1、|FOCUS 03/07/2019 1 FOCUS|EM 03 July 2019 Argentina:Capital flight to the upside KEY MESSAGES Hoarding of USD rose to USD2.5bn in May from USD2.3bn in April an increase of 7%m/m.Capital flight have reached USD8bn YTD in 2019.Cumulative foreign asset formation by the non-financial private sector reac
2、hed a new record.Around USD13.6bn of potential money(mostly time deposits)is available to be dollarized this year,according to our calculations.The BCRAs net liquid(freely available)international reserves,meanwhile,stood at USD15bn on 27 June.We remain concerned with the financial account dynamics.W
3、e are re-shaping our steepening strategy into a long USDARS strategy.Please refer to important information and MAR Disclosure at the end of this report EM STRATEGY Gabriel Gersztein,Global Head of Emerging Markets Strategy Andre Digiacomo,EM/Latam Strategist|Banco BNP Paribas Brasil Hoarding of USD
4、during the month accelerated 7%m/m but decreased 46%in comparison to the same month of last year(Table 1).Net demand for US dollar notes totalled USD1.1bn in May(gross demand was USD1.5bn),distributed among 1.070mn clients(see Table 1 and Fig.4-5).Orders for up to USD10,000 per month,per client,acco
5、unted for 63%of the total demand.The average value demanded by each client was USD1,430 in May 2019,implying a large number of agents were still dollarizing their portfolios.In order to assess the potential money available for dollarization,we gathered the most liquid ARS in the economy and compared
6、 it with the free availability international reserves(see Fig.1).According to our calculations,there is around USD13.6bn of potential deposit dollarization.Meanwhile,the BCRAs net liquid international reserves are around USD15bn(see Fig.1-3).Fig.1-3:Potential money for dollarization and private time
7、 deposits Sources:BCRA,Bloomberg,BNP Paribas;as of 28 June 2019 There is also USD6.3bn from the Tresury to be sold until the end of December 2019 on their daily auctionsThe BNPPs projection assumes that Argentina will eventually deplete all its net liquid international reservesto counterbalancethe d
8、ollarization of deposits.28.612.510.74.5150193857Free availability reservesNet liquid reservesShort-term debtCurrent accountSaving depositsTime-depositsUSD56.3bn8.63.10.01.6USD 15bn061218Potential money for dollarizationFree availability reservesNet liquid reservesShort-term debtCurrent accountSavin
9、g depositsTime-depositsUSD13.6bnBNPP AssumptionMost liquid ARS in the financial system4351596775-1.3%0.1%1.5%2.9%4.3%Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Apr-19 May-19 Jun-19Private time-deposits(rhs,3d moving avg)Leliq RateFX market:USD demand increases in May Foreign asset purchases by the non-finan
10、cial sector totalled USD2.5bn in May 2019 the biggest number so far this year.FX Strategy from now on When it comes to EM,the flexibility to adapt and adjust our views and positions following unexpected news is key.The challenge in the case of Argentina is to do so in a scenario of oddly high carry
11、and economic vulnerability.See details in the last page.|FOCUS 03/07/2019 2 Argentina:Foreign asset formation remains high EM STRATEGY Table 1 and Fig.4-5:Breakdown of foreign asset formation Sources:Bloomberg,BNP Paribas;as of May 2019 CapitalForeign Asset FormationNet demand ofGross demand Number
12、ofValues up to Average perFlight(mn)(non-fin priv sector)USD notesShare of USD notesclients(000)USD 10kclient(000)February-18-9341,34397072%2,23078042%2.86March-18-2,2612,4641,86876%3,16790037%3.52April-18-1,6852,0551,43470%2,73683038%3.30May-18-2,4294,6163,43975%5,0031,08031%4.63June-18-1,3023,0742
