See this week’s calendar of economic releases and BancTrust Data Monitor
See our Sovereign Bonds Daily and our Global Monitor
* Our tactical positioning is based on the rebalancing of our latest portfolio recommendation against the EMBIG Index’s weights of the credits we track. For more on this, please check LatAm and Caribbean Fixed Income Strategy: “Home-grown factors back on the front burner”, 10 February.
ARGENTINA (CCC+/Ca/CCC-) OVERWEIGHT *
Cristina makes vagues remark in new speech
Last Friday, Vice-President Cristina Kirchner reappeared on the political scene with a conference focused on Argentina’s structural economic problems and avoided talking about this year’s electoral candidacies. Cristina discussed the country’s main economic problem is related to high inflation, lack of a strong domestic currency and low real wages. In this vein, the VP advocated a broad political agreement between main political parties to renegotiate the IMF deal in the coming years, as it is an inflationary agreement that does not allow the country to grow. Beyond this call, which she had already put forward in the past, the VP made no further reference to the short-term economic issues. On the other hand, Cristina criticised the judges who sentenced her to seven years in prison. In this regard, Cristina reiterated that the only objective of the judicial case is to proscribe her, and denied once again any wrongdoing during her administration.
BA Mayor Larreta suggested that faster removal of FX controls are necessary
Buenos Aires City Mayor Horacio Rodriguez Larreta highlighted the need to eliminate FX controls “as soon as possible” and insisted on the importance of credibility and stability”. Although the main presidential hopeful of the opposition front Juntos por el Cambio (JxC) suggested a faster pace to remove FX controls, his statements on this regard are still ambiguous. In a radio interview, Mr Larreta reaffirmed the need to boost exports to solve dollar shortages. In this sense, he reiterated that he could also gradually eliminate and lower export taxes for some sectors. “I had a very good meeting with the agricultural sector, which represents 70% of national exports, and they made a very interesting proposal to increase food exports by 50% in a single government term”, Larreta commented. Finally, he ruled out the possibility of a dollarisation. “It is not serious”, Mr Larreta concluded.
YPF (YPFDAR) focus on shale oil growth may imply USD1-2bn annual cash burn in 2023 and 2024
Last Friday, YPF hosted an investor day at the NYSE, celebrating the 30th anniversary of its stock trading in the US. Management disclosed three distinct strategic pillars:
1) 2023-2035 monetization of its crude oil: ramping up capex to USD5-6bn in 2023 and 2024 (2/3 of upstream capex directed to crude oil), implying negative free cash flow of USD1-2bn annually (in the USD60 and USD80 Brent scenarios), but setting the infrastructure to grow 4x shale crude oil production and 2x shale gas within 5 years, potentially being able to export 35-40% of 450k bpd of crude oil produced in 2027 (800k boepd of total hydrocarbons production).
2) 2027-2050 monetization of natural gas - LNG: With initially more moderate investments than in crude oil, catered only to fulfil the plan gas commitments, YPF envisions a 1st stage LNG export project execution of 25mn cubic meters per day in 2026-2030 and subsequent project stages in 2031-2050 reaching 95mn cmpd.
3) 2030-2050 green hydrogen, lithium and other clean energies: Management highlighted their intention to continue investing in renewable energy (YPF Luz is already the second largest renewable generator in the country), taking the necessary steps to develop a greenfield lithium brine project that could eventually reach 25k tpy (Argentina holds 20% of the world’s Lithium resources, according to USGS), and identified the strong potential of Argentina to develop green hydrogen (Argentina ranks top 3 in terms of lowest estimated cost to produce it, according to BNEF, benefitted by the wind conditions in Patagonia with 100GW -according to GWEC- and 8.5mn tpy of green hydrogen potential per port).
Management committed not to exceed 1.75x net debt to EBITDA in 2023 (1.2x as of December 2022), and set a 5-year target of net leverage at or below 1.5x, turning cash flow positive as of 2025.
VENEZUELA (SD/C/WD)
Maduro adopts belligerent anti-US rhetoric
During a TV interview on Saturday, President Nicolás Maduro said that he doesn’t care whether the United States, “the right”, and the European Union recognise the 2024 presidential elections, stating that he is unconcerned about what these actors think of the Venezuelan democratic process. Maduro indicated that Venezuela is progressing in the consolidation of strategic alliances with other countries of the region (Colombia, Brazil, Honduras), while the US imperialism is going through a historic decline. Even though the comments by the Venezuelan President are part of the usual anti-US rhetoric, it does reaffirm the kind of extreme attitude, effectively adopted in the past, regarding the international recognition of Venezuelan institutions and government.
