DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND

ANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION

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Argentina: Decisions it can
and cant control

Emerging Markets Economics Latin America Argentina

Argentine policymakers may face complex tradeoffs in the third quarter
of 2014. The government has sacrificed economic growth in order to preserve
international reserves. This situation generates tensions that could lead to
policy mistakes. Specifically, an inclination to ease monetary policy
significantly or delay additional subsidy reductions could be undermined by
increased currency pressures once agriculture-related foreign exchange
inflows subside in the second half of this year. Our central case assumes that
pragmatism will ultimately prevail, based on President Cristina Kirchners
demonstrated willingness to adjust policies at home and abroad in order to
avoid a solvency crisis under her watch, Still, the coming quarters could be a
bumpy ride for investors, particularly if the U.S. Supreme Court denies
Argentinas appeal later this month.
The growth outlook remains gloomy. We expect Argentinas economy to
contract slightly in real terms in the first half of 2014, as weaker consumer
confidence, real wage losses and higher domestic interest rates drive a
downward adjustment in private consumption and investment. From the
supply side, capital controls are constraining production by limiting access to
inputs. A tepid recovery could begin later this year, but overall we project that
official data will report just 0.2% real GDP growth in 2014. Private estimates
will likely suggest a contraction between 1.0% and 3.0%. For 2015, we expect
public spending ahead of the presidential and congressional elections and an
uptick in investment in anticipation of regime change to underpin real GDP
growth of 1.5%.
Inflationary pressures have receded somewhat. Private and official
monthly inflation prints declined steadily between January and May in the
context of tighter monetary policy, weak economic activity and nominal
exchange rate stability in April. They could remain below 2.0% mom in the
coming quarter as the main impact of the devaluation has fed-through and the
government successfully capped average nominal wage increases around
30% yoy. We expect the new national CPI to show a 28.8% yoy increase at
year-end, while private inflation estimates could be closer to 35% yoy, up from
28.4% yoy in 2013. Faster-than-anticipated exchange rate depreciation and
greater-than-expected monetization of the fiscal deficit are the main risks to
our forecast.



Research Analysts
Casey Reckman
212 325 5570
casey.reckman@credit-suisse.com


This is an exact excerpt from the
Emerging Markets Quarterly Q3-2014,
published 6 J une 2014.
09 June 2014
Economics Research
http://www.credit-suisse.com/researchandanalytics

09 June 2014
Argentina: Decisions it can and cant control 2
The authorities could be tempted to ease monetary policy in this environment. In
fact, central bank President Juan Carlos Fabrega recently said that interest rates could
be lowered further if inflation remains below 2.0% mom. There are also reports that the
government is planning measures to stimulate consumer lending. We are concerned
that the scope for looser monetary policy will be limited by renewed pressure on the
peso and international reserves later this year given the typical seasonality of
Argentinas dollar inflows and the fact that spreads between the official and parallel
exchange rates usually widen when domestic liquidity rises. Still, for the time being we
assume that Fabrega would have President Kirchners blessing to increase sterilization
and hike interest rates again if needed to reduce the demand for dollars.
Additional expenditure restraint is needed to lessen macroeconomic pressures
associated with monetization of the fiscal deficit. Reductions in gas and water
subsidies announced earlier this year are projected to save a maximum of 13bn pesos,
or 0.3% of our projected 2014 GDP. The government is also planning to better target
electricity subsidies. This is important as energy subsidies rose to 2.4% of GDP (out of
4.0% of GDP in total subsidies) last year, up from 2.0% in 2012. We continue to expect
only modest progress, though, given the political cost of increasing public utility rates
during an economic downturn. We project that the federal governments primary fiscal
deficit will narrow to 0.2% of GDP this year from 0.7% in 2013. The overall deficit would
also improve slightly to 1.7% of GDP in 2014, compared to 1.9% last year.
We expect gradual, but accelerating, peso depreciation over the second half of
2014. Our estimate suggest that nearly 40% of the competitiveness gains from
Januarys devaluation were lost by the end of April, while the trade surplus was down
58% yoy to $1.0bn over the first four months of this year. We believe that the central
bank recognizes that nominal exchange rate deprecation must at least keep pace with
inflation, albeit with a lag. However, currently it also seems to want to prevent spot
market participants from assuming a predictable path for the peso. This is a somewhat
risky strategy, in our view, particularly if done in the absence of coordinated monetary
and fiscal policies. While no longer our central case, failure to anchor expectations could
ultimately result in another, more disruptive step devaluation before year-end.
We forecast that gross reserves will fall to $25.1bn by year-end from $28.6bn
currently. The improvement in the trade surplus stemming from the devaluation and
economic slowdown will be limited by weak Brazilian demand and Argentinas structural
energy deficit. Meanwhile, we expect the reduction in the services deficit to be largely
offset by increased capital flight. Remaining dollar-denominated debt service to private
creditors totals $3.3bn this year
1
and Argentina will also make a $650mn payment to the
Paris Club. Larger-than-expected FDI inflows following the agreement with Repsol and
the Paris Club could drive upward revisions to our projections. Downside risks include
significantly stronger domestic demand for dollars, hoarding by farmers and a sharp
depreciation of the Brazilian Real.
The external debt service burden is heavy in 2015. We estimate total foreign
currency debt service to private creditors of $12.3bn next year. This is 49.1% of our
year-end 2014 gross international reserves forecast and 78.6% of our net reserves
projection. If reserves decline more quickly than expected, the government would sooner
carry out another large devaluation than default ahead of presidential elections in
October 2015, in our view. Still, these figures suggest that securing market access,
whether to raise fresh funds or to refinance the $6.1bn Boden 15 maturity on 3 October
2015, could reassure investors concerned about potential pesification of local law debt.

