Wednesday, October 21, 2015

Argentina: Elections unlikely to change downward trajectory - BBH

FXStreet (Córdoba) - According to the Brown Brothers Harriman Global Currency Strategy Team the upcoming election could keep Argentina on the path towards further misery, without a change in government, unorthodox policies set forth by Presidents Kirchner and Fernandez could continue.

Key Quotes:

“Obviously, a win for the ruling party would be negative for Argentina assets since it would likely mean continuation of the existing unorthodox policy framework – but this is probably already priced in.”

That the ruling party could remain in power is, quite frankly, astounding. Years of economic mismanagement coupled with low commodity prices have left the economy in a shambles. GDP is expected to grow 0.5% this year, barely changed from 0.4% last year. The IMF expects 1.3% growth in 2016.”

Inflation remains too high. The official CPI reading is 14.4% y/y, but unofficial opposition estimates put inflation closer to 27% y/y.”

“With the international bond market closed off, the government will have to either 1) ramp up domestic debt issuance, 2) run the printing presses, or 3) both. We think it will be 3), with clear negative ramifications for bond holders.”

The peso (ARS) is one of the worst performers in EM, with the official rate -11%% YTD against the dollar. Using the unofficial “Blue Chip” rate, the peso is down -15% YTD to trade at record lows near 14.20. With the official rate around 9.5, the Blue Chip is trading at nearly a 50% discount.”

“We think it’s likely that the next government will have to speed up the pace of depreciation, as the current situation cannot be maintained indefinitely.”

“Argentine bonds remain a huge gamble. A higher court just overturned a lower court ruling, and would allow dollar debt to be paid in pesos if the lender had previously accepted local currency as a form of payment. Meanwhile, the holdout issue remains unresolved, which Scioli characterized as “not a priority.”
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