Download Argentina, beyond 2015: Capital needs

Latam Weekly Report
July 10, 2013
Argentina, beyond 2015:
Capital needs
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 We believe Argentina’s challenges beyond 2015 will
concentrate in three main areas: 1) economic growth 2)
external
sustainability
and
capital
inflows
3)
competitiveness and local costs (tax rates). We analyze
each of those challenges, and conclude attracting capital
inflows will be a main priority beyond 2015.
 Growth rates above 3% will require capital inflows to
finance investment needs, in particular in the energy
sector. But attracting foreign investment could potentially
require a more competitive environment, both in terms of
real exchange rate and local costs, with changes in taxes
for instance.
 In the external sector, and even when a 1% deficit in the CA
seems sustainable for an emerging economy, international
reserves will drain unless capital inflows increase. With
imports going up, the import coverage ratio, currently
around 6 months, could go down to 3 by 2015 and 1.8 by
2018, leaving the country considerably exposed to terms of
trade variations, unless capital inflows provide a cushion.
 We remain cautious on medium-term prospects, but
believe the situation can still be handled under a mild
inflow of foreign capital. In that scenario, not only default
chances would be diminished, but also potential growth
could double, leaving the country in a comfortable
situation looking forward.
Head Strategist
Alejo Costa
[email protected]
Strategy
Cristian Antuña
[email protected]
What lies beyond 2015? Mostly an investment need
While we wait for a final ruling on the pari-passu case, we look at
the main challenges for Argentina beyond 2015, after a few years of
high growth, in a context of two-digit inflation, high direct taxes,
and a deteriorating external balance, which are now constraining
growth prospects. In our view, it all comes down to higher
investment needs, which can only be funded through foreign
inflows.
Foreign inflows will be needed to boost growth and investment, in
particular in the energy sector, and to alleviate the external
constraint. In our view, the need for foreign inflows will also
condition tax and foreign policy, as a more favorable environment,
particularly regarding import and foreign exchange restrictions,
will be needed to attract those flows.
Growth: from consumption-driven to capital-driven
The last ten years have been dominated by a consumption-driven
view of growth. Government policy has boosted consumption
through expansive monetary and fiscal tools, in a context where
the external environment, in particular Brazilian demand and
favorable terms of trade, have done the rest. Slack capacity, a
competitive currency, and a lower debt burden were also
fundamental to boost initial growth during the period. But with
inflation at two-digit levels and the external front deteriorating,
government policies seem to have faced a wall, where higher
investment is needed to maintain momentum.
Despite reaching high growth rates, growth during the last decade
has been driven mostly by a recovery in the capacity utilization.
The reduction of slack capacity has been mostly explained by lower
unemployment, one of the pillars of Kirchner’s popularity. A
fraction of growth has been driven by higher productivity,
suggesting that, while foreign demand and government policy have
boosted labor demand, Total Factor Productivity (TFP)
contributions have mostly mean-reverted after the 2001 crisis, and
capital has remained stagnant as a fraction of GDP (see Figure 1).
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In our view, keeping momentum in growth will require higher
capital accumulation. Employment gains seem to have reached a
limit, and the trend in TFP (growing at an average 1.2%) is too
weak to sustain growth on its own. Future policy needs to
encourage capital accumulation, in particular through foreign
investment. Domestic savings are not enough to sustain growth
rates above 3%: according to our estimates, unless foreign capital
funded investment, current trends in employment, TFP and capital
accumulation would lead to a meager 2% potential growth.
Figure 1. Decomposing growth: A mean-reversion in TFP that run its
course?
20
15
10
5
0
-5
Projected growth
(potential)
Labor
-10
Capital
Projected growth
(potential)
TFP
-15
GDP
2020
2019
2017
2018
2016
2015
2013
2014
2012
2011
2010
2009
2008
2007
2005
2006
2004
2003
2001
2002
2000
-20
Source: INDEC, own projections.
We believe foreign inflows are needed to boost investment and
reduce the external constraint, in particular those arising from
energy needs. In our view, the country will need to either tap
foreign markets or increase FDI incentives, which are currently
subdued under current policies, mostly focused on domestic
demand. According to our calculations, growth rates above 4%
could be sustained should capital accumulate at a faster pace.
