29 October 2018
FOCUS 2
Please refer to important information & authors at the end of the report & MAR Disclosure
Fig. 1-6: Flows, foreign asset formation and direct USD purchase by the private sector
Sources: BNP Paribas, Bloomberg LLP; as of 23 October 2018
Non-resident portfolio net flows were a negative USD 1.285bn in September (Fig. 1-2) from USD
0.6bn in August. Outflows were USD 1.67bn, partially compensated by USD 0.38bn of inflows. Since
April, outflows have reached USD 11.36bn (a record high since 2002).
Compared to 2016 and 2017, foreign asset formation, domestic US dollar demand and capital flight
continue to exhibit unsustainable dynamics (Fig. 7, 8 and 10): capital flight and foreign asset
formation from the non-financial private sector remain at record highs (Fig. 11-12).
Capital flight until September 2018 totalled USD 17.6bn and USD 22.9bn on a 12-month rolling basis
(from USD 23.5bn in August and USD 6.8bn a year ago). We are particularly concerned about the
dynamics of the financial account: if the IMF loan is net out, there is a negative gap of USD 30.6bn
compared to 2017 (Fig. 14).
The good news: the commercial flow (using a cash concept) has stabilised (Fig. 15). In this regard,
Argentina needs to have a positive trade balance to both compensate for the financial outflows and
the need to re-monetize the economy using commercial US dollar inflows.
2,2
412,361,6
701,831,5
901,6
70
-646
-1,285
-1,500
-900
-300
300
900
1,500
2,100500
1,000
1,500
2,000
2,500
3,000
Feb-16Jun-16Oct-16Feb-17Jun-17Oct-17Feb-18Jun-18
Non-residents; portfolio
inflows
Non-residents; portfolio
outflows
FX balance: Non-residents
portfolio flows (rhs)
3,207
2,339
-3,500
-1,700
100
1,900
3,700
Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18
Foreign Asset formation of financial private sector
Foreign Asset formation of non-financial private sector
Total
55,3209,500
19,000
28,500
38,000
47,500
57,000
Feb-16Jun-16Oct-16Feb-17Jun-17Oct-17Feb-18Jun-18
Non-financial private sector
Financial private sector
Cumulativeforeign asset formation since
the end of capital controls(start of Macri
administration)
-3,207-2,339
-7,000
-5,000
-3,000
-1,000
1,000
3,000
Oct-17Dec-17Feb-18Apr-18Jun-18Aug-18
Cashflows from X+I good and services
Financial loans, debt bonds and credit lines
Non-resident portfolio flows (net)
Foreign asset formation; Financial and non-financial private sector
FDI20
26
32
38500
1,000
1,500
2,000
2,500
3,000
Feb-16Jun-16Oct-16Feb-17Jun-17Oct-17Feb-18Jun-18
Non-residents; portfolio inflows
Non-residents; portfolio outflows
USDARS (rhs)
6,183
-55,320
7,074
17,099
-11,424
14,956
-67,000
-42,000
-17,000
8,000
33,000
58,000
Feb-16Jun-16Oct-16Feb-17Jun-17Oct-17Feb-18Jun-18
IMF
Cumulative cashflows from X+I goods and services
Financial loans, debt bonds and credit lines
Cumulative non-resident portfolio flows (since the end of capital controls)
Cumulative foreign asset formation; Non-financial private sector
Cumulative FDI
29 October 2018
FOCUS 3
Please refer to important information & authors at the end of the report & MAR Disclosure
Fig. 7-15: Foreign asset formation and capital flight
Sources: BNP Paribas, Bloomberg LLP; as of 23 October 2018
International reserves
Gross international reserves (ex-IMF) total USD 48.2bn (the amount includes the swap with China,
the IMF loan, and the private sector US dollar deposits with banks). The trend has been a source of
concern (Fig. 16). According to our calculations net liquid international reserves are now ~USD 10bn
(Table 1).
