Subject: ARGENTINA UPDATE -> (BN) Worst Drought in 30 Years Adds to Argentina's Economi From: Martin Zeman Date: Wed, 28 Feb 2018 09:37:31 -0500 To: "Paul Barrett ( )" Cc: Xavier Avila < Davide-A Sferrazza Liam Osullivan Stewart Oldfield Good morning, Paul, Please see an update from my analyst on Argentina as well as the Bloomberg article on the drought they are having now: 09:08:29 good morning - yes -- soy production is going to drop to 47mn and this will have an impact on trade - but prices are also going up be of that - so mitigating this drop. 09:08:54 main issue, however, is that the currency is strong in fundamental value already and trade deficit is widening. 09:10:06 worse, the CB got cold feet (with pressure from treasury) and they decided to cut rates too early. this changed the perception on policy mix (tight money, strong currency) ahead of wage negotiations and inflation expectations surged to near 19% vs. 15% target. 09:10:51 the bottom line is that the cb had to turn cautious again - suggesting the treasury is accepting what they should have accepted before tight money for longer to break inflation inertia. 09:11:17 For ARS, this means that finally we can have some stability 09:11:55 we have been bearish since they cut and yesterday's more hawkish communication suggests the USD/ARS will be more stable in the near term. 09:13:30 Investors are skeptical and they would like to see more commitment from CB and tighter fiscal. So, in sum, I'd expect USD/ARS to stay rangebound for now but markets to be hesitant to build positions - unless we get additional commitment from CB they will not cut and Treasury tightens fiscal (less likely). MARTIN ZEMAN 09:14:37 Okay, that makes sense. Do you think as we approach June, the possible inclusion in the EM MSCI will help? How likely in % terms do you EFTA01436440