Correa sees a dollarisation of Venezuela as “geopolitical suicide”
Former President Rafael Correa expressed that dollarising the Venezuelan economy “would be geopolitical suicide” and one that recommends such a strategy “a traitor”. The opinion of the Ecuadorian leader, who was a harsh critic of the official dollarisation process in his country, is relevant for the analysis and general understanding of the policies adopted in Venezuela, as the influential group of economic counsellors that advise President Maduro is led by two former members of the Executive Cabinet of Correa. In this context, the reluctance of national authorities to allow a larger dominance of the dollar in domestic financial transactions, despite persistent three-digit inflation, is easier understood.
COLOMBIA (BB+/Baa2/BB+) UNDERWEIGHT *
Senate President outlined hints of a consensus in the health reform
Senate President Roy Barreras said that the government and lawmakers have “more agreements than disagreements” on the health reform. Mr Barreras´ statements came after a meeting with President Gustavo Petro. In this sense, Mr Barreras commented that the primary attention strategy, which seeks to prevent diseases, is a priority in the discussion. “Other points include the direct payment to hospitals and professionals without the insurance companies´ intermediation and the elimination of vertical integration to prevent dominant positions in the healthcare market”, he added. On another note, daily La República commented that the labour and pension reforms will be submitted to Congress on 16 March.
Finance Minister Ocampo to remain in the cabinet until June 2024
Finance Minister Jose Ocampo announced that he would remain in government until June 2024, when his sabbatical leave from Columbia University expires. Although there has been speculation about his departure following the recent ministerial reshuffle, Mr Ocampo clarified that it was President Gustavo Petro himself who asked him to remain in the cabinet.
COSTA RICA (B+/B2/BB-) OVERWEIGHT *
Finance Minister Acosta is comfortable with additional currency appreciation
Finance Minister Nogui Acosta stressed that “an exchange rate close to CRC500 per dollar favours the government's debt structure”, according to daily El Observador. At a press conference, the minister said that an FX close to these levels “gives enough margin to the government to cover all costs included in the budget”. However, Mr Acosta warned that a weaker currency will likely force the Treasury to request budget amendments. In this context, the minister highlighted the downward trend of the FX since 2H22, which currently stands at cUSDCRC550, from USDCRC695 in June 2022. In this regard, General Manager of the central bank (BCCR) Hezel Valverde ruled out the BCCR conditions its policy to benefit the Treasury. “I can assure you that there is no relation between the fiscal part and monetary and exchange rate policy” Ms Valverde stressed.
DOMINICAN REPUBLIC (BB/Ba3/BB-) NEUTRAL *
Minimum wage increases by 19% until 2024
The National Wage Committee announced a 19% increase in the minimum wage for private sector employees. In this regard, authorities informed the increase will be divided in two tranches, 15% in April and 4% in February 2024. The agreement came after months of discussion with several workers´ unions, which initially demanded a 35% increase. The increase is well above expected inflation and productivity growth, which could pose a threat to inflation dynamics going forward.
ECUADOR (B-/Caa3/B-) UNDERWEIGHT *
The opposition parties reassured they will submit an impeachment request in mid-March
Lawmakers from opposition parties stated they will submit an impeachment request in mid-March. In a press release signed by National Assembly (NA) President Virgilio Saquicela and representatives of the Correism, the Social Christian Party, and radical factions of Pachakutik and the Democratic Left, lawmakers ensured they will present an impeachment request. “The impeachment goes!”, reads the statement released on 10 March.
Former Constitutional Court judge believes there are no arguments to impeach President Lasso
Former Constitutional Court President (Feb-2019 to Feb-2022) Hernán Salgado told Ecuavisa that there are no arguments to impeach President Lasso. “There is an incommensurable eagerness” from lawmakers to impeach Lasso according to Mr Salgado. “Instead of shielding the impeachment, lawmakers destroyed it” according to Mr Salgado.
President Lasso tested positive for Covid-19
President Guillermo Lasso tested positive for Covid-19 for the second time during his mandate. According to an official press release on 11 March, President Lasso is in good health and he will continue working isolated in the next four days.
