1、25 February 2019 1 Argentina:Domestic US dollar demand rises;exports fall Capital flight shows no signs of a reversal Foreign asset formation,domestic US dollar demand and capital flight finished 2018 at record high levels,showing unsustainable dynamics(Fig.1,2 and 4).We are concerned that those dyn
2、amics could remain in place this year,given the uncertainties arising from a tight presidential election.We are particularly concerned with the financial account:if the IMF loan is netted out,there is a negative gap of USD47.7bn compared to 2017(Fig.8).The good news is that commercial flows(using a
3、cash concept)have stabilised(Fig.9).In this regard,Argentina needs to have a positive trade balance to compensate for the financial outflows and the need to re-monetize the economy using commercial US dollar inflows.However,although the trade balance was positive in January,both exports and imports
4、have fallen in comparison to January 2018;exports decreased by 4.7%,while imports declined by a whopping 26.5%.LATIN AMERICA STRATEGY Please refer to important information at the end of the report FOCUS EMERGING MARKETS|LATAM 25 February 2019 Andre Digiacomo EM/Latam Strategist +55 11 3841 3447 Gabr
5、iel Gersztein Global Head of Emerging Markets Strategy+55 11 3841 3421 Banco BNP Paribas Brasil S.A.KEY MESSAGES We are concerned that foreign asset formation,domestic US dollar demand and capital flight could remain at record high levels this year,given the uncertainties owing to a tight presidenti
6、al election.Foreign asset purchases(non-financial sector)amounted to USD1.7bn this January.As a result,cumulative foreign asset formation by the non-financial private sector has been USD59.5bn(the acceleration has been notable since the beginning of 2018).Net demand for US dollar notes totalled USD1
7、.3bn(gross demand was USD1.85bn),distributed among 1.3mn clients.Capital flight amounted to USD19.2bn in 2018 from USD15.7bn in 2017 and USD6.4bn in 2016.Non-residents net flows remained in the negative camp in January while net liquid international reserves remained low at USD5.1bn(net of IMFs cash
8、 injection,the FX swap deal with China,and private USD-denominated deposits in the financial system).Although the trade balance was positive in January,both exports and imports have fallen;exports decreased by 4.7%,while imports declined by a whopping 26.5%.We remain positioned long 5y CDS in relati
9、ve value with other countries and also long USDARS.TM 25 February 2019 2 Fig.1-9:Foreign asset formation and capital flight Sources:BCRA,BNP Paribas,Bloomberg LLP;as of January 2019.FX market:USD demand increased in January 2019 Foreign asset purchases(non-financial sector)amounted to USD1.163bn las
10、t October,USD0.408bn in November,USD0.9bn in December and USD1.7bn in January 2019.It represents an increase of 100%compared with last month and an upward trend compared to November 2018 when it reached its lowest level since June 2015.Net demand for US dollar notes totalled USD1.3bn(gross demand wa
11、s USD1.85bn),distributed among 1.3mn clients(see Table 1 and Fig.10-11).Demand for up to USD10,000 per month,per client,accounted for 70%.The average value demanded by each client was USD1,470 in January 2019,up from USD1,330 in December 2018 and still showing that a large number of agents were doll
12、arizing their portfolios.We continue to believe that there is a strong trade-off between local interest rates(Leliqs)and demand by US dollars.In our view,investors decide on whether to maintain their investments in pesos depending on the Leliq rates level,if they consider that this rate is not attra
13、ctive in risk-reward terms,they shift to US dollar.Also,as uncertainty rises ahead of the presidential election,we expect a pick-up in USD demand(see our economists election tracker for further details:Argentina:Election Tracker)9,951 22,148 27,230 1,958 07,00014,00021,00028,000JanMarMayJulSepNovCum
14、ulative foreign Asset Formation 2016Year 2017Year 2018Year 2019-2,172-12,410-26,334-1,423-29,000-23,400-17,800-12,200-6,600-1,000JanMarMayJulSepNovUSD purchases 2016Year 2017Year 2018Year 2019Non-financialprivate sector-6,391-1,714-15,708-19,166-20,000-16,300-12,600-8,900-5,200-1,500JanMarMayJulSepN
