Weekly Report N° 25

[Debt] On a Press Conference, Minister Guzman highlighted the main lines of the debt proposal but details are still pending. Lacking details, yesterday’s announcement can only be analyzed superficially. The message, tone and overall context of the announcement suggest that the initial offer was already rejected by major bondholders, but the government will insist on it as an opening posture in the upcoming negotiations. In our view, the Initial debt restructuring offer faces a high risk of rejection if it keeps following a hard-line, domestic agenda strategy.

[Activity] Economic activity is nosediving in 2020. The outlook looks worse than expected as March’s early indicators come in and will certainly deteriorate even further, now that the lockdown has been extended until late-April. We now forecast a -6.6% GDP decline (from our previous -4.7%), making 2020 the worst year since the Convertibility collapse. This outlook has noteworthy fiscal consequences, and our primary deficit forecast of 5.0% GDP now faces substantial downside risks.

[Monetary] Money base it growing aggressively, Since December it expanded at least ARS 717bn, or 42%, ARS 578bn of which were issued in the last month. Our concerns now are not only about amounts but also about speed, as money in circulation and credit to the private sector are also beginning to expand. In line with the monetary expansion, deposit interest rates are falling and the BCRA is trying to address it an unorthodox way, setting a minimum interest rate for short-term deposits.

[FX] Money expansion is happening much faster than our expectations and FX premiums are already reflecting this. Blue Swap Chip premium reached its all-time high since the return of FX controls: 66.6%, above our EOP premium expectations. High premiums may trigger and accelerate official FX depreciation (i.e. if exporters decide to retain agro sales similar to what happened in 2012 and 2015), but we still believe the Central Bank has some grip on it. Since the quarantine, the BCRA has purchased USD 453mn at the forex market in line with expectations (see SEIDO Special Report: April’s short term macro update ), driven by a recession-driven contraction of imports,

[Prices] Inflation surprised upwards in March (3.3% MoM vs 2.0% in February), above our 2.8% estimates and market expectations (2.6%). The lockdown introduced some noise in official data, as prices were surveyed normally only until March 20th and telephonically thereafter. Nevertheless, our high-frequency inflation tracking shows a deceleration in April. A high proportion of monitored prices are now increasing below 1% MoM and we now think April CPI could end up close to 2%.

[Activity]

Economic activity will nosedive in 2020. The outlook worsened as March’s early indicators came in and will certainly deteriorate even further, now that the lockdown has been extended until late-April. We now forecast a -6.6% GDP decline (from our previous -4.7%), making 2020 the worst year since the Convertibility collapse. This revision has noteworthy fiscal consequences: tax collection will plummet (see Weekly N °24 for VAR estimates of activity-tax elasticity) and fiscal expenditures will increase more than expected, in order to mitigate the shock.
GDP (EMAE) – YoY variation

We expect GDP to drop -14.3% YoY on Q2, with Q3 and Q4 also negative, at -6.3% and -3.2%, respectively. Even if the lockdown were to be lifted in early-May, it does not seem feasible a return to prior activity levels, as firms will close, layoffs will increase and uncertainty will remain very high, hindering any possible recovery path.

If the lockdown were to be extended for another full month, our forecast for Q2 could worsen to almost -20% YoY, with a GDP decline of -8.5% for 2020. That being said, consensus view has marked down activity forecasts, as March’s early indicators are worse than expected. We review some of them below.

Retail sales (CAME) dropped 48.7% YoY in real terms, the worst decline of the entire time series. Two sectors (Food & Beverages and Pharmacies) performed relatively better than the rest, though they showed significant negative variations. About 74% of retailers believe that it will take at least 5 months to return to normal activity.
CAME Retail sales – YoY variation

Car sales decreased -54.7% in March. New car sales are under 18,000 units, making 2020 the worst year since 2000 (a year that totaled 100,000 new car sales). Automotive production contracted 34.4% YoY, as firms face a free-fall of both domestic and external demand.
New car sales and Automotive Production – YoY variation

Construction activity is also collapsing. The “Construya” index declined -39.5% YoY in March and cement sales have dropped 47% YoY. These indicators correlate closely to the official estimate for construction activity, signaling that a further deterioration of this sector is imminent. The lockdown has shut down both public and private construction. The government has announced an increase of infrastructure spending and has relaunched the ProCreAr Plan, but the impact of these measures on activity will take some time to materialize.

Construction indicators – YoY variation

[Monetary]

Since the change of authorities at BCRA, monetary base has expanded ARS 717bn, or 42%. The most relevant expansion factor was Public Sector Financing (ARS 586bn) and, to a lesser extent, FX Purchases (ARS 107bn). This money injection ended mostly as banks’ legal and voluntary reserves (ARS 415bn and ARS 65bn, respectively), though money in circulation has increased significantly (ARS 237bn).
Monetary expansion factors

This upward trend has recently accelerated even more. The Covid-19 outbreak also has monetary consequences, as the Treasury has recurred to money printing to finance the fiscal deficit. During the last thirty days (with data up to April 13th), financing to the public sector totaled ARS 240bn, equivalent to 42% of total financing since the change of administration.

