LatAm Weekly – August 26-30

Argentina – Reprofiling debt The USDARS will remain under pressure at least until when the first-round presidential election takes place on October 27th. The results of the primary election or PASO (‘Primarias, Abiertas, Simultáneas y Obligatorias”) on August 11th signaled that left-leaning candidate Alberto Fernandez is the clear favorite to win the election. The market reacted negatively to the election result weakening the ARS by 35% and pushing 5year CDS to 1,200bps from 800bps (in the past days the spread has stabilized at 900bps). This means that the market is assigning a high probability that the government will default on its debt. Perhaps the most important market implication since the PASO election is that the local market basically stopped rolling over short term debt to the government both in pesos and in dollars. The Finance Minister said that prior to PASO the rollover ratio of short-term debt was 88%. After PASO it fell to only 10%. In short, the market stopped lending to the government. The Finance Ministry, in response to this dramatic situation, responded by unilaterally extending maturity of short-term debt in the hands of institutional investors by three-to-six months. This prompted the major rating agencies to put Argentina in ‘Selective Default’. The main implication of this decision is that it allows the government to preserve liquidity to keep it running in the coming months. Also, it allows the central bank to keep reserves. Mexico – Dovish Quarterly Inflation Report In the Quarterly Inflation Report for Q2 2019 (QIR) published on August 28, Banxico lowered its inflation forecast for Q4 2019 to 3.2%YoY from 3.7% three months ago. In our view, this is a big downward revision, which signals that Banxico is confident that inflation will trend lower in the coming months. This reaffirms our view that Banxico will continue cutting its policy rate in its upcoming meetings.