LatAm in Focus Argentina: A devaluation at last The BCRA allowed a step-wise devaluation and the ARS jumped to 8, in an
attempt to stop the drain of reserves. In our view, the government needs to
complement the devaluation with more restrictive monetary and fiscal policies to
stabilize FX and reserves. Our base-case scenario is that the government does
not implement a sufficiently comprehensive stabilization plan. In FX strategy, we
remain neutral on NDF as we expect high volatility this week. In EXD, we stay
market weight, with an underweight position in risk. We prefer Boden 15s to
Bonar 17s or Global 17s and we prefer Pars over Discounts.
The ARS devalued 17% last week amid falling reserves
The government finally allowed the peso to weaken in a step-wise fashion on 23
January, jumping to about ARS 8, posting a devaluation of 17% last week
(compared to a ARS 6.52 at the end of last year). The change of strategy came
after the piece-meal depreciation policy being implemented failed to stabilize
international reserves (IR) that were falling at an alarming pace. Gross IR stand at
$29.1bn, down from $30.6bn at the end of 2013. We estimate that net liquid
international reserves are only $10.4bn (subtracting foreign currency deposits at
BCRA, gold, SDR and other liabilities), less that net debt services in 2014-2015.
Is the devaluation enough to stabilize reserves?
We think the devaluation is a necessary condition to stabilize the external sector
in Argentina, but not a sufficient one (Argentina: now we are talking). If the
stabilization plan is perceived as not credible, the demand for pesos will keep
falling as the people perceived the economy lost its anchor, further increasing the
demand for foreign currency. To make the devaluation succeed, the government
needs to move the FX to a level at which, if complemented with other restrictive
monetary and fiscal measures, Argentines opt to stay invested in pesos instead of
dollarizing their portfolios. We think ARS 8 is not a level high enough to be
perceived as sustainable. In this regard, local press reports that grain exporters
continued hoarding dollars at this new exchange rate level. Besides, the BCRA
had to sell dollars for USD260mn in the last two days to defend the currency at
around ARS 8 due to the expectations of a larger devaluation.
In our view, the BCRA needs to increase interest rates to about 40% to stabilize,
at least temporarily, the demand for pesos, to convey that rates will be positive in
real terms. The recent 600bp to 26% increase in Lebac rates is a welcome step in
that direction, but it is not sufficient, in our view. Also, the BCRA will auction 4%
dollar-linked notes to banks in a bid to keep dollar deposits in the banking system
and protect gross reserves and systemic liquidity. Last, but not least, the
government should implement a comprehensive stabilization plan, including both
fiscal and monetary policies to stop monetary financing of the fiscal deficit to
anchor inflation expectations and to avoid a devaluation-inflation spiral. In that
regard, incoming wage negotiations will be a critical development.
According to Ambito Financiero, the government will soon announce a more
integral plan, including fiscal and monetary projections for 2014 and it could
increase interest rates further to incentivize the demand for pesos. However, our
base-case scenario is that the government does not implement a sufficiently
comprehensive plan to stabilize the FX market and reserves. While the increase
in interest rates may bring some short-term relief, we think that at current
exchange rate levels the loss of reserves will continue, albeit at a slower pace,
until the end of 1Q. In 2Q, with grain exports peaking, we expect a more balanced
FX market. The government is also working to keep price agreements with
supermarkets so that the devaluation does not translate into a proportional
increase in prices, but we think this effort will be fruitless. In fact, there is
evidence that the devaluation is being translated into prices for several products.
On Friday, the government announced it will ease some FX controls (aka “cepo
cambiario”) and will allow households to buy dollars for saving purposes at the
official rate (plus a 20% withholding earnings tax). On Sunday, the government
made clear that withholding tax to credit and debit cards will remain at 35% for
the moment. We believe that this measure aims at reducing the gap between the
official and the parallel exchange rate. Effectively, the parallel dollar “blue” fell
from 13 to 11.7 after the announcement, while the “blue chip” traded at ARS 10.9,
reducing the gap vs. the official to 36%. This announcement does not
substantially change the analysis. In our view, rationing will remain part of the
system in the absence of a comprehensive stabilization plan, as otherwise the
loss of reserves would be too fast.
Strategy: EXD MW market value, UW risk
Amid high uncertainty, the FX forward market is quite illiquid and 1-month forward
is at ARS 9. We remain neutral on NDF positions as we expect high volatility. In
EXD, we recommend Argentina at MW, with an UW position in risk. Given the
high FX uncertainty, we prefer RV trades. A solution involving the issuance of 5-
10y local law bonds should increase supply but also increase the ability to pay on
the 1-3y local law bonds. We prefer Boden 15s to Bonar 17s or Global 17s.
Among exchange bonds, we prefer Pars at $35.2 over the Discounts, as they
have underperformed and have limited downside.
The warrants at $7.9 are still
rich in our view, as we do not expect a payment due to a GDP restatement. In
addition, a payment would likely not be made if the Supreme Court upheld the
Appeals Court ruling. For an RV trade, swap out of EUR Pars into USD Pars at
even price, vs the 4- 8 point price difference pre-Oct 2012 court ruling. If the court
rules in favor of Argentina, if there is a settlement, or if the distressed buyers
unwind their long positions, we expect the USD bonds to outperform
FTE: BOFA / ML 27/1
abrazo
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