13、,22472%3,8031,11439%3.41July-18-1,9873,3512,38671%3,6931,35047%2.74August-18-3,1772,7902,12376%3,7671,21038%3.11September-18-1,3121,9791,19560%2,8251,03037%2.74October-18-8521,16347541%2,4331,09041%2.23November-18-306408-107-26%1,85088031%2.10December-18-41086240647%1,30098036%1.33January-19-1,5731,
14、9581,29366%1,8501,26070%1.47February-19-88796562164%1,16992069%1.27March-19-1,3241,77180545%1,32492063%1.44April-19-1,6252,3411,27755%1,6641,09063%1.53May-19-2,5682,4961,13045%1,5291,07063%1.43Average 2019-1,5951,9061,02555%1,5071,05266%1.431.32.52.14.63.1 3.42.82.01.20.40.92.01.01.82.32.5-0.50.82.1
15、3.44.7Feb-18May-18Aug-18Nov-18Feb-19May-19Net demand of USD notesDollarization2.23.22.75.03.83.73.82.82.41.91.31.91.21.31.71.57508509501,0501,1501,2501,3500.81.93.04.15.2Feb-18May-18Aug-18Nov-18Feb-19May-19Number of clients(000)Gross demand of USD notesForeign asset formation and capital flight Fore
16、ign assets formation,domestic US dollar demand and capital flight ended 2018 at record high levels,showing unsustainable dynamics(Fig.6,7 and 9).We are concerned that these dynamics could remain in place this year,given that the economy is in recession and there are uncertainties arising from the ti
17、ght presidential election,repressed inflation and potential dollarization.We are particularly concerned about the financial account:if the IMF loan is netted out,there is a negative gap of USD20.5bn YTD in 2019 compared to the corresponding period of 2018(Fig.12).The good news is that commercial flo
18、ws(using a cash concept)have improved considerably(Fig.14).In this regard,Argentina needs to have a positive trade balance to compensate for the financial outflows.Gabriel Gersztein,Global Head of Emerging Markets Strategy Andre Digiacomo,EM/Latam Strategist|Banco BNP Paribas Brasil|FOCUS 03/07/2019
19、 3 Argentina:A closer look at the financial account EM STRATEGY Fig.6-14:Foreign asset formation and capital flight Sources:Bloomberg,BNP Paribas;as of May 2019 Foreign asset formation remains at record high levels Non-residents flows declined to USD-0.858bn in May(Fig.15-16)with outflows totalling
20、USD2bn versus USD1.1bn of inflows.Since April 2018,outflows have reached USD22.6bn with capital flight totaling USD15.7bn in 2017,USD19.1bn in 2018 and USD8bn YTD in 2019.As Fig.15-16 show,non-residents inflows turned negative in April 2018,for the first time since President Macri took office.Foreig
21、n asset formation from the non-financial private sector has reached a new high(Fig.17-18).Fig.19-20 show the monthly and cumulative sources and uses of hard currency in Argentina since the end of capital controls.Since 2016,FDI and financial inflows have totaled USD8.7bn and USD24bn,respectively.Mea
22、nwhile,cumulative foreign asset formation by the non-financial private sector is USD67.3bn(the acceleration is notable since the beginning of 2018).So far,US dollars from external debt,the IMF and inflows have been mainly offset by capital flight(Fig.20).9,951 22,148 27,230 9,532 07,00014,00021,0002
23、8,000JanMarMayJulSepNovCumulative foreign Asset Formation 2016Year 2017Year 2018Year 2019-2,172-12,410-26,334-6,606-29,000-23,400-17,800-12,200-6,600-1,000JanMarMayJulSepNovUSD purchases 2016Year 2017Year 2018Year 2019Non-financialprivate sector-6,391-15,708-19,166-7,976-20,000-16,300-12,600-8,900-5
24、,200-1,500JanMarMayJulSepNovCapital flight 2016Year 2017Year 2018Year 2019-24,447-15,704-17,320-25,000-17,500-10,000-2,5005,0000112233442007200820102012201420162018USDARSCapital flight in spot FX market(USDmn,12m rolling,rhs)-10,486-5,288-16,000-12,500-9,000-5,500-2,000JanMarMayJulSepNovDiv+Interest
25、 paid 2016Year 2017Year 2018Year 2019Repressed figuresbecause of capital controls26,50122,37023,160-10,000-2,0006,00014,00022,00030,000-2,050-3501,3503,0504,7502003200520082011201320162018Foreign asset formation by non-fin private sector(USD bn)USD bn,12-m cumulative,rhs13,50516,283-1,193-275-18,000
