Economic and Political Dynamics in Argentina under the New Administration Japanese Chamber of Commerce and Industry in Brazil By Rodolfo G. Villalba Managing Partner Sao Paulo – Nov 22nd 2019 Fructus Capital SAS 1 A Simple Story of Argentina 2 Contact: [email protected]; [email protected] Total Consolidated Public Expenditure (% of GDP - Galiani) • From 2002 and 2015, 13 years of Populism almost double Public Expenditure from 22.4% to 42.2% of GDP • Macri reduced it down in 4 years by more than 5% percentage points of GDP Source: Foco Económico – Sebastián Galiani, Secretary of Economic Policy at Ministry of Economy 3 Contact: [email protected]; [email protected] Argentine Population and Income Earning Workers • As of July 2019, private productive activity by 20% of total population provides financial support for 45mm people, reflecting social plans, unconventional pensions and unnecessary public employment created by 13 years of populism Working Population as Percentage of Total Population of 45MM citizens 3182,3 Others: Social Plans, Elderly, Child, 7% Non-working Public Sector Employees PriVate Salaryman 6083,9 14% House SerVices Employees Only 20% (8,9mm 499,1 people) generate Independent 1% Monotributo/Authonomos financial resources to supporta populaton 32892,8 2341,9 73% 5% of 45MM Source: Prepared by Fructus Capital based on information sourced from Secretary of Labour 4 Contact: [email protected]; [email protected] GDP Growth • Argentina has high growth potential reflecting competitive advantages in various sectors • However, 13 years of Populism have severely affected growth mechanisms and left a country with serious problems including high taxes and unproductive labor capital 12,00% 10,13% GDP Growth 10,00% 8,85% 9,01% 8,05% 8,00% 6,00% REM Sep 6,00% - 2,9% (2019E) 4,06% 4,00% 0,6% 2,41% 2,73% 2,67% 2Q YoY 2,00% 0,24% 0,00% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -2,00% -1,03% 1H YoY -2,08% -2,48% -4,00% -2,51% -6,00% -5,92% -8,00% Source: Prepared by Fructus Capital based on information sourced from INDEC 5 Contact: [email protected]; [email protected] Key Selected Sectors Driving the Future of Argentina Agricultural, Mining, Fishing, Energy and Transportation sectors leading a solid and sustainable path towards growth 18% 17% Valor Agregado Bruto 2015 2016 2017 2018 2019 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Pesca Salud Ind. Manuf Enseñanza Construcción Elec gas y agua Hoteles y Rest. Minas y Canteras Inmob. y Alquiler Transp y ComunicInterm. Financiera Comercio May y Min Agric Ganad Caza Silvic Adm. Pública y Defensa Serv. Comunity Sociales Source: Prepared by Fructus Capital based on information sourced from INDEC Hogares con Serv Doméstico 6 Contact: [email protected]; [email protected] Central Bank Condition and Foreign Exchange 7 Contact: [email protected]; [email protected] Evolution of International Reserves • Since populism left power in Dic 2015, International Reserves have grown by 4 x to a peak of almost USD 80bn, to fall thereafter to USD 40bn level due to political uncertainty. • The question is … are Reserves sufficient to support the Peso? International Reserves in USD `000 90.000.000,00 $ PASO elections August 11th 80.000.000,00 $ End of CFK Macri Administration 70.000.000,00 $ 60.000.000,00 $ Market FX (Ar$/USD) 50.000.000,00 $ 40.000.000,00 $ International Reserves (USD) 30.000.000,00 $ 20.000.000,00 $ 10.000.000,00 $ - $ 7-jul-17 7-dic-17 7-jun-15 7-oct-18 7-feb-17 7-abr-16 7-sep-16 7-ago-19 7-ene-15 15-jul-15 7-nov-15 31-jul-16 23-jul-18 7-mar-19 15-dic-15 23-dic-18 7-may-18 23-jun-16 15-oct-16 31-oct-17 15-jun-18 30-jun-19 23-oct-19 15-feb-15 29-feb-16 23-feb-18 30-abr-15 23-abr-17 15-abr-19 30-sep-15 23-sep-17 15-sep-19 23-ago-15 15-ago-17 31-ago-18 23-ene-16 23-nov-16 15-ene-18 15-nov-18 31-ene-19 23-mar-15 15-mar-17 31-mar-18 15-may-16 31-may-17 23-may-19 31/12/2016 (*) 31/12/2016 Prepared by Fructus based on Central Bank of Argentina 8 Contact: [email protected]; [email protected] Evolution of Wide Monetary Base and Adequacy of International Reserves • International Reserves measured in AR$ grew since Dec 2015 faster than Wide Monetary Base • As a result convertibility risk of the Peso has declined significantly, and recently even more so since arrival of Sandleris to Central Bank, managing a controlled decline of reserves Wide Monetary Base and Internatinal Reserves 4.000.000.000 PASO elections 70,00 (AR$ ‘000) August 11th 3.500.000.000 End of CFK Macri Administration 60,00 3.000.000.000 50,00 Le quids Lebacs No bacs 2.500.000.000 Monetary Base (AR$) 40,00 Market FX (Ar$/USD) 2.000.000.000 30,00 1.500.000.000 20,00 1.000.000.000 500.000.000 10,00 0 0,00 7-jul-17 7-dic-17 7-oct-18 7-jun-15 7-feb-17 7-abr-16 7-sep-16 15-jul-15 31-jul-16 23-jul-18 7-ago-19 7-ene-15 7-nov-15 7-mar-19 15-dic-15 23-dic-18 7-may-18 15-oct-16 31-oct-17 23-oct-19 23-jun-16 15-jun-18 30-jun-19 15-feb-15 29-feb-16 23-feb-18 30-abr-15 23-abr-17 15-abr-19 30-sep-15 23-sep-17 15-sep-19 23-ago-15 15-ago-17 31-ago-18 23-ene-16 23-nov-16 15-ene-18 15-nov-18 31-ene-19 23-mar-15 15-mar-17 31-mar-18 15-may-16 31-may-17 23-may-19 31/12/2016 (*) 31/12/2016 Prepared by Fructus based on Central Bank of Argentina 9 Contact: [email protected]; [email protected] Evolution of FX Rate and Convertibility Risk • Market FX rate started a dramatic increase towards the end of 2017, and only achieved levels above conversion rate under liquidity stressed conditions towards Dic 2018 during Sandleris governorship. 70,00 PASO elections August 11th 60,00 FX Conversion (Liquidity Stressed) Market FX (Ar$/USD) 50,00 End of CFK Macri Administration 40,00 30,00 20,00 Start of the Run on the Peso 10,00 0,00 7-jul-17 31/12/2… 7-dic-17 7-oct-18 7-jun-15 7-feb-17 7-abr-16 7-sep-16 15-jul-15 31-jul-16 23-jul-18 7-ago-19 7-ene-15 7-nov-15 7-mar-19 15-dic-15 23-dic-18 7-may-18 15-oct-16 31-oct-17 23-jun-16 15-jun-18 30-jun-19 15-feb-15 29-feb-16 23-feb-18 30-abr-15 23-abr-17 15-abr-19 30-sep-15 23-sep-17 15-sep-19 23-ago-15 15-ago-17 31-ago-18 23-ene-16 23-nov-16 15-ene-18 15-nov-18 31-ene-19 23-mar-15 15-mar-17 31-mar-18 15-may-16 31-may-17 23-may-19 Prepared by Fructus based on Central Bank of Argentina TDC (Liqidity Stressed) calculated as (Monetary Base + Leqids + Net Repos ) / International Reserves 10 Contact: [email protected]; [email protected] Securities Portfolio decline in Value • Country risk premium performed a sudden rise from 700bp to 2500 bp after PASO • The value of Securities Portfolio dropped significantly as a consequence from AR$ 1.919 