Press play to listen
Editorial: Local Debt Restructuring Underway, Foreign Debt Still Gridlocked
Last Friday the executive submitted the bill to restructure the dollar debt under local law. This is a step in the right direction because it also fulfills the promise of matching the conditions of the proposal made to investors with foreign law bonds. The bond menu is identical, but logically the new securities will be issued under local law. Past due interest until the date of issuance will also be credited to those who accept the proposal in the first round.
There is a carrot and stick approach to maximize acceptance. Anyhow, the alternatives for those who do not accept are not very promising, so we expect a high turnout. On the one hand, the bill says that those who do not enter the swap will continue to be re-profiled and will not be paid anything until December 31, 2021. On the other hand, those who accept the proposal will have a RUFO clause (rights upon future offerings) so that if foreign law bondholders get a better deal, it will extend to local law investors. Another feature is that local law bondholders can choose to convert their assets to pesos by converting their dollar bonds into Boncer 26 and Boncer 28 (inflation linked paper). For the time being, we believe that this alternative will have little acceptance.
The market reacted to the news with a small rise, this means that much of this information was already included in the bonds’ prices. The million-dollar question is how much more should local law bonds yield than foreign law ones. Our view is that this yield should be between 150 and 200 basis points. Should it be less than this, there would still be room for these bonds to go up. Taking the 10% convention for foreign law bonds, we should consider 11.5% or 12% as exit-yield for these bonds.
This swap covers approximately USD 41.6 billion of nominal debt. The figure fell by USD 4 billion after the Treasury swapped Letes and other dollarized securities for Boncer 2023 and 2024 on Friday, an operation that took the market by surprise due to its extent. We estimate that, in addition to a good reception from the private sector, the public sector took an important share. So far this year, over USD 8 billion of public debt under local law have been converted to pesos. In the auctions that begin in August, some of the progress made with the so-called “Pimco Bond” will roll back.
From a macro perspective, solving this issue is positive. Firstly, it clears up a lingering uncertainty. Secondly, it generates some income for Argentine investors, who hold most of these securities. Thirdly, in the current political dynamics, the proposal is a step towards the moderation demanded by the business community.
However, in Argentina it is always one step forward and one step back. In his interview with the Financial Times, President Alberto Fernandez pointed out that he does not believe in economic plans. His saying was also emphatic in asserting there will be no further debt offers. At the same time, Minister Guzmán said that if the offer were rejected, Argentina would proceed directly to a negotiation with the IMF. As expected, these statements reduce the desire for Argentina’s debt, because they increase the exit-yield. Maybe they are just negotiation tactics to scare bondholders, but it is a little like dancing in the deck of the Titanic.
In the meantime, external restructuring is still in process. It was announced yesterday that the 3 groups of bondholders have come together. This may have a positive side in terms of making it easier to have a single contact to reduce transaction costs. But, given that the three groups together have blocking power, it seems that Argentina is going to have to improve the economic proposal once again, against what the Minister and the President have said. However, we remain optimistic about the settlement, as the difference in net present value is no more than USD 3.
What’s coming up this week…
• The Ministry of Economy should publish June’s fiscal report today. We estimate a primary déficit over ARS 300 billion, due in part to measures taken to confront the pandemic, and also because of the steep decline in tax revenues
• Also today, the INDEC will release the revenues-generating account of Q1-2020. In other words, we will know how the income was split between salaried workers, the self-employed and entrepreneurs.
• May’s EMAE will be released on Wednesday 22. We shall see how much activity recovered from the April slumps. This figure will probably be around +9% m/m seasonally adjusted, but activity shutdowns make the calculation very imprecise.
• On Thursday 23 May’s supermarket and shopping center sales will be revealed. Focus is on supermarkets as most shopping centers remained closed.
Liquidity in Pesos Is Still High
– So far in July, the growth trend in bank liquidity continues, even though the Central Bank is seeking to encourage an increase in subsidized credit to the private sector
– There is a seasonal effect due to the payment of mid-year bonuses, but the truth is that deposits have been growing strongly in monthly terms since last April
– Excess liquidity continues to put pressure on interest rates, which would be way below current levels were it not for CB’s regulation
So far in July, the bank liquidity growth trend continues, despite the Central Bank’s efforts to encourage increased subsidized credit to the private sector. In part, there is a seasonal effect from the payment of mid-year bonuses, but the truth is that deposits have been growing strongly in monthly terms since last April, mainly due to government aid to the private sector via IFE (Family Emergency Income), which has promoted banking use to facilitate collection.