15、ovCapital flight 2016Year 2017Year 2018Year 2019-24,447-15,704-18,227-25,000-17,500-10,000-2,5005,0000102030402007200820102012201420162018USDARSCapital flight in spot FX market(USDmn,12m rolling,rhs)-10,486-1,259-16,000-12,500-9,000-5,500-2,000JanMarMayJulSepNovDiv+Interest paid 2016Year 2017Year 20
16、18Year 2019Repressed figuresbecause of capital controls26,50122,37026,063-10,000-2,0006,00014,00022,00030,000-2,050-3501,3503,0504,7502003200520082011201320162018Foreign asset formation by non-fin private sector(USD bn)USD bn,12-m cumulative,rhs13,50516,283-17,5131,005-35,000-20,000-5,00010,000JanMa
17、rMayJulSepNovReserves ex-IMF including China swap+deposits 2016Year 2017Year 2018Year 201929,74927,817-12,322-74-20,000-9,0002,00013,00024,000JanMarMayJulSepNovTotal financial account ex-IMF 2016Year 2017Year 2018Year 2019-203-6,819-1,1371,065-7,000-4,000-1,0002,000JanMarMayJulSepNovX+S including se
18、rvices(cash concept)2016Year 2017Year 2018Year 2019 3 25 February 2019 Table 2 and Fig.10-11:Breakdown of foreign asset formation Sources:BCRA,BNP Paribas,Bloomberg LLP;as of January 2019.Foreign asset formation continues at record high levels Non-residents flows were a negative USD0.35bn in January
19、 2019(Fig.12-13)versus USD0.65bn in December 2018.Outflows in January were USD0.8bn,partially compensated by USD0.45bn of inflows.Since April 2018,outflows have reached USD15.7bn and capital flight totalled USD15.7bn in 2017,USD19.1bn in 2018 and USD1.5bn YTD in 2019.As Fig.12-13 show,non-resident i
20、nflows turned negative in April 2018,for the first time since President Macri took office,and have continued with the same dynamics since then.Foreign asset formation from the non-financial private sector has reached a new high(Fig.14-15).Fig.16-17 shows the monthly and cumulative sources and uses o
21、f hard currency in Argentina since the end of capital controls.FDI and financial inflows have totalled USD7.3bn and USD26.8bn,respectively.On the other hand,cumulative foreign asset formation by the non-financial private sector has been USD59.5bn(the acceleration is notable since the beginning of 20
22、18).As highlighted in our previous publications,we need to see a change in the trend in FX outflows:the dynamics of locals are critical to the stabilisation programme.So far,US dollars from external debt,the IMF and inflows have been mainly offset by capital flight(Fig.17).CapitalForeign Asset Forma
23、tionNet demand ofNet demand ofGross demand Number ofValues up to Average perFlight(mn)(non-fin priv sector)USD notesShare FX currencyShare of USD notesclients(000USD 10kclient(000)December-17-2,1722,7372,44189%29611%3,9001,04037%3.75January-18-2,5113,1241,60651%1,51849%2,8941,05046%2.76February-18-9
24、341,34397072%37228%2,23078042%2.86March-18-2,2612,4641,86876%59624%3,16790037%3.52April-18-1,6852,0551,43470%62130%2,73683038%3.30May-18-2,4294,6163,43975%1,17625%5,0031,08031%4.63June-18-1,3023,0742,22472%85128%3,8031,11439%3.41July-18-1,9873,3512,38671%96529%3,6931,35047%2.74August-18-3,1772,7902,
25、12376%66724%3,7671,21038%3.11September-18-1,3121,9791,19560%78440%2,8251,03037%2.74October-18-8521,16347541%68959%2,4331,09041%2.23November-18-306408-107-26%515126%1,85088031%2.10December-18-41086240647%45653%1,30098036%1.33January-19-1,5731,7211,29375%42925%1,8501,26070%1.47Average 2018-1,5952,2271
26、,48559%74141%2,8891,04341%2.782,7373,1241,3432,4642,0554,6163,0743,3512,7901,9791,1634088621,721-2,172-2,511-934-2,261-1,685-2,429-1,302-1,987-3,177-1,312-852-306-410-1,573-4,500-2,750-1,0007502,5004,250Dec-17Feb-18Apr-18Jun-18Aug-18Oct-18Dec-18International asset formation(non-fin priv sector)Capit
27、al flight(000)2,4411,6069701,8681,4343,4392,2242,3862,1231,195475-1074061,2933.752.762.863.523.304.633.412.743.112.742.232.101.331.471.32.12.93.74.5-4006001,6002,6003,600Dec-17Feb-18Apr-18Jun-18Aug-18Oct-18Dec-18Net demand of USD notes Net demand of USD notes per client(rhs)25 February 2019 4 Fig.12
28、-17:Flows,foreign asset formation and direct USD purchases by the private sector Sources:BCRA,BNP Paribas,Bloomberg LLP;as of January 2019 1,5901,6701,5967701,227-1,285-831-306-650-354-1,500-900-3003009001,5002,10005001,0001,5002,0002,5003,000Feb-16Jul-16Dec-16May-17Nov-17Apr-18Sep-18Non-residents;p