We follow Hayashi and Prescott (2002, see appendix), and
compute Argentina’s potential GDP under different scenarios of
capital accumulation. We also disentangle growth in the last
decade among capital, labor and productivity (TFP) changes, and
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find trends for each component under current policies. We
conclude that both labor and TFP trends are too weak to sustain
high growth in the next years, leaving capital as the only input that
can boost growth. But the current trend is flat: foreign capital
inflows will be needed to reach potential growth rates above 4%.
The external constraint: in need for capital
Following our update of Argentina and Brazil’s growth1, we put our
external sector projections up to date, and extend it to 2018.
According to our projections, the current account deficit will
revolve around 1% of GDP, with energy imports peaking around
2016. With gross international reserves currently sitting at
USD37bn, we believe international reserves will slowly drain,
falling by additional USD14.4bn by 2015, and USD6.9bn more by
2018, assuming no policy adjustments are introduced. However, a
change in policies that attracted capital inflows could modify that
scenario, particularly if those inflows are destined to investment in
the energy sector, currently absorbing a large fraction of reserves.
Table 1. A deteriorating external sector
2013 2014 2015 2016 2017 2018
Current Account Balance (in bn of USD) -4.742 -5.875 -3.920 -5.058 -2.007 -2.319
Current Account Balance (in % of GDP)
Exports
Agriculture exports
Industrial exports
Importaciones
Energy imports (nets)
-1,0%
86.582
35.174
18.145
75.463
6.877
-1,3%
89.097
34.440
20.407
81.756
10.210
-0,9%
97.273
35.490
26.487
88.114
13.492
-1,1%
102.538
37.093
30.161
94.890
17.287
-0,4%
110.418
37.737
36.917
99.730
17.871
-0,5%
117.753
38.492
42.879
107.387
18.913
Change in Reserves
-5.636 -5.933 -7.363 -2.761 -1.173 -3.000
* Includes warrant payments in 2014. Public debt payments are only included up to 80%.
In our view, post-2015 policy will need to make capital inflows a
priority. Even when a 1% deficit in the CA seems sustainable for an
emerging economy, and looks relatively low in international
comparisons, international reserves will drain unless capital
inflows increase. With imports going up, the import coverage ratio
(coverage of reserves in months of imports), currently around 6
1
Argentina’s growth for 2013 updated to 3.7% (triggering GDP warrants) and
Brazil’s to 2.5%.
Please see important disclaimer information on page 11
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months, could go down to 3 by 2015 and 1.8 by 2018, leaving the
country considerably exposed to terms of trade variations.
Local costs and competitiveness
The real exchange rate has appreciated in the last few months, and
taxes have steadily increased in the last ten years, leaving the
country with a less competitive environment. We believe policies
beyond 2015 will need to address those issues, either through taxbreaks for certain sectors, a more competitive real exchange rate or
a combination.
The real exchange rate has appreciated in the last few months,
mostly as a result of a weaker BRL. As US rates increased, a weaker
BRL has come down to a weaker Brazilian real exchange rate.
Argentina’s central bank has responded increasing the
depreciation pace of the crawling peg a few notches. But the policy,
if sustained in time, could overshadow inflation-control policy
through exchange rate pass-through.
Figure 2. Bringing up fiscal pressure (share of GDP)
40,0%
Provincial Taxes*
35,0%
Federal Indirect Taxes
30,0%
Federal Direct Taxes
25,0%
20,0%
15,0%
10,0%
5,0%
0,0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
*City of Buenos Aires, Provinces of Buenos Aires, Cordoba and Santa Fe
Source: Ministerio de Economia
Tax rates have rapidly increased to developed-country levels, with
fiscal pressure around 35%, up from 24% in 2003. The increment
has been focused on direct taxes, with social security and income
taxes explaining 9% of the hike. The government has used taxation
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as a method to re-distribute income, in a highly unequal country.
But the measure could backfire, as higher labor costs could reduce
work incentives and reduce competitiveness relative to peers,
where tax-rates are in general lower.