Tr to 0.962 Tr, representing a key source of negative equity, at level -5.7% of total assets Título del gráfico AR$ ,000 2.500.000.000 20,0% PASO elections August 11th 15,0% 2.000.000.000 10,0% 1.500.000.000 5,0% 1.000.000.000 0,0% 500.000.000 -5,0% 0 -10,0% 7-ene-19 7-feb-19 7-mar-19 7-abr-19 7-may-19 7-jun-19 7-jul-19 7-ago-19 7-sep-19 7-oct-19 7-nov-19 Public Securities (Assets) Equity / Total Assets Prepared by Fructus based on Central Bank of Argentina 11 Contact: [email protected]; [email protected] Securities Portfolio drop in Value brings Equity into Negative Territory • Total Value of Equity dropped from AR$ 634 bn on August 7th to AR$ -366bn on November 7th, compared to securities Porfolio value dropping from AR$ 1.919 bn to AR$ 886 bn • To the extend that country risk premium remains at high levels central bank’s assets liabilities management will remain highly exposed and add pressure to the exchange rate AR$ ,000 Public Securities (Assets) and Shareholders’ Equity 2,5E+09 PASO elections August 11th 2E+09 1,5E+09 1E+09 500000000 0 7-ene-19 7-feb-19 7-mar-19 7-abr-19 7-may-19 7-jun-19 7-jul-19 7-ago-19 7-sep-19 7-oct-19 7-nov-19 -5E+08 -1E+09 Prepared by Fructus based on Central Bank of Argentina 12 Contact: [email protected]; [email protected] Current Account Deposits in Foreign Currency at Central Bank • Depositors current account reserves in foreign currency at Central Bank started to drop rapidly due to their withdrawals after PASO elections on concerns about Fernandez’s policies • Central Bank made available enough USD for depositors’ withdrawals, but at the end Foreign Exchange controls were imposed AR$ ,000 International Reserves and USD Current Account Deposit Reserves 4E+09 (both in AR$ `000) PASO elections August 11th 3,5E+09 3E+09 2,5E+09 2E+09 Sep 1st, Exchange Controls 1,5E+09 1E+09 500000000 0 7-ene-19 7-feb-19 7-mar-19 7-abr-19 7-may-19 7-jun-19 7-jul-19 7-ago-19 7-sep-19 7-oct-19 7-nov-19 Prepared by Fructus based on Central Bank of Argentina 13 Contact: [email protected]; [email protected] Short Term Liquidity, A/L Management and Convertibility Risk • Since Country Risk Premium has not eased since AF’s victory, Central Bank new administration may favor a drop of the peso beyond AR$ 71 AR$ to USD, to absorbed negative equity AR$/USD Convertibility Risk Analysis PASO elections August 11th 80,00 $ AR$/USD 70,00 $ 70.90 67..58 60,00 $ 59.60 50,00 $ 56.76 Risk 40,00 $ 30,00 $ 20,00 $ Balance 10,00 $ - $ 7-ene-19 7-feb-19 7-mar-19 7-abr-19 7-may-19 7-jun-19 7-jul-19 7-ago-19 7-sep-19 7-oct-19 7-nov-19 TCD LT FX (Ar$/USD) TDC (Liquidity Stressed) TDC (Liquity Stressed 2) Prepared by Fructus based on Central Bank of Argentina TDC (Liqidity Stressed 1) calculated as (Monetary Base + Leqids + Net Repos ) / International Reserves TDC (Liqidity Stressed 2) calculated as (Monetary Base + Lequids + Net Repos + Current Accounts in Foreign Currencies ) / TDC LT takes into consideration total Assets and Liabilities of Central Bank 14 Contact: [email protected]; [email protected] Foreign Exchange and Inflation Risk FX restrictions helped to calm down market and private individuals, prevent a run on bank deposits and facilitate a transition to new presidency Will there be enough reserVes under a Peronist GoVernment? 1.