Investors on the safe side: capital flight deepens due to fear of the PIT-CNT plebiscite

The first sign of the reaction to uncertainty was seen in the dollar which, contrary to what is happening on the international scene due to rate cuts, has been appreciating. On Tuesday it broke two-and-a-half-year highs and traded at $42.25. Last week alone it accumulated an increase of 2.23% in its value.

Movements also occur at the title level, with the Monetary Regulation Letters (LRM) of the Central Bank and the sovereign bonds absorbing market sensitivity to the possibility of an abrupt change in rules.

“The dissemination of some polls that gave the victory of the plebiscite around 40-45 up to 48% caused fund managers who handle bonds of Uruguay in local currency have decided to move the positioning in these bonds, exiting these positions. The dynamic, at first was seen with few operations, but as the days went by, there began to be more sales from abroad of nominal bonds in pesos at a fixed rate and bonds in Indexed Units (UI)”, described Sebastian Arenahead of the table of Nobilis in dialogue with Scope.

Denisse Toledo Gallohead of Sales and Trading of Bridgehowever, added another factor to the behavior around global titles and bonds in addition to the concerns generated by the PIT-CNT plebiscite“We understand that this is partly linked to the market’s perception that the Uruguayan peso still had room to depreciate when compared to Latin American currencies and, in part, to the uncertainty that the October election and the plebiscite may generate,” he explained.

Currently, the nominal curve of global bonds in pesos is at levels of 10.20% in the long term, when at the end of August that same node was approximately 45 basis points below.

The impact on the exchange rate and what to expect from the dollar the day after

Operations with global bonds had a direct impact on the local exchange rate, leading to dollar to trade at levels not seen since March 2022.

“The AFAPwho are naturally the ones who buy these bonds, need to liquidate them in dollars. Although they have cash in dollars, they sell another part of it, some American treasury, some bonds in dollars, but the rest, which is the majority, they have to buy in the spot market. So they put a lot of pressure on the market. We saw a market that operates around US$25 million a day suddenly operate with sums of 100 million,” Arena commented.

“When we looked at the future scenario, we said: ‘by being in Uruguayan pesos we don’t have much to gain, but we do have a lot to lose’. We recommended switching to dollars because we saw that the surprises were going to be on the negative side, due to a rise in the exchange rate, due to a fall in the price of assets in local currency. Periods of elections, of changes, it is always better to transfer them to dollars than to Uruguayan pesos,” he added.

The depreciation of the national currency will not be the only consequence if on Sunday, October 27, 50% plus one of the voters support the PIT-CNT social security reform that will lower the retirement age from 65 to 60 years, will equate retirements and pensions to the minimum wage, and will eliminate individual savings through the AFAPs.

Various forecasts agree that the changes to the system, which would be immediate, would imply an increase in the annual expenditure of the State of 1,000 million dollars, an increase of deficit up to 4% of GDP and an increase of up to four times that of some taxes to finance it.

In addition, in the immediate future the sovereign spread would rise from the current 86-90 points to at least 200. Uruguay would lose its investment grade and there would be a drop in Uruguayan bonds of around 10%.

“Currently, the market’s concern is more focused on the approval of the PIT-CNT plebiscite “The question of who will be the next president is very important. If the bill is not approved, the dollar in Uruguay could follow what is happening internationally, that is, the weakening of the currency. Meanwhile, long-term peso bonds, which have been punished, yielding up to 10.40%, could return to the levels of May of around 9.17%,” said Toledo Gallo.

For his part, Arena considered that “if the plebiscite is approved, we all clearly know what awaits us in terms of bond prices, spreads, sovereign risk, exchange rates and so on.” “If it is not approved, there will clearly be a short-term fall in the exchange rate that will be relatively pronounced and whose speed and aggressiveness will depend on the return of the capital flows from the rest of the world,” he said.

“This situation that is now occurring, with fund managers exiting positions in local currency, if that is reversed and the next day they want to enter aggressively, the dynamic will be in the other direction. Uruguayexchange rate movements depend on the volume of these capital flows,” he stressed.