Strategy
We remain cautious on medium-term prospects, but believe the
situation can still be handled under a mild inflow of foreign
capital. In that scenario, not only default chances would be
diminished, but also potential growth could double, leaving the
country in a comfortable situation looking forward. Considering
the high premium in Argentina’s debt, we believe good scenarios
are fairly priced, and recommend being market-weight on
Argentina’s long-end of the curve, though only after the Pari-Passu
case is settled. Current volatility around the case will likely
redound in mark-to-market losses, as we remain negative on the
outcome of the case.
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Latam news and views
Argentina: vehicle sales and production, mixed data
Domestic vehicle sales increased 3.4%mom and 22.1%yoy, a
positive print for the overall economy. However, production of
domestic vehicles (-20.3%mom; 19.8%yoy) and external vehicle
sales (-14.1%mom; 42.6%yoy) underperformed analysts’ estimates.
Argentina: Appeals Court issued a purely administrative order
On July 9th the Second Circuit Appeals court issued a purely
administrative order, rejecting a set of Argentine appeals that had
been brought for protective/tactical reasons. Basically, there was a
first set of appeals that was later consolidated in a second set, so
the court has decided to dismiss the first set of appeals, in a purely
administrative decision.
Uruguay: inflation accelerated to 8.2% yoy
Following a 8.1% yoy (0.3%mom) in April, Uruguay’s prices rose
less than expected according to its mom figure (0.4% Vs
0.5%mom), but similar than expected according to its yoy print
(8.21%yoy). Inflation during the first half of the year was the
highest since 2008. Most economists believe that measures
announced by the Central Bank the previous week will not have a
significant impact to reduce inflation.
Uruguay: unemployment fell unexpectedly
The unemployment rate fell to 6.3% in May, from 6.7% in April,
significantly lower than expected (6.6%). Unemployment rate in
the Montevideo stood at 6.6% and in the rest of the country was
6.0%.
Peru: tax revenue grows 2.7% in June
Peru's tax revenue rose 2.7 % (YoY) in June due to the improved
performance of the primary sector according to the government.
The Peruvian government tax revenue totaled PEN 6.530 M soles in
June, said the tax collection agency (Sunat).
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APPENDIX
Appendix 1: Methodology
We follow Hayashi and Prescott2 who use a neoclassical growth
model to deconstruct GDP growth rates between two main factors,
capital and labor, and its total productivity. Departing from a
simple Cobb-Douglas production function, they derive a formula
for the per worker product as:
where y is the per worker product, A the total factor productivity, e
is the ratio between occupied workforce and total working-age
population and x is the capital over GDP ratio. For a more detailed
explanation about the data used and its treatment see the Data
appendix below.
Having series for the observable variables, i.e, capital, product and
labor, it is possible to construct a TFP series as a residual from the
formula above. We constructed a historical series for the
production inputs and, based on those, forecasts for labor, TFP and
capital, allowing us to compute potential GDP.
We assumed that unemployment would converge in 2020 to a 5%
steady state level. So the occupation ratio would rise gradually, and
end in .95 at that time. Similarly, we supposed that the capital over
product ratio would catch up with the Chilean one in 2020,
assuming this last one continues to grow at its present trend.
Finally, we took the historical growth rate trend of the TFP and
assumed that it would follow this path.
We constructed an out of sample series for labor, capital and TFP,
and compute the path for GDP shown in our analysis. This was
accomplished simply by solving for it in the stylized Cobb-Douglas
equation.
2
Hayashi, F. and Prescott, E. “The 1990’s in Japan: A Lost Decade”, Review of
Economic Dynamics, 2002.
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Appendix 2: Data
We used INDEC database to find series for:
Total capital stock at constant prices
GDP at constant prices
Also, we used the Labor Ministry’s BEL database to find series for:
Total working age population
Total employed population
Variables used in our model were treated the observable variables
with these formulae:
“y” is the ratio between real GDP and the total working age
population.
“e” is the ratio between employed people and total working age
population.
“x” is the total capital stock to GDP ratio.
