What is happening in the market?
-In the last 6 months there was a strong run (investors sold bonds in pesos) from the market to the bonds issued by the National State Treasury, which led to a large issue of money to rescue these bonds.
What bonuses?
-All the bonds, but for sample purposes I bring three bonds, in both cases the rates of return are compared before the June run, and data as of November 11. The first is the T2X3, it is a bond that matures in August 2023, it is a bond in pesos adjusted for inflation, the rate of return of this bond went from 1.8% per year in May 2022 to 7.0% per year in November 2022, a rise of 289% and could have risen much more if the Central Bank did not intervene. Something similar happened with the T2X4, it is a bond in pesos that adjusts for inflation and matures in July 2024. In this case, the rate of return went from 4.9% to 12.9% per year, which implies an increase of 163 %. The TO23 is a bond in pesos at a variable rate that matures on October 17, 2023, yielded 62.1% per year and went on to yield 135.8% per year, which implied an increase of 119%. In all three cases, a sharp rise in the rate is noted, which implies a greater risk of these titles, which implies that the market does not want to acquire them and future financing is complicated.
What happened to the money?
-With data from the BCRA we see that, in a similar period of time, reserves fell by US$ 3,733 million, the monetary base increased by $573,985 million and the indebtedness of the Central Bank, represented by the leliq and others, increased by $ 3,314,377 million. If we take the total monetary liabilities of the Central Bank, the increase is 42.3%, an increase higher than inflation for the period.
What happened to the dollars?
-We show you the evolution of the dollar MEP (stock market), CCL (Cash with Liquidation) and equilibrium dollar. The MEP dollar is what you can buy at the bank or through a stockbroker, acquiring sovereign bonds in pesos and selling them in dollars, it is totally legal. The CCL dollar is buying a bond in Argentina and selling it abroad, the difference with the MEP dollar reflects the cost of taking money out of the country (all legal). The equilibrium dollar arises from taking monetary liabilities and dividing them by reserves. In May the cost of taking money out of the country was 1.9%, today it is 4.4%. In May, the MEP and CCL dollars traded at values similar to the equilibrium dollar, currently they are very distant, something that will be corrected at some point, which would imply a rise in the MEP and CCL dollars at the equilibrium dollar value .
Can you compare these returns with inflation?
-Inflation between October 31 and May 31, estimating inflation for October at 6.5%, is 36.8%. This implies that the dollars, from the month of May onwards, are rising above inflation. This is in line with the mega issuance that the Central Bank has been carrying out, and then removes the issued money from the market through the placement of leliq and other financial instruments, increasing the Central Bank’s liabilities.
How is the movie going?
-The fiscal deficit for the months of October, November and December would be around $1,300,000 million, therefore, there are many pesos to finance. The government’s strategy is to finance them in the market, the joke is that whoever is in the market to buy these bonds is the Central Bank, it acquires them via monetary issue and subsequent absorption via leliq and other instruments. Ergo there is an uncontrolled monetary emission that, at some point, would begin to drive the alt dollars higher.
What happens to the field?
– Grain exports evolve downwards due to lower harvest expectations. According to our projections, 11.6 million fewer tons of wheat would be exported, 14.0 million fewer tons of corn and 11 million fewer tons of soy. In total we would export 36.6 million tons less, this would imply a lower inflow of dollars from abroad and a sharp drop in the collection of export duties. The following table reveals wheat, corn and soybean exports and their projections for the coming season. In dollars it would be approximately a little more than US$ 10,000 million that could be lost, and a drop in tax revenue that could be around US$ 3,000 million. Everything will depend on how prices evolve, which is why we put it in relative terms.
conclusions
- Argentine reserves are very low, and at the rate they are falling, it is impossible to finance the entry of merchandise from abroad, highly necessary to continue maintaining an adequate level of production. Less imports will imply less trade and a drop in industrial activity. This brings as a correlate less collection and a probable increase in the fiscal deficit.
- The launch of Fair Prices is a joke: pretending to set prices at the hands of a bureaucrat is something unthinkable in the modern world. Companies can maintain and even lower their prices if they increase investments, improve productivity and there is more consumption. For this, a stable economy is necessary, with single-digit inflation, without monetary issue, fiscal surplus and a positive balance of dollars. The government does not guarantee any of these premises, but it feels entitled to set prices and state, as Gabriel Rubinstein did, the profit margin of the companies, a difficult calculation to carry out, and clearly an invention. Companies may have a higher economic result than he predicts, but probably when you go to the flow they are showing losses, because between selling the merchandise and collecting it, inflation eats up the margin and what this gentleman does not know is that the structural expenses of the companies grow month by month, while in the market it is increasingly difficult to validate a price increase, without losing the quantity produced. In short, they are not trained to understand what is happening in the market, and even less within a company.
- When a company loses sales, unit costs rise, since structural expenses rise every month, because the Government does not generate positive economic expectations, which encourage investment and greater factor productivity. This implies that the margins are economic, but not financial, inflation is the worst tax that a company can have.
- There is no possibility of higher dollar inflows in the short term, as exports will decline and we are still waiting for the repo operations and the Qatar trust that the minister promised upon taking office. On the other hand, the extension of the Chinese swap has more announcements than certainty that it will finally happen. Any resemblance to the Chinese tale is mere coincidence.
- The government reports an economic reality but the opposite happens in the market. As we show in the tables provided in this report, we have fewer and fewer reserves and more monetary liabilities. With these results, the logical consequence will be that, sooner rather than later, there will be an adjustment in the exchange rate.
- Do not lose sight of the fact that we have ahead of us a sharp rise in the fiscal deficit, which, for seasonal reasons, in the last quarter of the year will at least double the deficit of the first 9 months, with a very significant rise in the months of November and December .
- On Tuesday, November 15, the price index for October will be known. If it were 6.5%, inflation in the last 12 months would be 88%. The fixed term rate should rise to at least 78% per year, this would leave us with an effective rate of 112.9% per year. At the end of Friday, the Treasury bill maturing in January yielded an internal rate of return of 112.5% and the one maturing in February 117.7% annually, with which it would not be improbable a rise in the rate that today is 75% per year, and would go to 78% per year, an increase of 3%.
- Our recommendation is that you continue taking financing and buying capital goods or increasing your stock. Argentina is in an inflationary dynamic that will be difficult to stop. Adjust the control board very well, if profitability accompanies it, proceed to borrow and bet on a future liquefaction. If you do not have profitability at this juncture, proceed to adjust expenses, we do not see salary increases that change the market dynamics. Grow or adjust, according to the company’s numbers, signs of very difficult times ahead.
Source: Ambito
