Latam Strategy
6 August 2018
globalmarkets.bnpparibas2
ae(1+r).
The formula is intuitive and helpful to identify the most important drivers for a
sustainable debt path.
Charts 1-4 show the automatic debt dynamics of Argentina since 2014 until now (last years of
Cristina Kirchner administration and since the Macri government started).
We did not include the provincial debt, liabilities and quasi-fiscal deficit of the central bank
(BCRA), and the program to reduce the central government liabilities with the BCRA. Otherwise the
results would have been worse.
According to the IMF staff report of July 20181, the projected reduction of liabilities with the BCRA
will be USD 2.2bn until the end of 2018 and USD 5.2bn in Q1 of 2019, USD 1.0bn in Q2, USD 3.8bn
in Q3, and USD 1.5bn in Q4 (a total of USD 11.5bn).
Due to the relatively high proportion of hard currency government debt, ARS performance tends
to significantly impact on the debt-to-GDP ratio. According to our calculations, the contribution of
ARS to the deterioration of the debt dynamics is equivalent to 3.4% of the GDP (Chart 2).
The impact of real GDP growth and currency performance is expected to worsen in the coming
months (real growth will turn negative while the full impact of the nominal ARS depreciation in
Q1 2018 on the debt-to-GDP ratio will be reflected in the coming quarters).
A combination of high inflation and proportion of hard currency debt has been beneficial for the
debt dynamics, though. Despite the recent surge in the cost of rolling over the public debt (both in
hard and local currencies), inflation has been consistently above the weighted average of the
interest rates on hard and local currency central government debt, contributing positively to the
public debt dynamics (Chart 4).
Unfortunately, rolling over the public debt will be more expensive in the coming quarters (due to
the recent spike in ARS rates and credit premium). Thus, the positive contribution of real interest
rates (Chart 4) is expected to contract.
According to our calculations, interest payments should account for 2.7% of GDP in 2019 (without
including provinces and quasi-fiscal deficit). Thus, the consolidated nominal deficit should
remain at above 7% of GDP.
Unless further fiscal consolidation effort is made, the scenario described above may lead to
potential liability management or further support from IFIs.
Chart 1-4: Automatic debt dynamics2
-2.2%
2.1%
-26%
-18%
-10%
-2%
6%
Feb-14Feb-15Feb-16Feb-17Feb-18
Automatic debt dynamicsPrimary fiscal deficit
Argentina | Automatic debt dynamics (% GDP)
thehigher, the worse for the public debt
3.4%
-12%
-6%
0%
6%
Feb-14Feb-15Feb-16Feb-17Feb-18
Argentina | Automatic debt dynamics | FX rate depreciation contribution(% GDP)
thehigher, the worse for the public debt
0.1%
-3%
-2%
-1%
1%
2%
Feb-14Feb-15Feb-16Feb-17Feb-18
Argentina | Automatic debt dynamics | Real GDP growth contribution
thelower, the betterfor the public debt
-5.7%
-14%
-10%
-7%
-3%
1%
Feb-14Feb-15Feb-16Feb-17Feb-18
Argentina | Automatic debt dynamics | Real interest rate contribution(% GDP)
thehigher, the worse for the public debt
Sources: Bloomberg, BNP Paribas, IMF | contribution to public debt in % of GDP.
1 imf/en/Publications/CR/Issues/2018/07/13/Argentina-Request-for-Stand-By-Arrangement-Press-Release-
and-Staff-Report-46078Caveat:the approach may not be adequate in examining roll-over risks—the risk that maturing debt cannot be re-
financed. Liquidity risk may arise even in the presence of solvency, hence, a full evaluation of these risks requires a more
disaggregated—and higher frequency—data on the debt stock.
Due to the relatively high
proportion of hard currency
government debt, ARS
performance tends to
significantly impact on the
debt-to-GDP ratio.
Rolling over the public debt
will be more expensive in
the coming quarters. Thus,
the positive contribution of
real interest rates is
expected to contract.
Interest payments should
account for 2.7% of GDP in
2019 (ex-provinces and
quasi-fiscal deficit).
Latam Strategy
6 August 2018
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The following tables show the monthly maturities until Q4 2019. We identify September and
October of 2018 and March, April, and May of 2019 as the most critical months (high
concentration of hard currency debt and maturities with the private sector).
The table only includes existing debt from the central government; BCRA liabilities and debt of
provinces have not been included.