Fig. 16 and Table 1: International reserves (ex-IMF) and FX intervention
Sources: BNP Paribas, Bloomberg LLP; as of 23 October 2018
9,951
22,148
24,7955,000
10,000
15,000
20,000
25,000
JanMarMayJulSepNov
Cumulative foreign Asset Formation 2016
Year 2017
Year 2018
-2,172
-12,410
-25,817 -27,000
-21,400
-15,800
-10,200
-4,600
JanMarMayJulSepNov
USD purchases 2016Year 2017
Year 2018
Non-financialprivate sector
-6,391
-15,708
-17,599-19,000
-15,300
-11,600
-7,900
-4,200
-500
JanMarMayJulSepNov
Capital flight 2016
Year 2017
Year 2018
-24,447
-15,704
-22,941-25,000
-17,500
-10,000
-2,500
5,000020
30
40
200720092011201320152017
USDARSCapital flight in spot FX market (USDmn, 12m rolling, rhs)
-7,009
-16,000
-12,500
-9,000
-5,500
-2,000
JanMarMayJulSepNov
Div+Interest paid 2016Year 2017Year 2018
Repressed figuresbecause
ofcapital controls
26,50122,370
31,409
-10,000
-1,000
8,000
17,000
26,000
-2,050
-350
1,350
3,050
4,750
200320062008201120142017
Foreign asset formation by non-fin private sector (USD bn)
USD bn, 12-m cumulative, rhs
13,505
16,283
-20,979
-23,000
-12,000
-1,000
10,000
JanMarMayJulSepNov
Reserves ex-IMF including China swap + deposits 2016
Year 2017
Year 201829,749
27,817
-15,233-20,000
-9,000
2,000
13,000
24,000
JanMarMayJulSepNov
Total financial account ex-IMF 2016
Year 2017
Year 2018
-203
-6,819
-3,277
-7,000
-4,000
-1,000
2,000
JanMarMayJulSepNov
X+S including services (cash concept) 2016Year 2017
Year 2018
Gross Reserves (a)USD deposits (b) *Net (c=a-b)
26-Oct-1848,284Net of other items
26-Oct-1848,28413,64934,635computed gross reserves
19-Oct-1848,58513,82734,758
12-Oct-1848,54312,78735,756China Swaps-10,000
5-Oct-1849,14112,97536,166IMF loan-14,927
28-Sep-1849,00313,55535,448Total (d)-24,927
21-Sep-1849,56912,62336,946
14-Sep-1850,00816,37033,638Net (c)-(d) **9,708
7-Sep-1851,21416,42934,785
31-Aug-1852,65818,52034,138
17-Aug-1855,34015,38739,953
3-Aug-1854,79613,98540,811
22-Jun-1863,27416,92746,347IMF deal money
15-Jun-1857,79916,77641,023
(*) using foreign currency deposits computed for monetary base(**) Repos were not netted out
34,743
19,816
62,414
33,357
19,000
27,000
35,000
43,000
51,000
59,000
Jan-18Apr-18Jun-18Aug-18Oct-18
International reserves
(ex-USD deposits in
the banks)
International reserves
(ex-USD deposits in
the banks and IMF
money)
International reserves
(ex-IMF money)
IMFdeal money (USD 15bn)
29 October 2018
FOCUS 4
Please refer to important information & authors at the end of the report & MAR Disclosure
Leliqs are the new Lebacs
The velocity of growth of Leliqs (which yield 71% rates) makes the quasi fiscal deficit unsustainable:
At the current pace, the quasi fiscal deficit will likely reach 3.5-6% of GDP depending on the money
demand scenario assumed for H1 2019.
Should money demand (monetization) not pick up quickly from the current depressed levels, a liability
management from BCRA (see Argentina: It’s not you (USD), it’s me (ARS) for further analysis)
How the Leliqs add to banking system riskSo far, the monetary authority has issued seven-day
Leliqs at a rate of 71% (1.38% weekly). The Leliqs are sold to the commercial banks in exchange of
pesos, which are mainly time deposits. Time deposits have grown at 57% y/y pace.
Leliqs to time and saving deposits ratio reached ~43% in October. Leliqs already represent ~78% of
the international reserves (ex-deposits and IMF, even without netting the swaps with China - Fig. 17)
and 158.3% of the net liquid reserves (if the swaps with China were also netted).
In theory, as long as depositors continue to leave the money in time deposits and/or t+1 funds (which
mostly invest in savings and time deposits), the mechanism would continue. Yet, there are two main
risks:
The first is the ~71% rate, which increases the need to further issue Leliqs to roll-over the
existing ones.
The second is the uncertainty surrounding the upcoming Presidential elections as we
expect a (partial) wave of re-dollarization of savings and time deposits ahead of the
event. Under this scenario, the BCRA will be forced to print pesos in exchange of Leliqs
because of the liquidity needs of commercial banks to make savings and time deposits
available for those agents willing to re-dollarize their portfolios.
The latest will be the point at which either a sharp acceleration of inflation and ARS depreciation will
take place or some liability management should be put in place.
We are also weary of any unexpected external shock or further drop in ARS demand. The condition
for the current programme to work is a concatenation of positive events mainly coming from the
external (portfolio inflows and turnaround of the current account) and domestic sectors (increase in
business and consumer confidence, hence re-monetization of the economy), which while plausible,
shouldn't be taken as a base case scenario.
Fig. 17-19: Growing uneasy with the Leliqs
Sources: BNP Paribas, Bloomberg LLP; CAFI; as of 23 October 2018
FX market: USD demand remains high, despite the slowdown in September
Foreign asset purchases (non-financial sector) amounted to USD 3.0bn in June, USD 3.3bn in July,
USD 2.79bn in August, and USD 1.979bn in September.
Net demand for US dollar notes totalled USD 1.2bn (gross demand was USD 2.8bn), distributed
among 1.03mn clients– see Table 2 and Fig. 20-21.
Demand of up to USD 10,000 per month (per client) accounted for 47%. The average value
demanded by each client was USD 2,740 in September from USD 3,110 in August, still showing a
large number of agents dollarizing their portfolios.
Despite the record high pace of ARS depreciation and domestic real interest rates in August, capital
flight does not show signs of reversal. For more details, see Table 2 and Fig. 10.
1,022
15,368
77.6%
0%
20%
40%
60%
80%4,000
8,000
12,000
16,000
20,000
Mar-18Apr-18Jun-18Jul-18Sep-18
Lebacs in US dollars; financial institutions (mn)
Leliqs in US dollars
Leliqs + Lebacs / reserves (ex-IMF); rhs
15,368
42.6%
0%
10%
20%
30%
40%
50%3,000
6,000
9,000
12,000
15,000
Dec-17Mar-18May-18Jul-18Sep-18
Leliqs in US dollars (mn)Leliqs / [Time + saving deposits]; rhs
132,134
50,000
70,000
90,000
110,000
130,000
150,000
May-18Jun-18Aug-18Sep-18
AUM Mutual Funds inMoney Market
instruments (ARS mn)。