| March base-case scenario is now gone. In this report, we highlight the main features of this new COVID-19, supply squeezed, monetary financed, locked down, rereprofiled base case scenario1. Our new growth forecast for 2020 is -4.7%, under the optimistic assumption that the lockdown is hard in April and softly lifted in May and June, and that the activity is back to normal in Q3. However, we also believe that this V-shaped recovery has downside risks. 2. We expect real tax collection to fall vertically in Q2 (see Weekly N° 24 for our VAR estimate of activity to taxes impact). We foresee a national primary deficit of 5% GDP for 2020, plus 2% GDP in interest and at least 1.5% GDP from the provinces. 3. In this scenario, Treasury ARS financing needs for 2020 rise to USD 28nb (5.7% GDP) under the assumption of 50% – forced or voluntary – rollover of ARS interest and amortization payments. Money printing looks like the sole financing source in this context. 4. In the opposite direction, we believe that the Balance of Payments will improve in the short term, with imports decreasing more than exports (-30% vs -15% YoY). We estimate a private current account surplus of USD 21.6bn and a public current account deficit (interest payments) of USD 7bn. Paradoxically, this trade surplus being hoarded into Central Bank’s reserves adds pressure to money imbalances. 5. We believe that the short term consequences of this base money creation – that represent as much as 90% of Pre-COVID money base without considering FX purchases – will be contained by the recession and the lockdown-driven credit squeeze. We estimate transitory money base demand can grow between 3-4% GDP in the very short term to compensate for the lower velocity of circulation and banking multipliers. 6. Inflation so far has remained fairly stable with only a mild acceleration to the range 2.5-3.0%, although there is a visible hike on food staples. We now expect 40% for the year with – a lot of – upside risk. 7. However, mid-term outlook is very worrisome. If and when the COVID shock is over, money overhang will have to be sterilized beyond any feasible degree. As a measure of the order of magnitude, monetary overhang under normal conditions may be as high as total credit to the private sector (7-8% GDP). As a comparison, BCRA’s non-monetary liabilities reached 11% GDP prior to the currency crisis of 2018. We expect inflationary pressures to grow as we advance into 2021. 8. We also believe FX markets will replicate this dynamic, although defining the timing of the reversal is not easy. FX should benefit from the credit and liquidity squeeze – forcing some dedolarization – and the BoP surplus, but only in the short term, as pressures will increase throughout the year. We expect a crawling peg below inflation for the official FX rate (EOP ARS/USD at 74), and a Blue Chip Swap premium growing to 60% by the end of the year. 9. In the debt front, we believe that USD local-law debt default was the natural outcome of the misguided “one size fits all strategy” that the government sought (See Special Report). However, we do not think that this can be extrapolated to International Law debt, where the official grip is much softer and the threat less credible. Paying USD 3bn to international law bondholders – or less, if some exchange can be achieved – in 2020 does not look excessive to avoid paying the costs of an open-ended debt default. Summary of forecasts  |
| 1. Our new growth forecast for 2020 is -4.7%. How to estimate GDP growth while activity is facing an instant recession? We work under the optimistic assumption that the lockdown is hard in April and softly lifted in May and June, and that activity is back to normal in Q3. Following observed dynamics in other countries, we assume 70% YoY contraction in restaurants and tourism in Q2, 30% in construction, mining, oil and gas, 25% in commerce, 21% in industry, 15% for transport, 10% in real estate, professional services, and financial intermediation, 5% in electricity, waterworks and gas and no impact in health and education, security and administrative services. This dynamics implies a QoQ S.A. contraction of 15% and a YoY that may be as low as -20% at the peak of the crisis in April and a reversal in Q3. However, we believe that this V-shaped recovery has downside risks. COVID lockdown impact on activity Q2 and 2020 YoY Change  Monthly Estimate of Economic Activity YoY Change  2. We expect real tax collection to fall vertically in Q2, and the national primary deficit of 5% GDP for 2020, plus 2% GDP in interest and at least 1.5% GDP from the provinces. The government announced a number of fiscal measures to support economic activity, that we estimate at 1.2% of GDP. However, we expect most of the fiscal consequences to come from tax collection fall. How much can it fall? We have estimated a Vector Auto-Regressive Model (VAR) of tax collection and economics activity. Cumulative activity to tax elasticity lies in the range 1.6-1.9 for activity related taxes and 