Table 1: Economic Calendar
Date
Event
07/10/2013
07-11-2013
07-12-2013
07-12-2013
07-12-2013
07-12-2013
07-12-2013
07-12-2013
07-12-2013
07-12-2013
07-15-2013
07-15-2013
15-19 JUL
07-19-2013
07-19-2013
Trade Balance (INEI)
Reference Rate
Industrial Production (YoY)
Consumer Price Index (MoM)
Consumer Price Index (YoY)
Wholesale Price Index (MoM)
Wholesale Price Index (YoY)
Consumer Price Index (MoM)
Consumer Price Index (YoY)
Mercosur Summit
Unemployment
Economic Activity Index (YoY NSA)
Budget Balance
Economic Activity Index (YoY NSA)
Economic Activity Index (MoM SA)
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PE
PE
UR
AR
AR
AR
AR
PN
PN
AR
PE
PE
AR
AR
AR
Country
Period
Survey
Prior
Peru
Peru
Uruguay
Argentina
Argentina
Argentina
Argentina
Panama
Panama
Argentina
Peru
Peru
Argentina
Argentina
Argentina
Jun
Jun
Jun
Jun
Jun
May
Jul
May
Jun
Jun
Jun
Jun
Jun
Jun
Jun
0.50%
8.20%
----4.25%
-0.7%
-------
0.32%
8.06%
85.646
79.590
49.594
-$378M
4.25%
12.10%
0.7%
10.3%
1.2%
13.1%
0.4%
3.7%
5.7%
Table 2: Argentine Debt
Table 2: Statistics for sovereign USD bonds
Security
Yield
Carry
Roll
Vol
Total
Ratio
Bonar '13
Price
103,00
3,01%
73
79
805
152
0,19
0,48
49,4
Boden '15
88,75
14,65%
343
154
803
497
0,62
2,26
200,6
Bonar '17
79
15,70%
366
144
838
510
0,61
3,37
266,2
Global '17
76,25
18,00%
417
144
1470
561
0,38
3,10
236,4
57
16,30%
379
21
1308
400
0,31
7,50
427,5
32,5
12,60%
297
-202
1122
95
0,08
13,15
427,4
Disc NY Law
Par NY Law
Duration DV01 (1MM)
Table 3: Statistics for provincial USD bonds
Security
Yield
Carry
Roll
Vol
Total
Ratio
BUEAIR15
BUEAIR17
101,00
86,75
12,15%
15,33%
287
358
32,0
20,0
527
786
319
378
0,61
0,48
Duration DV01 (1MM)
1,80
3,28
181,8
284,5
BUENOS15
BUENOS17
86,00
90,00
20,75%
16,10%
476
375
27,3
24,1
703
758
503
399
0,72
0,53
2,17
1,89
186,6
170,1
BUENOS18
BUENOS21
69,00
70,00
19,90%
20,05%
458
461
-17,5
-20,9
1154
1209
440
440
0,38
0,36
3,98
4,28
274,6
299,6
BUENOS28
65,00
16,70%
388
-27,3
888
361
0,41
6,86
445,9
*Vol refers to autocorrelation-adjusted 2012 volatility, under a GARCH(1,1). Total refers to pure carry plus roll. Ratio refers to the ratio
of total carry over volatility. All statistics are computed with a 3m of data. Carry and roll computed for 3m horizon.
Table 4: Statistics for corporate USD bonds
Sector
Maturity
Next
Payment
Frequency
(months)
Coupon
Residual
Value
Banco Hipotecario 2016
Banks
27-Apr-16
27-Oct-13
6,0
10%
Banco Macro 2017
Banks
1-Feb-17
1-Aug-13
6,0
9%
Banco Galicia 2018
Banks
4-May-18
4-Nov-13
6,0
Banco Galicia 2019
Banks
1-Jan-19
1-Jan-13
Banco Macro 2036
Banks
18-Dec-36
18-Dec-13
Transener 2016
Electricity
15-Dec-16
Hid. Piedra del Águila 2017
Electricity
11-Jul-17
Edenor 2017
Electricity
Edenor 2022
Electricity
Petrobras Argentina 2013
Oil and Gas
Petrobras Argentina 2017