1
This estimate includes foreign currency interest and amortization payments to private creditors on sovereign, provincial and
corporate bonds.
09 June 2014
Argentina: Decisions it can and cant control 3
On the legal front, our base case remains that the U.S. Supreme Court will call for
the U.S. Solicitor Generals views this month. Argentinas appeal of the injunction in
the pari passu case is set to be conferenced by the justices on 12 June. As per standard
Supreme Court practice, the outcome will most likely be announced around 9:30am on
Monday, 16 June. The news could be delayed one week if the case is relisted. Involving
the Solicitor General would likely add around six months to the process and, assuming
he does not change his previously expressed position in favor of hearing the appeal,
increase the odds that the Supreme Court eventually takes the case. If that happens, the
Courts decision would likely be handed down by the end of June 2015. Argentina:
Updated views on pari passu explains our view and potential next steps in greater detail.
A near-term denial of Argentinas appeal would likely be the worst outcome for
bondholders. The lower court could move quickly to lift the stay, leaving the
government, holdouts and exchange bondholders little time to reach a settlement that
would avert a selective default before the 30 June coupon payment on foreign law
Discount bonds. Argentina could request rehearing by the Supreme Court. This would
most likely be denied, but it could potentially extend the stay beyond 30 June. In any
case, this scenario would probably lead to volatility in Argentine bond prices, while a
selective default would likely be followed by an offer to swap foreign law bonds for local
law securities. Overall, we think that the likelihood of a settlement with holdouts will rise
over time as accessing international capital markets becomes a more pressing need.
We are still optimistic that the policy environment will improve over the medium
term. The three front-runners for the 2015 presidential election (Buenos Aires Mayor
Mauricio Macri, Buenos Aires legislator Sergio Massa and Buenos Aires governor Daniel
Scioli) and their advisors all promise more market-friendly economic policies. These
include increased central bank independence, inflation-targeting, fiscal adjustment and
eventual relaxation of capital controls. We would expect the adjustment to be gradual,
which may disappoint some market participants, but it could be helped by capital inflows.
In the meantime, political dynamics will likely remain somewhat fluid this year and next
as politicians and parties continue to explore potential alliances.
09 June 2014
Argentina: Decisions it can and cant control 4
Weaker consumer
confidence, especially since
Januarys devaluation, has
been a key driver of
Argentinas economic
slowdown.
On the production side,
privately collected data
show how industry,
particularly the automobile
sector, has been affected by
slackening domestic and
Brazilian demand along with
import restrictions that
disrupt the supply chain.

