Argentina s national accounts revision Lower growth forecast, no clarity on GDP warrants yet

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1 FLASHNOTE Argentina s national accounts revision Lower growth forecast, no clarity on GDP warrants yet ECONOMICS LATIN AMERICA - ARGENTINA Argentina s revision of its national accounts showed economic growth was anaemic in recent years We lower our GDP growth forecast for 2016e and 2017e on the back of a slow recovery and external uncertainty Not clear how new accounts impact value of GDP warrants, which government has offered to change for collar bonds Javier Finkman Chief Economist, South America ex-brazil HSBC Bank Argentina S.A. javier.finkman@hsbc.com.ar Jorge Morgenstern Senior Economist HSBC Bank Argentina S.A. jorge.morgenstern@hsbc.com.ar Argentina s national statistics institute INDEC published its revised 2004 base national accounts on June 29. With the new set of national accounts, accumulated growth for the period was revised down to 48.6%, significantly below the prior 66.3% official estimate, but in line with private estimates. Following this release, we adjust our GDP growth forecast for Argentina downwards. We now expect the economy to contract by 1.0% in 2016 (-0.2% previously) and to expand 2.5% in 2017 (2.8% previously). The downgrade is a result of the recovery in economic activity coming later than expected and emerging uncertainty about the external environment. New national accounts do not eliminate uncertainty about how much Argentina may have to pay out on outstanding GDP warrants that were issued as part of previous debt restructurings. The consequences of new national accounts for the calculation of the warrant payment could be significant. If the rebasement is done in 2004, the warrant payments will be much lower. In our view, authorities are not likely to make an announcement on what the base year will be anytime soon. The uncertainty about the rebasing date and the difficulty in valuing the warrant increases the incentive for investors to accept a collar offer made earlier this week, in our view. The government has said the exchange could save it USD9.4bn. Table 1. HSBC forecasts for Argentina f 2017f GDP growth (y-o-y %) 2.4 [0.2] -1.0 [-0.2] 2.5 [2.8] CPI (December, y-o-y %) Primary fiscal balance ex ANSES, BCRA (% GDP) Interest rate on 1-m deposits (December avg %) Exchange rate (year-end, USD-ARS) Source: INDEC, Ministry of Finance, BCRA, HSBC estimates Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Bank Argentina S.A. View HSBC Global Research at:

2 Revised national accounts show a stagnant economy INDEC revision since 2004 shows less GDP growth and more inflation Argentina s national statistics institute INDEC published its revised 2004 base national accounts on June 29, another step in the normalization of statistics in Argentina. With the new set of national accounts, accumulated growth for the period was revised down to 48.6%, significantly below the prior 66.3% official estimate, but in line with private estimates for instance, consulting firm OJF s IGA estimated a 45.5% expansion in the economy for that period. According to the new estimates, GDP expanded 0.2% per year since The old estimated suggested a 1.5% pace of expansion. The GDP deflator was revised upwards. While no data was previously available for 2015, accumulated GDP inflation for the period was revised upward to 555% from 407% previously. As a result, the size of the Argentine economy is now estimated at USD630bn as of 2015 current prices. For 2014, the revised figures imply a 4% increase. This impacts key economic metrics of the economy such as the GDP measured in USD, per capita GDP and debt-to-gdp ratios. See table 2 at the end of this report for a comparison of the different estimates. Chart 1. Revised series highlights GDP stagnation in recent years ARSbn, 2004 constant prices % y-o-y Old series, growth (RHS) Revised series, growth (RHS) Revised series Old series -10 Source: INDEC Cutting our GDP growth forecasts Following this release, we lower our GDP growth forecast for Argentina. We now expect the economy to contract -1.0% in 2016 (-0.2% previously) and to expand 2.5% in 2017 (2.8% previously). The downgrade is a result of the recovery of economic activity coming later than expected and emerging uncertainty about the external environment. Reforms such as the elimination of subsidies launched by the current administration last December are having a negative impact on economic activity. Although we expect that economic activity will begin showing signs of improvement towards 4Q16, gains are likely to be mild in the near-term. A stronger recovery in GDP growth is not likely until 2017, in our opinion. Uncertainty about warrant remains Still unclear on GDP warrant calculation The new national accounts do not eliminate uncertainty about the value of outstanding GDP warrants and the amount the government will have to pay out. The Ministry of Finance has yet 2

