Itaú BBA - Weekly Fixed Income LatAm Strategy: New fiscal targets in Argentina, feasible but ambitious

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Weekly Fixed Income LatAm Strategy: New fiscal targets in Argentina, feasible but ambitious

May 7, 2018

Argentina remains vulnerable to tightening global financial conditions.

ARGENTINA: The recent measures, especially the substantial rate hikes and the guidance of a faster fiscal adjustment, contributed to calm down the markets by the end of last week, but Argentina remains vulnerable to changes in global financial conditions, given the wide current account deficit and low reserves. Even considering the recent exchange rate weakening, it is likely that the current account deficit this year will stand between 3.5% and 4.0% of GDP. Reserves, once excluding foreign currency liabilities of the central bank, stand at around 5% of GDP.

Furthermore, while we think the new fiscal targets are feasible, they are certainly ambitious. Higher inflation and a weaker currency will likely provide support to tax collection and the government still has control on around 50% of the primary budget. However, even if the fiscal consolidation is implemented, it could have adverse consequences for Macri’s popularity, casting doubts on the outcome of next year’s presidential elections, which can generate renewed noise in the markets.

Argentina’s 5-year CDS ended last week at 317bps, after reaching as high as 350bps early on Friday. We saw a strong reversal in the market on Friday, with a relevant flow of buyers of external bonds. Our long position in Argentina’s CDS against the Latam average now posts a 72-bp loss (see table below). We are inclined to step out of the position, given the risks mentioned above, but the improvement in the market (if it continues) may offer a better exit price in upcoming days.

This week the central bank will hold its biweekly monetary policy meeting to decide on the reference rate on Tuesday.

MEXICO: Local rates have been widening as well, because of (1) the tightening in global financial conditions, (2) AMLO becoming more likely to win presidency, (3) fears that his party will be able to increase representativeness in Congress, and (4) the lack of a NAFTA agreement up to now. The 3-year TIIE nominal rate increased 18bps during the week to 7.68%, causing further losses to our receiver (current P&L: -0.84%). The market currently implies almost 20bps in hikes over the next 3 months and a spot nominal rate still higher than 7.0% in the next 3 years, which we believe is excessive.

We will continue to receive outright the 3-year nominal TIIE rate in Mexico, because we believe that declining inflation (already below 3% at the margin, seasonally-adjusted and annualized) is consistent with normalization in rates going forward. In addition, our base-case assumes that NAFTA will be renegotiated successfully and that AMLO will win presidency, but without major deterioration in macro policy.

This week keep an eye on April’s CPI inflation (Wed.), for which we expect a -0.31% variation, taking the 12-month reading down to 4.58% (5.04% in March). 

BRAZIL: BRL depreciated, CDS increased and local rates widened last week. We have no position in Brazil today (after a good gain receiving Jan21), mainly because of election risks, which may increase going forward.

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