Exhibit 1: Consumer confidence
Exhibit 2: Privately collected
economic indicators
Headline index *June 2002=100 (lhs), **2004=100, seasonally adjusted
(rhs), ***1993=100, seasonally adjusted (rhs)
25
30
35
40
45
50
55
60
65
May-03 Jan-07 Sep-10 May-14


130
135
140
145
150
155
160
165
170
175
180
100
200
300
400
500
600
700
Apr-10 Apr-11 Apr-12 Apr-13 Apr-14
Auto production*
Construction activity**
FIEL's IP index***

Source: UTDT, Credit Suisse Source: ADEFA, Grupo Construya, FIEL, Credit Suisse

Tighter monetary policy has
also taken a heavy toll on
credit to the private sector
since February.
Policy makers face a
complicated tradeoff
between continuing to
reduce interest rates and
anchoring domestic
expectations, particularly
with regards to potential
currency depreciation.

Exhibit 3: Private sector credit growth
Exhibit 4: Monetary aggregates and
interest rates
Monthly changes in bn ARS, May data is through the 23rd % change yoy, 20-day moving average for the monetary
aggregates (lhs), % (rhs) data though 23 May 2014
-5
0
5
10
15
20
Jan-13 Sep-13 May-14
Mortgage
Consumer
Commercial


10
15
20
25
30
10
15
20
25
30
35
40
45
50
May-12 May-13 May-14
M2 (lhs)
Monetary base (lhs)
Private Badlar (rhs)

Source: Central bank, Credit Suisse Source: Central bank, Credit Suisse

Real wages losses have
been inherent to the on-
going economic adjustment.
Meanwhile, monetization of
the fiscal deficit should
continue despite efforts to
reduce subsidies.


Exhibit 5: Consumer and wage
inflation
Exhibit 6: Federal government fiscal
balance
% change year on year % of GDP
10
15
20
25
30
35
40
Apr-10 Apr-11 Apr-12 Apr-13 Apr-14
Private inflation estimate
Consumers' inflation expectation
Wage inflation*


-3
-2
-1
0
1
2
3
4
06 07 08 09 10 11 12 13 14F15F
Primary fiscal balance
Overall fiscal balance

*Average of public and private sector wages
Source: INDEC, UTDT, Credit Suisse
Source: Ministry of Economy, Credit Suisse

09 June 2014
Argentina: Decisions it can and cant control 5
The spread between the
official and parallel
exchange rates tends to
widen when domestic
liquidity increases or
controls are tightened.
Our real effective exchange
rate calculation indicates
that approximately 39% of
the competitiveness gains
from Januarys devaluation
were eroded after three
months.

Exhibit 7: Blue chip swap Exhibit 8: Real effective exchange rate
USD/ARS in levels (lhs), BCS implied in Boden 15 bonds.
Spread in % (rhs), as of 3 June
Increase = appreciation
0
10
20
30
40
50
60
70
80
90
100
3.8
4.6
5.4
6.2
7.0
7.8
8.6
9.4
10.2
11.0
11.8
12.6
13.4
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Spread (rhs)
Blue Chip Swap (lhs)
Official ARS (lhs)


0
25
50
75
100
125
150
Apr-05 Apr-08 Apr-11 Apr-14
REER using privately
estimated inflation data
REER using official
inflation data

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse Source: Credit Suisse

The central bank has been
able to purchase dollars in
recent months, but this
trend may be difficult to
sustain after the seasonal
agriculture-related foreign
exchange inflows recede.
We project that gross
international reserves will
end 2014 at $25.1bn now
that it seems unlikely that
the government will make a
payment on the GDP
warrants in December.

Exhibit 9: Agricultural export
proceeds vs. net dollar purchases
Exhibit 10: Gross central bank foreign
exchange reserves
$bn, 2014, May data is through the 23rd $bn
-4
-3
-2
-1
0
1
2
3
4
Jan Feb Mar Apr May
Grains and oilseeds
export proceeds
Net central bank dollar
purchases


25
30
35
40
45
50
55
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

Source: CIARA-CEC, central bank, Credit Suisse Source: Central bank, Credit Suisse

The timing of Argentinas
potential return to the
international capital markets
is very relevant to the
outlook for dollar-
denominated debt service in
2015, as the total due to
private creditors that year is
equivalent to about 79% of
our net reserves forecast for
year-end 2014.
Although not our base case,
a denial of Argentinas
Supreme Court appeal could
lead to a credit event in the
very near term unless a
private settlement were
reached quickly.