Political analyst Pedro Donoso believes that Lasso’s real threat is in the “streets”
In an interview with La Posta, political analyst Pedro Donoso stated that in his opinion the impeachment would not succeed. Mr Donoso believes that the recently appointed Government Minister is doing a great job at dealing with threats in the National Assembly. In this regard, Mr Donoso believes that the most likely scenario is that the impeachment would either “get stuck” in the Constitutional Court or fall short to gather support from lawmakers if it passes the Constitutional Court test. Nevertheless, failure to impeach President Lasso would not change governability prospects. Moreover, Mr Donoso warned that the government’s weakness is “in the streets”. Mr Donoso believes that failure to impeach President Lasso would move conflicts to the streets, where people could “vent” their social discontent.
HONDURAS (BB-/B1) OVERWEIGHT
Expectations point to slow convergence to the inflation goal and further economic slow down
The monthly survey of macroeconomic expectations released by the Central Bank of Honduras showed that 12-month inflation expectations stood at 7.7% for the second consecutive month, but below the level of 8.3% registered last December. The figure continues to be consistent with the scenario of slow convergence to the inflation target of 4%±1%, and high vulnerability to new adverse inflationary shocks. Regarding economic activity, growth forecasts were cut down for the second month in a row, this time from 3.4% to 3.2%. Meanwhile, the confidence index fell to 45.6, from 48.1 in January, staying in the area that points to weakness in future economic conditions. Economic agents continue to expect increases in the reference interest rate, projecting, on average, a rate of 3.44% for the end of the year, despite the clear aversion shown by national authorities to use this monetary policy tool.
PANAMA (BBB/Baa2/BBB-) UNDERWEIGHT *
Malpass and Cortizo met in Panama city
President Laurentino Cortizo thanked World Bank President David Malpass for the financial support offered by the multilateral institution to the country. Cortizo and Malpass met last week in Panama, as part of a four-day official visit by the World Bank’s head to Latin America and the Caribbean. A readout published by the World Bank indicated that both leaders discussed “the challenging outlook for developing countries as they face slower global growth, high inflation, and rising interest rates”. It also disclosed that Malpass “recognized Panama’s progress toward reducing the fiscal deficit, and underscored the importance of achieving both fiscal and debt sustainability and pension financing”. At the end of January (latest official figure available), Panama had outstanding liabilities with the World Bank for USD1.6bn, significantly lower than those with the Inter-American Development Bank (USD4.4bn), the other large development financing institution.
Restrictions on FQM lifted; environmentalist announced legal actions against the new mining contract
The Panamanian Maritime Authority lifted on Friday restrictions to First Quantyum Minerals (FQM) to load copper in the port of Punta Rincón. The decision puts an end to the suspension imposed last 26 January that forced the eventual halt of the Cobre Panamá mine. Also, last week an environmentalist group announced that it would introduce a demand before the Supreme Court (CSJ) after considering that the new mining contract signed between the government and FQM was unconstitutional. In particular, the activist organisation argues that national authorities followed procedures similar to those implemented back in 1997, which resulted in a deal that was declared unconstitutional by the CSJ in 2017. The legal action must await, however, for the official approval of the contract by the National Assembly.
PARAGUAY (BB/Ba1/BB+) NEUTRAL *
Colorado party’s presidential candidate Peña continues leading vote intention
According to a survey conducted by pollster FaSac Consultores, Colorado´s party (ANR) candidate Santiago Peña would be leading vote intentions ahead of the 30 April presidential elections. According to the poll, Mr Peña would obtain 42.8% of votes, followed by the opposition candidate Efraín Alegre from the Concertación Alliance with 32.1%, Paraguayo “Payo” Cubas from Cruzada Nacional (13.7%) and Nueva República candidate Euclides Acevedo (6.1%). The remaining candidates would obtain 2.1% of votes, while 1.5% of the surveyed would vote blank or null and 1.7% preferred not to answer. The study was carried out between 3 and 9 March and polled 1,000 people.
PERU (BBB/Baa1/BBB) UNDERWEIGHT *
Trade surplus continues shrinking in January
The trade balance recorded a surplus of USD1.1bn in January, a reduction of 13.6% y-o-y. The result is consistent with the outlook of a new decline in the country’s trade surplus in 2023 (BancTrust forecast: USD7.7bn; 2022: USD9.6bn), after the decrease of 35.6% observed in 2022. The lower surplus in January was the result of contractions of similar magnitude in both exports (-14.5% y-o-y) and imports (-14.8% y-o-y), with the weakness in the demand for foreign goods being associated with the lower dynamism of domestic economic activity. In the month, a new deterioration of terms-of trade was also observed, this time of 3.9%, as export prices fell 1.9% y-o-y while import prices rose 2.2% y-o-y. Recall that, in 2022, terms-of-trade dropped by 8.4%. Note, however, that the adverse impact of these nominal shocks has been mitigated by the still strong external asset position of the country, with net international reserves reaching USD73.9bn or 29.0% of GDP last March.
