40

60

80

100

120

2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)

External public debt/GDP Public debt/GDP

0

5

10

15

20

25

2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)

International reserves/GDP


(e) Estimate.

Source: Indec. BCRA. Haver and BBVA Research

Annual macroeconomic forecasts

2017 2018 e 2019 e 2020 e

GDP (% YoY) 2.7 -2.5 -1.2 2.5

Inflation National CPI (% YoY. EOP) 24.8 47.6 35.0 25.0

Exchange rate (vs. USD. EOP) 17.7 37.9 49.0 55.0

Monetary policy rate (%. EOP) 28.8 59.3 40.0 29.0

Private consumption (% YoY) 4.0 -2.4 -2.9 3.2

Public consumption (% YoY) 2.7 -3.3 -2.6 -1.0

Investment (% YoY) 12.2 -5.8 -12.3 6.1

Fiscal balance (% GDP) -5.9 -5.0 -3.3 -2.3

Current account (% GDP) -4.9 -5.2 -2.2 -1.5


April 2019

Argentina Outlook

2Q19

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Presentation Argentina Outlook 2Q19 - Microsoft · hike. but an increase could occur at the end of...

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