Exhibit 11: Foreign currency debt
service to private creditors
Exhibit 12: Upcoming foreign law debt
payments and CDS expiration dates
$bn, interest and amortization $mn
0
2
4
6
8
10
12
14
16
2014* 2015 2016 2017 2018
Corporate Provincial
Sov. External Sov. Local


Payment date Instrument
Amount
($mn)
6/20/2014 CDS -
6/30/2014 Discount 532
9/20/2014 CDS -
9/30/2014 Par 166
12/2/2014 Global 17 42
12/20/2014 CDS -
12/31/2014 Discount 532
3/20/2015 CDS -
3/30/2015 Par 166
6/2/2015 Global 17 42
6/20/2014 CDS -
6/30/2014 Discount 532
*Total for the remainder of the year, includes Repsol compensation
Source: Ministry of Economy, ANSES, BCRA, Credit Suisse
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

09 June 2014
Argentina: Decisions it can and cant control 6
Argentina: Selected economic indicators
2007 2008 2009 2010 2011 2012 2013 2014F 2015F
National accounts, population and unemployment
Real GDP growth (%) 8.0 3.1 0.1 9.1 8.6 0.9 3.0 0.2 1.5
Growth in real private consumption (%) 9.0 5.6 3.5 7.1 10.8 4.2 4.3 -3.1 0.5
Growth in real fixed investment (%) 13.9 7.9 -14.6 21.2 18.2 -5.2 3.0 -2.7 2.3
Fixed investment (% of GDP) 20.7 21.6 18.4 20.5 22.3 20.9 20.9 20.3 20.5
Nominal GDP ($bn) 329.8 405.9 378.5 462.7 557.7 603.1 611.5 525.1 502.4
Population (mn) 39.4 39.7 40.1 40.8 41.3 41.7 42.2 42.6 43.0
GDP per capita, $ 8,379 10,214 9,431 11,343 13,516 14,451 14,488 12,325 11,683
Unemployment (% of labor force, end-year)
(1)
7.5 7.3 8.4 7.3 6.7 6.9 6.4 7.0 6.8
Prices, interest rates and exchange rates
CPI inflation (%, December to December)
(2)
8.5 7.2 7.7 10.9 9.5 10.8 10.9 28.8 26.5
CPI inflation (%, average)
(2)
8.8 8.6 6.3 10.4 9.8 10.0 10.6 29.0 26.6
Exchange rate (ARS per USD, end-year) 3.15 3.45 3.80 3.98 4.30 4.92 6.52 9.80 11.90
Exchange rate (ARS per USD, average) 3.12 3.16 3.73 3.91 4.13 4.55 5.48 8.39 11.34
REER (% change, December to December)
(3)
-8.6 8.6 -18.3 0.3 0.7 -4.3 -1.6 -2.5 5.3
Nominal wage growth (% year-on-year change, average)
(4)
20.6 22.3 19.7 19.7 27.7 26.9 25.1 30.0 27.5
Central bank's 7 day repo rate (%, end-year) 10.30 13.00 11.50 11.50 11.50 11.50 11.50 11.50 11.50
Fiscal data
General government fiscal balance (% of GDP) 0.8 0.7 -1.3 0.3 -1.8 -2.8 -2.9 -2.6 -3.1
General government primary fiscal balance (% of GDP) 2.7 2.3 0.7 1.9 0.1 -0.5 -1.2 -0.7 -1.1
General government expenditure (% of GDP) 24.8 26.4 29.7 30.6 32.8 35.2 36.3 37.7 38.8
Federal government fiscal balance (% of GDP) 0.9 1.1 -0.5 0.2 -1.3 -2.0 -1.9 -1.7 -2.3
Federal government primary fiscal balance (% of GDP) 2.5 2.5 1.2 1.4 0.2 -0.2 -0.7 -0.2 -0.8
Gross general government debt (% of GDP, end-year)
(5)
56.2 46.1 50.0 42.8 38.0 36.7 33.5 37.8 37.7
Net general government debt (% of GDP, end-year)
(5) (6)
50.3 41.0 38.9 31.7 26.9 25.0 20.8 21.0 18.3
Money supply and credit
Broad money supply (M2, % of GDP) 16.4 15.3 16.2 17.5 17.0 19.3 19.8 18.0 17.1
