Forex Investment and Currency Trading

Argentina’s high vulnerability to a deterioration in the external sector will translate into sharper peso weakness in H2 as the seasonally strong harvest period in Q1 gives way to a worsening political environment and more difficult financing conditions for the remainder of the year.

A new inflation index introduced in Q1 in essence enables the government the ability to change weights for selected products on an ongoing basis and is likely to exacerbate under-reporting of inflation. We are concerned about more manipulation of economic data.

Deteriorating credibility in the government will continue to make more difficult access to financing. The sharp rise in nominal ARS yields that ensued following the mid-2007 global credit crisis and resulting reduction in demand for peso-denominated debt is a testament to waning appetite for Argentine risk. The treasury and BCRA have attempted to circumvent this by sharply increasing debt placement with state-owned institutions, in particular the social security administration (ANSES). Even so, debt issued has been mostly USD denominated. Limited participation in primary auctions of selected government debt to stateowned banks, and the move to redeem Lebacs/Nobacs to contain the sharp rise in yields, has exacerbated the liquidity problem. Lack of credibility in the new inflation index and increasing lack of transparency of economic indicators will continue to dampen the demand for CER-indexed paper and sustain widening of bonds spreads in local debt markets. Access to external debt markets will remain limited as long as there is little progress in the Paris Club negotiations and some news on hold-outs. Little progress is expected this year.

The outlook for longer-term foreign flows is weak as government policy-making fails to restore investor confidence. This highlights further vulnerability of Argentina’s balance of payments to the external sector especially in the event of a commodity price correction. In 2007, Argentina was the only country where FDI contracted (by 40% y/y) and the prospects for this year are USD3-4bn in FDI at most. Increasing deterrents to longer term investment are to blame, particularly the rise in government intervention in the business environment.