BCRP’s general manager gives further details about official growth-inflation expectations
During the presentation of the March Monetary Program to the press, the Monetary Policy Manager of the Central Reserve Bank of Peru (BCRP) Carlos Montoro commented that the estimated drag on economic growth from protests and road blockades in February would be approximately 2.0 pp, from 4.0 pp projected for January. In this regard, he reiterated the expectation of a 1.4% y-o-y decline in economic activity during the first month of the year. Regarding inflation, Montoro revealed that the BCRP expects, for March, a monthly rate “somewhat lower” than the one observed in the same period of last year (1.5% m-o-m), an insight that could be critical when assessing the scenarios for April’s monetary policy meeting.
Lawmaker submits bill draft to raise tax pressure on mining
A legislator from Popular Action (AP) introduced last week a bill aimed at increasing the fiscal burden over the mining sector, in order to take advantage of the high international prices of metals. The law project proposes significant upward adjustments in royalties (from 12% to 30%) and in special taxes to this activity (from a range of 8%-13%, to one of 12%-34%). Even though the government of former President Pedro Castillo found some support from the IMF regarding the space to increase mining taxes and royalties, the magnitude of the changes proposed by AP are certainly too large to be accepted by Congress.
TRINIDAD & TOBAGO (BBB-/Ba2) OVERWEIGHT *
Finance Minister admits foreign currency shortage but discards devaluation of the TTD
Finance Minister Colm Imbert said that while there was no foreign exchange crisis, there exists some shortage. In this vein, the finance minister remarked that 2023 will not be as good as 2022 due to the retraction of energy and petrochemical prices that would lead to lower FX inflows. Despite this, Mr Imbert insisted that a devaluation of the local currency was not necessary. In this regard, he explained that the central bank's reserves were at a healthy level of almost USD7bn, covering over eight months of imports. In addition, the finance minister highlighted that the country also relies on the Heritage and Stabilisation Fund, which adds about USD5bn to the stock of external buffers. Mr Imbert also stressed that, although the prices of the country's exports have declined in recent months, they are still at relatively high levels compared to recent history. This is in line with our outlook for this year, in which we expected lower energy prices to weaken the country’s fiscal and external position, despite some partial compensation from a recovery of the energy and non-energy sectors' output (see our 2023 Year Ahead Outlook: “Lingering challenges”, 16 December 2022). On another note, Mr Imbert referred to the development of the Dragon gas field and explained that the gas from it could be used in various plants in the country for the production of LNG, methanol and urea. Finally, the finance minister added that the government is currently in negotiations with Guyana and Suriname to access gas from these countries.
Our Latest Reports:
Argentina Flash Report: “Treasury leaks a misleading swap result, as private sector participation disappoints”, 10 March
Venezuela Economics and Strategy: “Our views on 9 critical issues for bondholders”, 9 March
Argentina Fixed Income Strategy: “Provincial fundamentals take the front seat”, 03 March
Ecuador Flash Report: “More pain to come”, 01 March
Panama Economics and Strategy: “The risk of fiscal mirage”, 28 February
Venezuela Economics and Strategy: “Moderation, the essential ingredient for a feasible transition”, 14 February
LatAm and Caribbean Fixed Income Strategy: “Home-grown factors back on the front burner”, 10 February
Peru Economics and Strategy: “Relative spreads to deteriorate further as politics remain unsupportive” 07 February
Ecuador Flash Report: “Reduce exposure on bonds as governability is set to deteriorate”, 06 February
Trinidad and Tobago Fixed Income Strategy: “TRITOB 24s: A story of overstated risks”, 03 February
Ecuador Flash Report: “Court rules to uphold tax reform and reduces fiscal uncertainty”, 02 February
Ecuador Economics and Strategy: “Political risk back to the spotlight”, 26 January
Venezuela Economics: “Chevron’s strong start and the outlook for the Venezuelan oil sector”, 23 January
Argentina Flash Report: "Massa pulls another rabbit out of the hat", 18 January.
Venezuela Economics and Strategy: “A key year for the opposition and for bondholders”, 16 January
Argentina Economics and Strategy: “The new elephant in the room”, 12 January
Argentina Flash Report: “Little upside on BUEAIR 27 from Supreme Court ruling”, 21 December 2022
2023 Year Ahead Outlook: “Lingering challenges”, 16 December 2022
BancTrust & Co. Research & Strategy Team.