26、-3,00012,000JanMarMayJulSepNovReserves ex-IMF including China swap+deposits 2016Year 2017Year 2018Year 201929,74927,8174,739-12,322-15,801-20,000-9,0002,00013,00024,000JanMarMayJulSepNovTotal financial account ex-IMF 2016Year 2017Year 2018Year 2019-203-6,819-1,1376,389-7,000-3,50003,5007,000JanMarMa
27、yJulSepNovX+S including services(cash concept)2016Year 2017Year 2018Year 2019Gabriel Gersztein,Global Head of Emerging Markets Strategy Andre Digiacomo,EM/Latam Strategist|Banco BNP Paribas Brasil|FOCUS 03/07/2019 4 Argentina:Portfolio outflows and reserves EM STRATEGY Fig.15-20:Foreign asset format
28、ion and capital flight Sources:Bloomberg,BNP Paribas;as of May 2019 Gabriel Gersztein,Global Head of Emerging Markets Strategy Andre Digiacomo,EM/Latam Strategist|Banco BNP Paribas Brasil 1,968-1,363-1,285-306-227-138-858-1,500-900-3003009001,5002,10005001,0001,5002,0002,5003,000Feb-16Jul-16Jan-17Ju
29、l-17Jan-18Jul-18Jan-19Non-residents;portfolioinflowsNon-residents;portfoliooutflowsFX balance:Non-residentsportfolio flows(rhs)2,4962,819-3,500-1,7001001,9003,700Dec-16Apr-17Aug-17Dec-17Apr-18Aug-18Dec-18Apr-19Foreign Asset formation of financial private sectorForeign Asset formation of non-financia
30、l private sectorTotal67,287013,00026,00039,00052,00065,00078,000Feb-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19Non-financial private sectorFinancial private sectorCumulative foreign asset formation since the end of capital controls(start of Macri administration)-3,205-2,460-1,802-1,853-7,000-5,000-3,000-
31、1,0001,0003,000Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Cashflows from X+I goods and servicesFinancial loans,debt bonds and credit linesNon-resident portfolio flows(net)Foreign asset formation;Financial and non-financial private sectorFDI41363837394345142128354205001,0001,5002,0002,5003,000Feb-16Ju
32、l-16Jan-17Jul-17Jan-18Jul-18Jan-19Non-residents;portfolio inflowsNon-residents;portfolio outflowsUSDARS(rhs)8,703-67,2873,99724,369-2,89539,094-80,000-42,000-4,00034,00072,000Feb-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19Cummulative IMFCumulative cashflows from X+I goods and servicesFinancial loans,debt
33、 bonds and credit linesCumulative non-resident portfolio flows(since the end of capital controls)Cumulative foreign asset formation;Non-financial private sectorCumulative FDIFig.21 and Table 2:International reserves(ex-IMF)and FX intervention Sources:Bloomberg,BNP Paribas;as of 27 June 2019 Gross Re
34、serves(a)USD deposits(b)*Net(c=a-b)Net of other items27-Jun-1964,30415,67748,627computed gross reserves21-Jun-1964,64015,50649,13414-Jun-1963,78215,51548,267China Swaps-19,3007-Jun-1964,75716,94347,814IMF loan-9,95031-May-1964,77916,64148,138BIS-2,50024-May-1965,59816,70048,898Others*-1,50015-Apr-19
35、76,89415,58861,306Total(d)-33,2501-Apr-1966,21317,55248,66128-Dec-1865,80614,30951,497Net(c)-(d)*15,37715-Dec-1849,88714,37235,51531-Oct-1853,95516,61437,34124-Oct-1848,47718,12630,35122-Jun-1863,27419,66543,60915-Jun-1848,46819,55028,918(*)using foreign currency deposits computed for monetary base(
36、*)Repos and other international agencies swaps38,53348,46854,80748,48314,00022,00030,00038,00046,00054,00062,000Jun-18Oct-18Jan-19May-19International reserves(ex-USD deposits inbanks and IMF money)International reserves(ex-IMF money)International Reserves(ex-USD deposits inbanks)Additional swap with
37、 China(USD9bn)IMF USD15bn disbursementIMF USD10bn disbursementIMF dealmoneyInternational reserves Gross international reserves,including the swap with China,the IMF loan and private sector US dollar deposits with banks,totalled USD64bn(see Fig.21).According to our calculations,net liquid internation
