[Fiscal] With the likely approval of the “Economic Emergency Bill” and the extension of the budget, the government discretion for fiscal management – without the need of Congress intervention – will be high in the first part of 2020, which will be strongly conditioned by the debt restructuring. A cumulative 0.1% GDP surplus was reached in November, the highest since 2011. Although this starting point is better than 2015, the fiscal structure continues to present difficulties and determines an endogenous deficit of -2.1% GDP by 2020. In the last two months, the Pampas region was affected by rains 50% below normal. Although it is still in early stages, this could affect the dynamics of Export Taxes.
[Markets] Daniel Marx and Adrian Cosentino will head the debt council created by the government in order to assist in the debt restructuring proposal. Next week the Treasury will face net maturities for approximately USD 230m.
[Monetary] Net reserves grew USD 11.8 bn during Macri´s administration. Remunerated liabilities at minimums since 2014. Badlar real rate is 2.2% at the beginning of the new administration. Money demand at the lowest levels since early 2000´s. Banking system in foreign currency bigger and healthier than in 2015.
[Fiscal]
The primary deficit of November was ARS 6.3mm and it reached a cumulative surplus of 0.1% GDP, the highest since 2011. This result shows the continuity of the fiscal consolidation process, which most likely determines a deficit of -0.5% GDP in 2019.
Primary deficit dynamics
The starting point is better than in 2015 but the fiscal structure continues to present difficulties. Despite having reduced the primary deficit by 3.6% GDP (from -4.1% to -0.5% GDP), the high indexation and the new tax structure does not allow fiscal consolidation during periods of deflation. In this way, we estimate that the endogenous deficit – assuming no fiscal polity changes – is -2.1% GDP for 2020, with downside risk
Endogenous primary deficit
One point to highlight is the decrease in the size of the National Public Sector, that went from 19.9% to 17.9% GDP. On the other hand, the big problem with this decrease is the deterioration of the income structure. If we look at the composition of the first 11 months of 2015 and 2019, we observe how in 2019 the taxes (Social Security and other taxes) lose considerable weight, while non-traditional items strongly increased their participation (such as export taxes, income from property and capital income)
Composition of primary income
In 2020 the fiscal dynamics will be strongly conditioned to the restructuring of debt and the extension of the 2019 budget. With the extension of the budget and the “Economic Emergency Bill” the incoming government gets a margin of discretion to modify items. This Bill gives to the central government the possibility of discretional modifications without the intermediation of the Congress. Finally, the dynamics of export duties further affected the possibility of reaching a fiscal balance only by increasing taxes – See weekly report N°14.Fiscal policies
Changes were made in the estimation of the collection of taxes on tourism and the purchase of foreign currency. Due to possible co-participation, we estimate an income of 42.34% of the total collected, although modifications could be made at the time of its presentation.
In the last two months, the Pampas region was affected by rains 50% below normal and could affect even more the export taxes collection. This could affect the dynamics of the first months of the year where the coarse harvest of soybeans and corn is concentrated. Because of this, the projection of wheat harvest was reduced by 2.5 million tons (to 18.5 million). Although it is still early, this adds even more uncertainty for the first months of 2020 in the activity and in the fiscal field.
Water profile (Dec 18 vs Dec 19)
[Prices]
Inflation in November accelerates to 4.3% (vs. 3.3% in October). Iinter-annual inflation was 52.1%. Current week inflation was 0.5% WoW (vs. 0.8% WoW previous week).
[BOP Cash balance]
Accumulated balances in the current account until October (last available data) was USD 4.4.
[Markets]
Daniel Marx and Adrian Cosentino will head the debt council, an expert council established by the government in order to assist in the debt restructuring proposal. Both experts have already had experience in debt negotiations: Marx participated in the renegotiation team between 1989 and 1993, while Consentino was in the External Debt Restructuring Unit, then being an advisor to the Ministry of Finance during Macri government. The first gave some hints in the past about how a restructuring should look like, with details such as 20% of capital haircut and not discriminating against local law for the worse. Last Wednesday, Marx gave an interview at the Tv show Cafe Financiero where he focused on the consistency of future cash flows, mentioning that it could be generated through a combination of capital, interest and term restructuring.