29、ortfolioinflowsNon-residents;portfoliooutflowsFX balance:Non-residentsportfolio flows(rhs)-1,7611,7213,2052,3561,5742,460-3,500-1,7001001,9003,700Dec-16Mar-17Jun-17 Sep-17 Dec-17Mar-18Jun-18 Sep-18 Dec-18Foreign Asset formation of financial private sectorForeign Asset formation of non-financial priv
30、ate sectorTotal59,47607,00014,00021,00028,00035,00042,00049,00056,00063,000Feb-16Jul-16Dec-16May-17Nov-17Apr-18Sep-18Non-financial private sectorFinancial private sectorCumulative foreign asset formation since the end of capital controls(start of Macri administration)-3,205-2,460-7,000-5,000-3,000-1
31、,0001,0003,000Oct-17 Dec-17 Feb-18 Apr-18Jun-18 Aug-18 Oct-18 Dec-18Cashflows from X+I goods and servicesFinancial loans,debt bonds and credit linesNon-resident portfolio flows(net)Foreign asset formation;Financial and non-financial private sectorFDI41363837142026323805001,0001,5002,0002,5003,000Feb
32、-16Jul-16Dec-16May-17Nov-17Apr-18Sep-18Non-residents;portfolio inflowsNon-residents;portfolio outflowsUSDARS(rhs)7,335-59,4764,93526,777-8,21928,264-74,000-49,000-24,0001,00026,00051,000Feb-16Jul-16Dec-16May-17Nov-17Apr-18Sep-18Cummulative IMFCumulative cashflows from X+I goods and servicesFinancial
33、 loans,debt bonds and credit linesCumulative non-resident portfolio flows(since the end of capital controls)Cumulative foreign asset formation;Non-financial private sectorCumulative FDI 5 25 February 2019 International reserves Gross international reserves totalled USD67bn(the amount includes the sw
34、ap with China,the IMF loan and private sector US dollar deposits with banks).The trend has been a source of concern(Fig.18).According to our calculations,net liquid international reserves are now USD5.1bn(Table 2).Fig.18 and Table 2:International reserves(ex-IMF)and FX intervention Sources:BCRA,BNP
35、Paribas,Bloomberg LLP;as of 25 February 2019.Strategy We have been bearish on Argentina since Q1 2018 and have held the view that despite the IMF programme in place,nothing has structurally changed so as to justify a less negative view.We disagree with those aiming to get the most from carry until a
36、 couple of months before the election.In a tight presidential run,such a strategy might prove too risky due to lack of liquidity,over-crowded technical position and potential herding behaviour.In a nutshell:if you want to panic,do so first.We should also remember that ARS adjustments have always bee
37、n sudden after periods of relative tranquillity.Despite the negative carry,we would like to be prepared for further depreciation,which is a matter of when and not if,in our view.Thus,we are positioned long USDARS.Also,we are still long 5y CDS in relative value with other countries.Gross Reserves(a)U
38、SD deposits(b)*Net(c=a-b)Net of other items25-Feb-1967,00314,96252,041computed gross reserves18-Feb-1966,97214,80752,16511-Feb-1966,78315,26351,520China Swaps-18,6004-Feb-1966,84514,25952,586IMF loan-28,29528-Jan-1966,42914,06052,369Total(d)-46,89521-Jan-1966,41815,21651,20214-Jan-1965,96114,47651,4
39、85Net(c)-(d)*5,1467-Jan-1965,73614,91350,82331-Dec-1865,80614,61651,19017-Dec-1866,32415,43850,8863-Dec-1858,60614,08744,51922-Jun-1863,27417,23246,042IMF deal money15-Jun-1851,29617,32433,972 (*)using foreign currency deposits computed for monetary base (*)Repos were not netted out52,31924,02551,93
40、038,70914,00022,00030,00038,00046,00054,00062,000May-18Aug-18Nov-18Jan-19International reserves(ex-USD deposits inthe banks)International reserves(ex-USD deposits inthe banks and IMFmoney)International reserves(ex-IMF money)IMF deal money(USD 28.3bn)Additional swap with China LEGAL NOTICE This docum
41、ent has been written by our Strategist and Economist teams within the BNP Paribas group of companies(collectively“BNPP”);it does not purport to be an exhaustive analysis,and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objecti
42、vity of this report.This document is non-independent research for the purpose of the UK Financial Conduct Authority rules.For the purposes of the recast Markets in Financial Instruments Directive(2014/65/EU)(MiFID II),non-independent research constitutes a marketing communication.This document is no
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