Total Maturities 2018Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18 September-December
Capital of local currency denominated debt1,8071,7443,8171,7241,0976,1141,0283,58612,79423,521
Capital of hard currency denominated debt2,7083,4912,7531,9851,9152,1421,3304,8168,56016,848
Interest payments of local currency debt932971,359294701,20788851,3103,410
Interest payments of hard currency debt9711,3701,548703433859921,1481,5564,081
(a) Total6,4176,7029,4774,7063,1259,8484,2389,55524,22047,861
of which: Intra-Public Sector 2018Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Public Sector Tot% Total
Capital of local currency denominated debt1,1721,7333,1381,7128732,1811,0163,57512,77419,54683%
Capital of hard currency denominated debt628-348371165429321083,3887,27010,79864%
Interest payments of local currency debt19883837925561015147961,56146%
Interest payments of hard currency debt17720783242171111842058411,34133%
(b) Total2,1751,6755,1782,0111,3742,9341,4597,17221,68133,24669%
Total Maturities 2019Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Total 2019
Capital of local currency denominated debt2,4454,5535,2041,9943051,8574697180227617,048
Capital of hard currency denominated debt1,1501,2055,2402,8935,4891851901322,24514416923419,276
Interest payments of local currency debt23557468845871207557885058165,207
Interest payments of hard currency debt947423789747121,550700393758444691,5458,576
(c) Total4,7765,80511,5696,7466,5104,4631,5661833,3781,8616502,60150,107
of which: Intra-Public Sector 2019Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Intra-public Tot% Total
Capital of local currency denominated debt2,4393,3023,4911,9882991,828448117411013,97282%
Capital of hard currency denominated debt761191,922137481717301,9941413665,02926%
Interest payments of local currency debt304263151446254195114441372614%
Interest payments of hard currency debt5017110182848404316271261988391,19014%
(d) Total2,5953,4425,7862,3341,1353,147513512,3902552161,31820,91742%
Total until Q4 2019 (capital + interest)
Capital and interest (a)+(c)97,96845%
Intra-public sector (b)+(d)54,16355%
Hard currency48,78250%
Local currency49,18650%
13,783
11,852
9,929
8,497
7,3636,7466,373
5,50336,324
21,73827,28823,179
19,76516,89719,64713,81312,500
25,000
37,500
50,000
20192020202120222023202420252026
InterestCapital
58.8%
60.1%
59.0%
61.9%
64.9%66.9%
67.4%
68.5%
69.9%
57%
61%
64%
68%
71%
201020112012201320142015201620172018
Debt in hard currency as
% of total debt
40.0%
35.9%
37.4%40.1%
41.4%
48.6%
51.7%
56.6%58.8%
30%
38%
45%
53%
60%
201020112012201320142015201620172018
Central Government debt
as % of GDP
Gross Debt
119%110%123%140%176%
213%
254%
300%308%
75%62%64%68%82%
91%130%178%
189%
0%
75%
150%
225%
300%
201020112012201320142015201620172018
Debt in hard currency as % of
exports
Central government; external
debt as % of exports
142.9
199.9
80
110
140
170
200
20102011201220132014201520162017
Real GDP in USD (base 100
in Q3 2012)
Central government total debt
(base 100 in Q3 2012)
Sources: Secretary of Finance; Macroviews; BNP Paribas; as of 31 March 2018
Hard currency denominated debt from the central government as a percentage of the total central
government debt reached 69.9% in Q1 2018. The central government debt was 58.8% in the same
period. These numbers do not reflect recent peso depreciation (36.2%). Also, hard currency debt
has kept edging higher (increase in Letes issuance and IMF deal).
Latam Strategy
6 August 2018
globalmarkets.bnpparibas4
Thus, according to our calculations, gross debt-to-GDP ratio has already reached 70%, issuing a
warning on the sustainability of the Argentinean public debt.
Granted, a sizable part of the central government debt (54.2%) is held by public sector agencies
(USD 48.7bn by the central bank alone). Yet, our main concern is not necessarily the stock of debt
but the cost of rolling it over and the amount maturing in H2 2018 and 2019 held by the private
sector: As of today, total interest payments alone will be worth USD 21.2bn until Q4 2019 (59.5%
corresponding to hard currency debt).
Provinces
The overall debt level of provinces masks significant heterogeneity within the group. The ratio of
debt to total revenues ranges from 1% to 70%, and those provinces that have the greatest debt to
revenue ratios also tend to have the largest absolute debt stock, showing potential contingent
liability risks for the federal government.
The IMF projects provincial debt on an upward trajectory to 7.3% by 2022. While this is still
below historical highs, risks remain, including:
1. 60% of debt is denominated in foreign currency. Any adjustment of the FX rate would
raise the debt level and force a faster fiscal consolidation (and/or even a bail-out by the
central government): ARS depreciation in 2018 should increase debt to 6.4% of GDP (this
is not included in the central government debt figures).
2. Also, lower transfers from the central administration and drop in economic activity will
put stress on the finances of the provinces in an electoral year (this is one of the reasons
why the provincial bonds have deteriorated more than those of the republic in recent
weeks). Support from provinces in the Upper House is critical for the approval of the
2019 budget (linked to the IMF deal).
Stratetegy and implications
The implied cumulative default probability (CDP) of Argentina for 2y is 15% and for 5y is 24%
(Chart 10). We believe this is not enough given the challenging financial scenario in 2019.
Charts 10-11: Argentina implied default probability
15%
24%
0.0%
15.0%
30.0%
45.0%
60.0%
75.0%
90.0%
Mar-19Mar-24Mar-29Mar-34Mar-39Mar-44
Brazil Globals CPDMexico Globals CPD
Colombia Globals CPDArgentina Globals CPD
13.5%
16.8%
20.0%
23.3%
26.5%
Oct-17Dec-17Jan-18Mar-18May-18Jun-18
Argentina | 5y defaultprobability
Sources: BNP Paribas; CPD stands for cumulative default probability; as of 3 August 2018
Trade recommendation:
Buy protection in Argentina 5y CDS at 428bp, allocation USD 20mn (~USD 8k DV01).
Sell protection in a basket of Brazil, Mexico and Colombia 5y CDS at 211bp, 113bp and 102bp,
respectively; allocation: USD 20mn (~USD 8-9k DV01) each country; carry is ~0bp/month; initial
target: USD 500k.
CountryAllocationExposure (USD, k DV01)5Y CDS4Y CDS1Y Roll-DownRoll-Down x Exposure
ArgentinaUSD 20mn8.2427391-35-291
BrazilUSD -20mn-8.3212174-38313
MexicoUSD -20mn-8.811487-27242
ColombiaUSD -20mn-8.910478-26230
Total-17.7494
Gross debt-to-GDP ratio
has already reached 70%.
Our main concern is the
cost of rolling over and
the amount maturing in
H2 2018 and 2019 held
by the private sector.
As of today, total interest
payments alone will be
worth USD 21.2bn until
Q4 2019 (59.5%
corresponding to hard
currency debt).。