Treasury will face net maturities for approximately USD 230m next week – These amounts are mostly for the payments of T-bills if the new government does not restructure them fast enough. On the other hand, last week it was disbursed ARS 9.4bn and USD 212m.
[Monetary]
Alberto Fernandez’s administration starts with USD 13.5bn of net reserves. The new government led by Alberto Fernandez receives the Central Bank with net reserves at USD 13.5 bn, well above the level Macri inherited from CFK´s second term (USD 1.7 bn). Gross reserves, at USD 43.8 bn, are significantly higher than the USD 24.8 bn existent in late 2015. However, both figures are well below the USD 22.1 bn and USD 66.1 bn of net and gross reserves before the primaries, respectively.
Net and Gross reserves
Central Bank interest-bearing liabilities at minimums since 2014. Macri received the sum of repos and Lebacs at 5.0% of its GDP, and rapidly increased this figure up to 10.8% in March 2018. Since then, massive currency depreciation and acceleration on inflation made the weight of this stock to return to about 5% of GDP. Currently, the sum of Leliqs and repos represents 4.8% of GDP, giving the present administration some space to absorb liquidity through them.
Interest-bearing Liabilities
Badlar real rate is 2.2% at the beginning of the new administration. Having received real rates at extremely negative levels (-12.0%), Macri´s administration was erratic at guaranteeing positive real rates to savers. Only after the current crisis in late 2018 banks increased the rate paid for term deposits to an average of 5.2% since September 2018. Badlar real rate is likely to turn negative in the short term if the incoming government insists on lowering rates to boost the economy.
Real interest rate – Private Badlar
Money demand at the lowest levels since early 2000´s. The monetary base now represents 6.2% of GDP, compared to the 9.0% it represented when Macri took office. Similar collapses are observed when measuring M2 and M3.
Monetary aggregates
Banking system in foreign currency remains healthier than in 2015. When Macri took office loans in foreign currency stood below USD 3 bn, and deposits were of USD 8.9 bn. To date December 9th, deposits more than double to USD 18.3 bn, while loans grow 3.5x to USD 10.9 bn, and banks remain liquid despite the collapse in deposits –and also in loans- observed since August´s primaries. Deposits and loans in USD
| [Prices] Inflation in November accelerated to 4.3% (vs. 3.3% in October). Thus, inter-annual inflation was 52.1%. In this way, the new government receives one of the heaviest inheritances with high normality. As an advantage, the prices affected are not so distorted with a real competitive exchange rate in historical terms and lower delays in electricity, gas, and fuels.  For December, we expect a deceleration (3.2%). Finally, we estimate 2019 inflation at 53% YoY with upward risk.  Current week inflation was 0.5% WoW (vs. 0.8% WoW previous week). Meanwhile, Core inflation stood stable at 0.7%. As of December 13th, the general monthly inflation is 3.4% MoM and core is 3.3% MoM.  Another key relative price, subsidies, has a strong correction with respect to 2015. In the case of electricity, coverage increased from 16% in Nov-18 to 59% in Nov-19, reducing the real subsidy expenditure by 36%. On the other hand, gas subsidies present a similar situation, close to parity. Electricity subsidies  |
[Exchange balance]
The new administration assumes the presidency with an accumulated balance in the current account until October (last available data) of around USD 4.4 bn where USD 18.6 corresponds to a surplus in goods which is offset by a deficit in USD services -4.8 bn and primary and secondary income of USD -9.4 bn. If we compare these levels with the starting point of the outgoing government in 2015, it is observed that the exchange current account shows a great deficit towards October accumulating USD -8.3 bn, where goods showed a surplus of USD 3.9 bn, meanwhile services reached a deficit of USD -7.2 bn and primary and secondary income accumulated USD -5.0 bn.
Exchange Current account
Accumulated Jan-Oct (USD bn)
Likewise, the incoming government starts from a lower REER than the one with which the outgoing administration started. Thus, the official REER as of December 10, 2015 was at ARS 36.44 (vs. ARS 58.12 REER Blue Swap chip), while the official REER at the same date of 2019 was ARS 59.86 (vs. ARS75.50 REER Blue Swap Chip).
REER
[Annex]   |