38、al reserves currently stand at USD15.2bn(Table 2).|FOCUS 03/07/2019 5 Argentina:FX Strategy from now on EM STRATEGY For further analysis Argentina:Uphill struggle to restore fiscal solvency Argentina:Analysing mutual funds flows Argentina:L-shaped recovery ahead Argentina Election Tracker-Will new a
39、lliances change things?Gabriel Gersztein,Global Head of Emerging Markets Strategy Andre Digiacomo,EM/Latam Strategist|Banco BNP Paribas Brasil Strategy We have been out of the ARS since President Macri named Senator Miguel Angel Pichetto as his running mate on 11 June.Since then,we were only positio
40、ned in a steepening strategy,which aimed to get the most out of the increasing demand for US dollars we expected between June and August.Due to the monetary authoritys commitment to keep the monetary base constant and the ARS stable,selling international reserves would mean absorbing more pesos off
41、the system and consequently having a negative impact on the Leliq rate.The dynamics we projected look like this:BCRA sells US dollars buys ARS commitment to keep monetary base constant amount of ARS in the system interest rates In hindsight,we underestimated the firepower of the monetary authority a
42、nd the government to keep the ARS stable in nominal terms.We also admit we entered our current steepening strategy earlier than optimal(link:Argentina-Less tail risk,not still a game changer).Furthermore,the nomination of Senator Miguel Angel Pichetto and better global financial conditions triggered
43、 a new wave of carry trades on the ARS,letting the BCRA reduce interest rates and,thus,negatively affecting our position.This aside,we did not find elements to change our bearish view.The so-called external rebalancing of the economy is simply because imports have collapsed.Furthermore,we have not s
44、een signals of a reversal in capital flight while the current account deficit remains well above sustainable levels.The consolidated fiscal deficit(including financial and quasi-fiscal results)is almost 7%of GDP and the stock of Leliqs poses a risk if money demand does not pick up the way the author
45、ities expect.On the political front,we believe that the news on the nomination of the vice president is already priced into the ARS.Similar to 2018,we believe that agents are underestimating the level of repressed inflation building up in the economy,not factoring in financial fiscal and quasi-fisca
46、l deficits,and assuming that the current monetary regime and levels of interest rates can be sustainable in the medium-term.When it comes to EM,the flexibility to adapt and adjust our views and positions following unexpected news is key.The challenge in the case of Argentina is to do so in a scenari
47、o of oddly high carry and economic vulnerability.We believe it is time to re-start building a short ARS position,so we reshaped our strategy in place.We are closing the shorter leg USD25mn,short USDARS via NDF,maturity 22-July-19 while partially closing the longer leg of our strategy USD17mn,long US
48、DARS via NDF,maturity 21-November-19.We will keep a USD8mn long USDARS via NDF position,maturity 21 November-19.Our previous strategy was closed for a 3.75%loss.The details are below:Close USD25mn of our short USDARS via NDF position(Maturity:22-July-19)42.95 Close USD17mn of our long USDARS via NDF
49、 position(Maturity:21-November-19)50.40 Keep USD8mn of our long USDARS via NDF position(Maturity:21-November-19)50.40 Legal Notice This document 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 exhaustiv
50、e analysis,and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity 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 Market