1.2-1.3 for social security taxes, thus ranging the total elasticity between 1.4 and 1.5, consistent with a real contraction of 7-8% YoY in tax collection or more (see Weekly N° 24). National Government real primary income and spending evolution % YoY change  Impact of main impact measures ARS Bn and % of GDP  Note: Other measures involve the expansion of the Repro Program, an increase of unemployment benefits, debt deferrals with ANSES for social beneficiaries and accelerated payments of export refunds. These measures are more difficult to cost lacking detailed information, though we assume a conservative ARS 90bn. Historical primary and fiscal balance % of GDP  3. In this scenario, Treasury ARS financing needs for 2020 rise to USD 28bn (5.7% of GDP) under the assumption of 50% – forced or voluntary – rollover of interest and amortization repayments. Money printing looks like the sole financing source in this context. Short Term local and foreign currency financial needsUSD Bn and % of GDP 4. In the opposite direction, we believe that the Balance of Payments will improve in the short term. We estimate that imports will decrease more than exports (-30% vs -15% YoY respectively), being the impact of the recession on foreign purchases stronger than the drop in external demand for Argentine products. Moreover, the deficit of the service trade balance will be more than halved, as tourism will be negatively affected by the Covid outbreak and its consequences. Thus, we estimate a private current account surplus of USD 21.6bn and, after the reprofilement of USD local-law debt, the public current account deficit (interest payments) will be down to USD 7bn (from 11bn in 2019). Paradoxically, this current account surplus being hoarded into Central Bank’s reserves adds pressure to money imbalances.  5. We believe that the short term consequences of this base money creation will be contained by the recession and the lockdown-driven credit squeeze and that a transitory “noninflationary money financing” space of 4% of GDP is available. Money base expansion to finance Treasury needs represent as much as 90% of Pre-COVID money base, without considering FX purchases from the BOP trade surplus. However, we estimate transitory money base demand can grow by the combined effect of the recession, lower money velocity of circulation and lower banking multipliers. In other words, despite intense money base creation, we foresee a liquidity squeeze that may contain inflationary and FX pressures. We estimate that this transitory “noninflationary financing” space is somewhere near 4% of GDP, 0.7% of which has already been used in Q1. Central Bank’s Transfers to the treasury % of Initial money base  Banks loans to the private sector and liquidity as % of GDP  Money aggregates and Money base demand estimates % of GDP  6. Inflation so far has remained fairly stable with only a mild acceleration, although there is a visible hike on food staples. We now expect 40% for the year with – a lot of – upside risk. Core inflation has been moving around 0.7% from five weeks in a row now and Inflation seems to be back on the 2.5-3.0%, up from January and February, mostly driven by hikes in food staples. Our average expected inflation now is 3% for the rest of the year, increasing our EOP inflation forecast to 40%, although with upside risk. Headline, core and food and beverages Inflation WoW Change   7. However, the mid-term outlook is very worrisome. If and when the COVID shock is over, money overhang will have to be sterilized beyond any feasible degree. As a measure of the order of magnitude, monetary overhang under normal conditions may be as high as total credit to the private sector (7-8% GDP). As a comparison, BCRA’s non-monetary liabilities reached 11% GDP prior to the currency crisis of 2018, 6pp above current levels. We expect inflationary pressures to grow as we advance into 2021. Central Bank’s Remunerated Liabilities % of GDP  8. We also believe FX markets will replicate this dynamic, although defining the timing of the reversal is not easy. FX should benefit from the credit and liquidity squeeze – forcing some dedolarization – and the BoP surplus, but only in the short term, as pressures will increase throughout the year. We expect a crawling peg below inflation for the official FX rate (EOP ARS/USD at 74), and a Blue Chip Swap premium growing to 60% by the end of the year.Oficial and Blue Chip Swap Multilateral Real Exchange Rate March 18th = 63.72  Blue Chip Swap Premium % of official FX rate  9. In the debt front, we believe USD local-law debt default was the natural outcome of the misguided “one size fits all strategy” that the government sought. However, we do not think that this can be extrapolated to International Law debt, where the official grip is much softer and the threat less credible. Paying USD 3bn to international law bondholders – or less, if some exchange can be achieved – in 2020 does not look excessive to avoid paying the costs of an open-ended debt default. |
