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Argentina reaches a deal on debt restructuring

August 4, 2020

Argentina and the main creditor groups reached an agreement on debt restructuring

Talk of the Day

Chile

COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 99 deaths (75 on the previous day) and 1,762 confirmed cases (from 2,073). The 7-day moving average of deaths increased to 74, from 71 on the day before. The total number of deaths now stands at 9,707, with 361,493 confirmed cases, which implies a 2.7% mortality rate. The estimated reproduction rate (R) is now at 0.95 (from 1.0).

The economic activity posted another double-digit annual decline in June, completing the worst quarterly performance on record, yet again suggesting at the margin that the worst of the slump is behind for the Chilean economyThe monthly GDP proxy (IMACEC) shrunk 12.4% yoy in June (15.3% fall in May), leading to a 14% drop in 2Q20 (+0.4% in 1Q20). The annual activity contraction in June was milder than our -14.5% call (market consensus: -15.0%). Mining production continued to be mostly unaffected by the quarantine, posting growth of 2.2% yoy in June (1.2% previously). Meanwhile, non-mining activity shrunk 14.0% yoy in the month (17.0% drop in May) as mobility restrictions, a loosening labor market and low confidence resulted in a significant drag from services and construction, and, to a milder extent, commerce and manufacturing. Nevertheless, the economy stopped falling at the margin for the first time since February, rising 1.7% from May, indicating that the expected gradual recovery process anticipated for 2H20 is underway. As the largest urban area of the country partially opened up towards the end of July and the evolution of the pandemic consolidates a favorable trend, the activity recovery is expected to continue ahead. Although consumer confidence remains near historic lows (at 21.2 points in July), the recent approval of the 10% pension withdrawal bill and a USD 625 middle-class income transfer (approved late last week) could offer some respite. Meanwhile, business confidence, excluding the volatile mining component, sits at 34.9 points in July (50 = neutral), above the lows reached in April (25.1 points) as commerce pessimism moderates. As a share of pension withdrawals (potentially as high as USD 18 billion) is directed to consumption, activity would receive a significant boost that could result in a milder GDP decline than the 7% we currently estimate. Going forward, there remains significant uncertainty, partly coming from the constitutional reform plebiscite in October that would continue to hamper investment decision-making and contain a more meaningful recovery ahead. The national accounts data for 2Q20 will be released on August 18.

Business and consumer confidence remained low in July. The ICARE business confidence index came in at 37.8 points (neutral=50), 12.6 points lower than one year earlier, but remained broadly stable from June. Construction continues to drag confidence down (12.7, 33.2 points lower over 12 months) as it remains the most pessimistic sub-index, but the deterioration was widespread. Commerce (40.6, 10 p.p. down from July 2019) and manufacturing (42 points, -2.3 p.p.) are also pessimistic, while mining remains the sole optimistic sub-index at 50.3, despite falling 16.2 points from last year, as mining regions were affected by sanitary measures in the month. Excluding mining, business confidence came in at 34.9 points, retreating 11.7 points from July 2019, but above the cycle low of 25.1 recorded in April. Similarly, consumers remained downbeat in the month, with GfK reporting sentiment came in at 21.2 points (neutral=50), a 19.1 point deterioration over 12 months, but was broadly unchanged since April. The timing for consumption of household goods (16.4 points, -36.9 p.p.) and the economic situation of the country (15.1 points, 25.5 p.p. deterioration) were the main drags in the month. The respondent’s economic situation was also pessimistic (at 17.0 points), while the country's economic situation in one year also deteriorated, but sat higher at 34.2 points. Meanwhile, the country's five-year outlook recorded a second consecutive month of improvement, gaining 1.2 points (over 12 months) to 23.5. Overall, pessimistic consumers and businesses means that consumption and investment decisions will remain contained ahead. The gradual roll-back of distancing measures appears key to a more significant improvement in sentiment and activity.

Day Ahead: The central bank will release the results of the financial traders’ survey at 9:30 AM (SP time). At the start of July, traders left inflation expectations broadly unchanged at 1.7% for the one-year outlook and 2.6% over two years. Meanwhile, the policy rate was still seen remaining at 0.5% for at least the next year and only reaching 0.75% in two years. No major adjustments to the scenario are likely.

Brazil

COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 561 deaths (541 on the previous day) and 16,641 confirmed cases (from 25,800). The 7-day moving average of deaths decreased to 1007, from 1,014 on the previous day. The total number of deaths now stands at 94,665, with 2,750,318 confirmed cases, which implies a 3.4% mortality rate. The estimated reproduction rate (R) is currently at 1.02 (from 1.05).

The trade surplus reached USD 8.1 billion in July, beating our forecast (USD 7.5 billion) and in line with market estimates. Exports totaled USD 19.6 billion, down by 2.9% yoy, controlling for the number of working days. The composition of exports cushioned the slide in shipments to other countries, as rising sales of agricultural goods (17.3%) and extraction/mining products (1.5%) offset the decline in exports of manufactured items (-12.0%). Exports rose by 3.0% compared to the previous month, the first increase since the pandemic began. At USD 11.5 billion, imports dropped significantly by 35.2% yoy, adjusting for the number of working days. Purchases plummeted in mining/extraction (-62.7%) and manufacturing (-33.6%). On a monthly basis, imports declined 5.8%. The annualized seasonally adjusted quarterly moving average for the trade surplus advanced to USD 65 billion in July from USD 56 billion in June. In upcoming months, imports will likely remain at lower levels, reflecting the weak dynamics of the Brazilian economy. We forecast a large trade surplus this year, as imports fall more sharply than exports. **Full story here.