Broad money supply (M2, % year-on-year change) 26.1 16.5 16.7 38.7 23.5 35.1 25.0 20.0 22.5
Domestic credit (% of GDP) 22.6 19.7 22.7 23.3 25.0 29.4 33.2 30.3 29.3
Domestic credit (% year-on-year) 14.9 9.0 26.8 31.4 37.0 40.0 37.6 20.0 25.0
Domestic credit to private sector (% of GDP) 11.4 11.0 11.0 11.6 13.3 14.6 15.7 14.0 13.0
Domestic credit to private sector (% year-on-year) 37.8 20.5 9.4 36.1 44.8 31.5 31.3 17.5 20.0
Balance of payments
Exports (goods and non-factor services, % of GDP) 20.1 20.2 17.6 17.7 17.9 15.9 15.9 18.6 19.5
Imports (goods and non-factor services, % of GDP) 16.2 16.8 13.1 14.8 16.0 13.9 14.8 16.7 17.9
Exports (goods and non-factor services, % change in $ value) 21.6 23.9 -18.9 22.7 21.9 -3.6 1.5 0.3 0.2
Imports (goods and non-factor services, % change in $ value) 29.9 27.4 -27.4 39.0 29.6 -5.6 7.6 -2.7 2.3
Net balance of factor income ($bn) -5.9 -7.6 -9.0 -13.5 -12.4 -11.5 -10.7 -11.2 -12.6
Current account balance ($bn) 7.4 6.8 11.0 -0.8 -2.3 0.0 -4.3 -2.5 -5.2
Current account (% of GDP) 2.2 1.7 2.9 -0.2 -0.4 0.0 -0.7 -0.5 -1.0
Net FDI ($bn) 5.0 8.3 3.3 10.4 9.2 11.1 7.9 7.1 9.5
Scheduled debt amortization ($bn) 6.3 6.6 4.3 5.4 9.0 5.8 6.2 5.4 7.9
Foreign debt and reserves
Foreign debt ($bn, end-year)
(5)
141.3 142.2 133.4 136.0 147.8 149.1 144.6 147.4 139.5
Public ($bn)
(5)
87.6 81.8 79.6 76.2 79.9 78.9 77.0 80.8 74.0
Private ($bn) 53.7 60.5 53.8 59.8 67.9 70.2 67.5 66.5 65.5
Foreign debt (% of GDP, end-year)
(5)
42.9 35.0 35.2 29.4 26.5 24.7 23.6 28.1 27.8
Foreign debt (% of exports of goods and services)
(5)
213.0 173.1 200.2 166.4 148.3 155.3 148.4 150.9 142.5
Central bank gross FX reserves ($bn) 46.2 46.4 48.0 52.2 46.4 43.3 30.6 25.1 17.6
Central bank net FX reserves ($bn)
(7)
41.9 35.8 36.4 41.1 35.3 30.5 17.7 15.7 8.2
Central bank gross non-gold FX reserves ($bn) 44.7 44.8 46.0 49.7 43.2 40.0 28.2 23.2 15.8
(1) Starting in 2003, people participating in the Jefes de Hogar subsidy program are counted as employed; adjusting the data by Jefes de Hogar, the unemployment rate is 2-4 points higher.
(2) Reflects official national CPI series beginning in 2014. (3) Increase indicates appreciation. REER estimates use the official inflation series. (4) Weighted average of wages in the formal and
informal private sector, and the public sector. (5) Debt data assume that Paris Club debt remains in arrears until repayment begins in 2014. (6) Net of Brady guarantees (through 2003), the
Bogar bond, government bonds held by Central Bank and by the social security agency (ANSES), and estimated government cash holdings. (7) Net of borrowing from the BIS and other bilateral
lenders and reserve requirements on dollar deposits.
Source: INDEC, Central Bank, Ministry of Economy, Credit Suisse





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Disclosure Appendix
Analyst Certification
I, Casey Reckman, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will
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