Concerns are not only about amounts but also about speed. We mentioned in our SEIDO Special report – March short term macro update that, based on past events, the Central Bank had room to expand money supply an additional 3.4% GDP in a period of around one year (from March onwards). However, in just over a month the BCRA has expanded money supply about 2.1% GDP. The speed of monetary expansion is not aligned with past events, representing considerable risks to our envisioned scenario.

Money in circulation is beginning to expand. After several months of almost no increase (even with significant financing to the public sector), money in circulation expanded 11.5% MoM (up to April 13th), representing the highest monthly expansion since 2004.
Histogram money in circulation monthly variation (seasonally adjusted)

Credit to the private sector is also increasing. After several months of decline, credit to the private sector increased 8.9% MoM (up to April 14th). The expansion was mainly explained by Advance loans (38.6% MoM), which includes low-rate loans to finance payment of wages (part of the policy response package to Covid-19). To a lesser extent, Documents (9.4% MoM) and Credit Cards (5% MoM) also contributed to the increase of credit to the private sector.
Credit to the private sector – Monthly variation

In line with the monetary expansion, deposit interest rates decreased. Up to April 15th, private Badlar rate decreased to 18%, the lowest since end-2017, showing a sharp decrease compared to the 29.5% reported a month ago. Meanwhile, the reference rate has not changed since March 10^th. As a result, the spread with private Badlar increased to 20.2%.
Reference rate vs Badlar / TM20 interest rate

Broader monetary aggregates also expanded, but to a lesser extent. Private M2 expanded 16% MoM or 79% YoY, while private M3 increased 9% MoM or 59% YoY. This result is mainly explained by the poor performance of private term deposits, which decreased 9.5% MoM in nominal terms (including a drop of 12% MoM of term desposits smaller than ARS 1mn).
Monthly variation of private M2 and M3.

Trying to deal with the situation in an unorthodox way, the BCRA has set a minimum interest rate for small deposits. By the A6980, the institution established that term deposits lower than 1 million pesos have to be remunerated at least at 70% of the Leliq rates, which represents 27%. Of course, this is higher than the 17% that banks are currently offering. This measure increases money repression and might produce even more money disintermediation, as banks will have problems to increase credit to the private sector (paradoxically, the other objective the Central Bank was aiming for).

On the other hand, after the quarantine the BCRA has purchased USD 453mn at the forex market, as expected (see SEIDO Special Report: March short term macro update). We believe this is a result of the considerable drop of imports of consumption goods and services (such as tourism, cars and other durable consumption goods). Trucks arrivals at port continue at a very good pace, signaling that exports of agro dollars have not decreased and are close to the historical high levels seen at this time of the year.

USD Fx Purchases Truck arrival at ports

However, the increase of the FX premium could affect this scenario, if exporters decide to retain agro sales (similar to what happened between 2012 and 2015). In the previous capital control episode, it was observed that agro exporters did not commercialize all of their production and retained grains, in order to maintain some store-of-value good and avoid keeping pesos. If the premium continues to escalate, we could observe this pattern in the medium term, something that would have lasting effects in long-term agro production.
Production minus commercialization by weeks

[Prices]

Inflation surprised upwards in March. INDEC’s CPI accelerated to 3.3% in March (from 2.0% in February), above our own estimates (2.8%) and market expectations (2.6%). It should be noted that the lockdown had consequences on the CPI measurement, as INDEC surveyed prices only until March 20th, and by phone since then. Though we have no evidence whatsoever of data-tampering, the situation could have introduced some noise on official data due to changes in the price collection method.
Variations of all CPI categories accelerated last month. Seasonal items accelerated to 4.9% MoM (up from 2.5%), mostly due to increases in Education (17.5% MoM). Regulated prices increased 3.3% (vs 0.7% in February) and Core inflation also accelerated, to 3.1% (up from 2.4%). On the other hand, the annual inflation rate was 48.4% in March, below the previous month’s 50.3%.

Monthly Inflation by items

We highlight the increase in Food and Beverages (3.9% MoM), mainly explained by Vegetables, Meat and Fruits (9.9%, 4.1% and 3.3% MoM, respectively). There were also significant increases in Communication (8.3% MoM) and Clothing and Footwear (4.2% MoM). At the other end, INDEC reported an increase of just 1.4% MoM in Housing, which was due to a decrease of electricity, gas and other fuels’ tariffs.
We expect inflation to decelerate in April, with a monthly rate that could end close to 2% MoM. Our own data shows some inflation deceleration recently. Observing the distribution of price increases, we find that 42% of our monitored prices increased by less than 1%, while 18% of them increased 1-2%, 21% increased 2-4%, and 19% increased 4% or more. The distribution of price variations has changed in the past couple of weeks, in favor of smaller increases (see graph below), possibly due to tighter price controls.
Current week inflation stands at 0.4% WoW (vs -0.1% WoW of the previous week). Meanwhile, core inflation is 0.4% WoW (vs -0.2% WoW of the previous week). As of April 16th, the general monthly inflation is 2.4% MoM and core inflation is 2.1% MoM.