Macro Vision – 10 frequently asked questions about the tax reform: This is the first paper in a series of publications on the tax reform in Brazil. In this edition, we answer 10 frequently asked questions, focusing on proposals to reform the taxation of goods and services, which are being discussed by a Special Committee in the National Congress. **Full story here.

Itaú Daily Activity Tracker: Our indicator increased by 3.1 p.p., to 90.7 (latest available data from Thursday, July 30th). The 7-day moving average increased by 0.4 p.p., to 86.5. The indicator is up 64% from the bottom seen on March 28th, and is now 10% below the mid-March level, when the series started. See our report here.

Day Ahead: June’s industrial production will be released at 9:00 AM (SP time). We forecast 8.0% mom/sa growth, widespread among sectors, from a 7.0% drop in May. In year-over-year terms, we expect a 9.8% drop, milder than the 21.9% drop registered in the previous month.

Colombia

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 320 deaths (225 on the previous day) and 11,470 confirmed cases (from 10,673). The 7-day moving average of deaths increased to 304, from 294 on the previous day. The total number of deaths now stands at 10,650, with 317,651 confirmed cases, which implies a 3.4% mortality rate. The estimated reproduction rate (R) is now at 1.27 (from 1.20).

The minutes from Friday’s monetary policy meeting, at which the board unanimously opted to ease monetary policy by a further 25-bps to 2.25% (accumulating 200 bps since the easing cycle started), provided no clues as to the next steps. The board highlighted that  despite a handful of activity indicators posting some improvement in May, the rapid labor market loosening (unemployment rate reaching historical maximum) and loss of income mean that a significant widening of the negative output gap unfolded in 2Q20 (although it was challenging to estimate the magnitude). Last week, general manager Echavarria noted that the technical staff downgraded its growth outlook for this year to a contraction between 10% and 6% (from a 2%-7% fall, previously). Meanwhile the board noted that inflation continues to fall, and is close to the lower bound of the range, while expectations for the 1-year horizon remain below the central bank’s 3.0% target. Hence, the board believes the policy response undertaken would help alleviate the effect of the shock, without risking the target of inflation converging to 3%. Tomorrow, the central bank will unveil its quarterly inflation report, which will likely provide further insight into the technical staff’s position, particularly about the foreseen trajectory of the policy rate.

Paraguay                                                                  

After posting declines in the last three months, consumer prices rose by 0.5% mom in July, in line with our call, taking the twelve-month inflation reading to 1.1% (from 0.5% in June). Core inflation increased by 0.3% mom, taking the annual reading to 1.5% (from 1.3% in June). Headline inflation remained well below the lower bound of the Central Bank target range of 4% (± 2%). Meat prices rose by 1.1% mom in July, due to lower domestic supply as the international market reopens gradually. Alcoholic beverage prices increased, following the reopening of restaurants, bars and social gatherings. Finally, prices of durable goods (particularly laptops, cars and home appliances) also increased due the currency depreciation. Our inflation forecast for this year stands at 1.5%.

Argentina

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 55 deaths (54 on the previous day) and 5,376 confirmed cases (from 5,241). The 7-day moving average of deaths receded slightly to 102, from 103 on the previous day. The total number of deaths now stands at 3,667, with 201,906 confirmed cases, which implies a 1.8% mortality rate. The estimated reproduction rate (R) is currently at 1.02 (stable).

Argentina and the main creditor groups reached an agreement on debt restructuring. The path to restructure USD 66 billion bonds under foreign legislation is now open. After months of negotiations, the parties made a preliminary agreement on financial terms and legal wording of the new contracts according to a brief statement from the government. The deadline to participate in the exchange was extended until August 24 and the result will be announced on August 28,

To get out of default is not guarantee of access to markets but it is necessary step to initiate discussions with the IMF. A new stand-by agreement will likely include a fiscal consolidation program and less reliance on central bank financing. Finally, the government will restructure the dollar-denominated bonds under Argentine law -with similar terms to those to be applied on the external debt- through a bill just passed by Congress.

Mexico

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 274 deaths (784 on the previous day) and 4,853 confirmed cases (from 9,556) The 7-day moving average of deaths decreased to 581, from 585 on the previous day. The total number of deaths now stands at 47,746, with 439,046 confirmed cases, which implies a 10.9% mortality rate. The estimated reproduction rate (R) is currently at 1.1 (from 1.3).

Peru

COVID-19 update: according to the Johns Hopkins University, Peru registered a daily increase of 206 deaths (191 on the previous day) and 6,667 confirmed cases (from 7,448). The 7-day moving average of deaths increased slightly to 198, from 197 on the previous day. The total number of deaths now stands at 19,614, with 428,850 confirmed cases, which implies a 4.6% mortality rate. The estimated reproduction rate (R) is currently at 1.4 (from 1.5).
 



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