Itaú BBA - Argentina’s CDS to continue outperforming its Latam peers – Sovereign Debt Trade Idea

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Argentina’s CDS to continue outperforming its Latam peers – Sovereign Debt Trade Idea

December 1, 2017

We believe that the difference between Argentina’s 5y CDS spread (239bps) and the average of Latam ex-Argentina (102bps) will continue to narrow going forward.

STRATEGY TEAM:

Ciro Matuo, CNPI, ciro.matuo@itaubba.com
Eduardo Marzaeduardo.marza@itaubba.com
Luka Barbosa, lbarbosa@itaubba.com
Pedro Correapedro.correa@itaubba.com

 

Argentina’s USD bonds are likely to continue outperforming its Latam peers, as fiscal reforms (just passed in the Senate) are set to improve the country’s risk premium. We believe that the difference between Argentina’s 5y CDS spread (239bps) and the average of Latam ex-Argentina (102bps) will continue to narrow going forward. The average of Latam considers Brazil, Mexico, Chile, Colombia and Peru (see chart).

We prefer expressing the positive view on Argentina’s fiscal scenario through a relative trade against other Latam countries, instead of an outright position in Argentina, because we also see risks of a general shift upwards on emerging markets CDS spreads, as the global economy becomes slightly less favorable to emerging markets.

For cash investors, we recommend an OW position in Argentina, and long position in the Bonar 2024 (entry at 4.132%).

 

We believe the mid-term elections consolidated the political capital of Macri’s administration. The increased representation in Congress is positive for the government’s push for fiscal consolidation.

Faster than expected, the Senate passed a bill (which now heads to the lower chamber) that sets a cap on real terms on primary expenditures, both at national and provincial level. The bill followed an early agreement between the Nation and almost all provincial governors but one. This agreement gave place to another bill introducing changes to the formula that adjust pensions which was also passed. Under the new formula, pensions will be adjusted quarterly using a mix of CPI increases (70%) and wage increases (30%). The changes will likely result in significant savings for the treasury (around 0.4% of GDP).

Economic activity growth is accelerating. The GDP proxy expanded at a solid pace in 3Q17 (4.3% yoy; 5.2% qoq/saar, see chart), and the rebound has been road-based, with construction and services as the most dynamic sectors, while manufacturing is also performing well. We forecast GDP growth to accelerate to 3.5% in 2018, from 2.9% this year.

We project a gradual fiscal consolidation. With the constraint on spending, and GDP growth on a recovery trend, the nominal balance will narrow from the 6.2% of GDP deficit projected for 2017 towards 2% in coming years, according to our calculations (see chart). This level would be more in line with the deficit of EMs with higher credit ratings (see chart). We believe the passing of fiscal enhancing measures by the government could prompt the market to anticipate a sovereign rating upgrade in the foreseeable future.

 



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