3 to announce what the new base case GDP will be. The 2010 prospectus for the GDP warrants explicitly considers the case of a rebase of the national accounts: If in any year, the year of base prices for calculating Actual Real GDP is changed by INDEC, the Base Case GDP will be adjusted accordingly. For example, if the year of base prices is changed to 2008 and Actual Real GDP for 2010 with 1993 prices is X, and with 2008 prices is Y, then the Base Case GDP for 2010 = Base Case GDP multiplied by a fraction, the numerator of which is Y and the denominator of which is X. Differences among payments are large and contingent on the year chosen for rebasement Unfortunately, the prospectus is silent about when the new ratio should be applied. Given the fact that 1993 national accounts were published until 2012, we see two most likely limit cases: rebasement is done either in 2004 or in The consequences for the calculation of the warrant payment are significant. If the rebasement is done in 2004, the base is much larger and excess GDP above base and therefore warrant payments are much lower (see chart 2). As an example, if the economy were to grow 4% in 2017 not our base case with inflation of 28%, we estimate a payment for the USD warrant in 2018 would be USD0.5 with a 2004 rebasement, which would increase to USD3.8 if the rebasement were in 2012 instead. Chart 2. GDP warrant payment is conditional to the Base Case adjustment ARSbn, 2004 constant prices ARSbn, 2004 constant prices New base case, using 2004 ratio New base case, using 2012 ratio Actual GDP Source: INDEC, HSBC estimates. HSBC forecast used for actual GDP after The arrows show the 'Excess GDP' for each alternative Base Case adjustment, on which the GDP warrant payments are determined. Argentine government offers GDP warrant buyback Investors were surprised by the offer of a collar by the authorities on June 28, one day prior to the announcement of the new national accounts. The offer actually fixes a range value for the instrument more or less aligned with current market values as if authorities would be providing investors with an exit from these securities with a reasonable gain but not an extraordinary one. Under a 2004 rebasement scenario and incorporating our new GDP growth forecasts, the collar looks attractive as the excess GDP on which the payment is calculated might be negligible (see chart 2). Under the 2012 ratio adjustment, warrant payments may be significant once GDP growth surpasses the 3% threshold. In this case, investors may prefer the volatility of the warrant, but there is uncertainty about the issuer interpretation of the prospectus. The press release announcing the collar offer included the comment that Argentina would be saving up to USD9.4bn. Bloomberg reported that Argentina plans a USD2.5bn external debt issuance to fund the buyback. In our view, authorities are not likely to announce what the base year will be soon. Even if the warrant payment is triggered in 2017, payment would not be made until December 15, Indeed, uncertainty about the value of the warrants may increase the incentives for investors to accept the collars instead. 3

4 Given that the prospectus is silent on the issue, administration officials could choose the option that is most favorable for the public sector: a rebasing in In other recent instances in which officials were able to make choices about monetary policy, such as which CPI would be used to adjust inflation-linkers, the outcome was favorable to the state. In this case, legal advice could also impact the decision. Table 2. Argentina's national accounts estimates in comparison base (revised) GDP growth (%) GDP deflator change GDP (current prices, USDbn) GDP per capita Gross debt (% GDP) base (old) GDP growth (%) GDP deflator change GDP (current prices, USDbn) GDP per capita Gross debt (% GDP) base GDP growth (%) GDP deflator change GDP (current prices, USDbn) GDP per capita Gross debt (% GDP) Source: INDEC, Ministry of Finance 4

5 Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Javier Finkman and Jorge Morgenstern Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst. 5

6 Additional disclosures 1 This report is dated as at. 2 All market data included in this report are dated as at close 29 June 2016, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument. 5 HSBC has managed or co-managed a public offering of securities for the Government of Argentina within the past 12 months. 6 As of 31 May 2016, the Government of Argentina was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6

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