As a result, peso deposits have increased 8.4% in July compared to the previous month’s average, driven by the growth of savings accounts which are 13.3% higher than in June. Time deposits continued to increase and so far this month they have grown 7.8%. In annual terms, the private sector’s peso deposits continued to accelerate, from 79% last month to 85% currently.
As for credit, it increased 3.9% in the first half of the month, led by consumer loans (5.6%), while commercial loans grew 3.1% and real estate loans continued to lag behind (0.9%). The bulk of subsidized loans was concentrated in April and it slowed down over the following months. In annual terms, credit increased half as much as deposits. Thus, it grew 44.5% annually in June and so far in July accelerated in the margin (47.4%).
Excess liquidity continues to put pressure on interest rates, which would be way below current levels were it not for CB’s regulation. In this context, interest rates for time deposits continue to be close to the floor set by the CB at 30%, while short rates continue to be below the 19% set for 1-day reverse repos.
Inflation Accelerated 2.2% in June
– Driven by the greater opening of the economy, national inflation was 2.2% in June, up from the 1.5% print of the previous two months
– In particular, core inflation was 2.3% and seasonal inflation was 4.8%, while regulated prices only rose by 0.8% m/m
– Inflation in Food and beverage accelerated slightly from 0.7% in May to 1.0%
– In y/y terms, national inflation moderated to 42.8%, while so far this year accumulated inflation amounts to 13.6%
The lockdown continued to relax in June both in the Buenos Aires Metropolitan Area (AMBA) and in the interior of the country, and several industries and businesses resumed their activities. Inflation rose partially because a carryover effect from May. Also, the 2.7% average increase in the dollar must have been a factor and thirdly the opening of new activities previously affected by the lockdown generated a new set of prices. Still, demand is far from buoyant to validate a bigger price jump.
Additionally, the extension of the price cap program kept inflation low in the “Food and Non-alcoholic Beverages” category, the one with the highest weight in the general indicator. Another factor that also contributed to the acceleration of the monthly record was the CB’s new regulation that forces importers to use the dollars they have declared to make their payments instead of accessing the FX market, by increasing the importance of the parallel exchange rate as a reference price, increasing restocking costs.
In effect, the national CPI crafted by the INDEC showed a 2.2% monthly variation, well above the 1.5% record from the two previous months, although still below pre-lockdown levels. With greater commercial activity, core inflation accelerated from 1.6% in May to 2.3%. Likewise, inflation in seasonal products was 4.8% (vs. 4.7% in May), while regulated prices continued to be limited by the tariff freeze in utilities and public transportation and registered a scarcely 0.8% rise (-0.1% the previous month).
In particular, the item “Clothing and footwear” registered a 6.6% rise, once again the greatest effect in the general indicator in the month (0.59 pp.) As both online trade and shops opened in some provinces, price increases in seasonal garments took place, which in turn explain most of the “seasonal” category rise. On the other hand, inflation recorded in the “Recreation and culture” (4.2%) and “Home equipment and maintenance” (4.1%) categories was also over the general inflation driven by the increases recorded in home appliances, telephone equipment and other durable equipment.
Inflation in the Food and Beverage category was 1.0%, slightly above May’s 0.7%, although well below April’s 3.2%. In addition to the introduction of the “Price-Cap” program, which forced stores to lower the prices of 2,300 products that make up the mass consumption basket back to those in effect on March 6, inflation in this area was also moderated by the weakness that economic activity and especially private consumption have been showing, and an exchange rate that, despite having accelerated its depreciation, still continues to act as a nominal anchor.
The only item that had general inflation assigned was again “Restaurants and Hotels”, because most of the premises that make it up remained closed. With all this, inflation in goods (2.9%) was again above that of services (0.9%).
Thus, in y/y terms, national inflation moderated from 43.4% to 42.8%, while accumulated inflation so far this year amounted to 13.6% (it had been 22.4% a year earlier). On the other hand, in Greater Buenos Aires, monthly inflation was 2.1% and it moderated to 41.3% y/y, while in the City of Buenos Aires, CPI-BA’s inflation was 1.4% monthly and 37.4% y/y
Moving forward, it will be necessary to monitor what happens to the exchange rate that began to slowly react in recent weeks, while it will also be essential to see if the Central Bank decides to sterilize or maintain the money issuance in circulation that it is carrying out to compensate for the fall in revenues and finance the increase in expenditure needed to mitigate the economic effects of the lockdown.
For July, we estimate monthly inflation at 2.5%, driven by the easing of the lockdown in the interior of the country and also pushed by the carry-over from June. The second half of the year looks much more challenging in terms of inflation: we expect a higher monthly rate of inflation, hand-in-hand with a faster depreciation of the exchange rate, which will take December’s year-on-year record close to 40%.