Oil and Gas
Capex 2018
Outstanding
Parity
1,0
102
88%
15,7%
2,3
B-
-
104
95%
2,11
3,87
88,0
1,0
95,1
10,4%
2,9
-
B3
105,6
9%
1,0
102
85%
1,73
86,0
13,1%
3,6
B-
B3
300,0
6,0
6,0%
1,0
107
93%
2,35
100,1
17,0%
4,0
-
Caa1
229,3
6,0
10%
1,0
101
72%
0,72
72,0
12,1%
7,9
-
Caa3
149,1
15-Dec-13
6,0
8,9%
1,0
101
48%
0,74
47,6
79,5%
0,9
CCC
-
53,1
11-Jan-14
6,0
9%
1,0
100
84%
0,10
83,8
18,4%
2,0
B-
-
98,8
9-Oct-17
9-Oct-13
6,0
11%
1,0
103
47%
2,80
48,0
37,8%
2,9
CCC-
Caa1 /*-
24,8
25-Oct-22
25-Oct-13
6,0
9,8%
1,0
102
50%
2,17
50,7
23,9%
4,5
-
Caa1 /*-
300,0
30-Oct-13
30-Oct-13
6,0
9%
1,0
102
100%
1,95
100,1
9,1%
0,3
B
B1
200,0
15-May-17
15-Nov-13
6,0
6%
1,0
101
103%
0,98
104,0
4,8%
3,4
BBB
A3
300,0
Oil and Gas
10-Mar-18
10-Sep-13
6,0
10,0%
1,0
103
68%
3,47
70,0
21,2%
3,1
B-
-
200,0
Pan American Energy 2021
Oil and Gas
7-May-21
7-Nov-13
6,0
8%
1,0
101
97%
1,49
97,0
8,6%
5,1
-
B1
500,0
YPF 2028
Oil and Gas
2-Nov-28
2-Nov-13
6,0
10%
1,0
102
101%
2,03
103,5
9,8%
7,7
-
-
100,0
TGS 2017
Oil and Gas
14-May-17
14-Nov-13
6,0
7,9%
1,0
101
89%
1,33
90,2
13,4%
1,9
B-
B3
374,0
Arcor 2017
Food and Beverage
9-Nov-17
9-Nov-13
6,0
7%
1,0
101
107%
1,33
107,0
5,5%
3,7
-
B1
200,0
Arcos Dorados 2019
Food and Beverage
1-Oct-19
1-Oct-13
6,0
7,5%
1,0
102
104%
2,17
106,8
6,3%
5,0
-
Ba2
308,6
IRSA 2017
Real Estate
2-Feb-17
2-Aug-13
6,0
8,5%
1,0
104
88%
3,85
91,5
11,8%
2,8
B-
-
150,0
Alto Palermo 2017
Shoppings
11-May-17
11-Nov-13
6,0
7,9%
1,0
101
88%
1,40
89,7
11,6%
3,1
B-
-
115,0
Paper
9-Jun-17
9-Dec-13
6,0
6%
1,0
101
108%
0,64
109,1
3,9%
3,4
BBB-
Baa3
270,0
200,0
Alto Paraná 2017
Accrued
Interest
Credit Rating
Mod.
Duration S&P Moody's
Technical
Value
Company
Price
YTM
( in millio n o f
USD)
224,6
Tarjeta Naranja 2017
Financials
28-Jan-17
28-Jul-13
6,0
9,0%
1,0
104
89%
4,18
93,0
12,7%
2,1
-
-
Raghsa 2017
Real Estate
16-Feb-17
16-Aug-13
6,0
9%
1,0
104
86%
3,52
89,0
13,3%
2,6
-
B3
100,0
Airport
1-Dec-20
1-Sep-13
3,0
10,8%
0,9
91
94%
1,18
95,5
12,7%
3,2
B-
B3
300,0
Aeropuertos Arg 2000 2020
Autopistas del Sol 2020
Highways
1-Jun-20
1-Dec-13
6,0
6%
1,0
101
70%
0,73
71,0
16,0%
4,1
-
-
155,7
IRSA 2020
Real Estate
20-Jul-20
20-Jul-13
6,0
11,5%
1,0
106
94%
5,59
99,4
12,0%
4,4
B-
-
150,0
IMPSA 2020
Industrial
30-Sep-20
30-Sep-13
6,0
10%
1,0
103
74%
3,03
76,0
16,7%
4,9
B
-
390,0
Please see important disclaimer information on page 11
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securities. Investors should also be aware that secondary markets for such instruments may be limited or even not exist.
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PUENTE or any of its shareholders, executives or employees may provide oral or written market commentary or trading strategies different from the opinions
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