[Activity] A lot of activity data was released this week, with mixed signals. Q1 GDP was released, with a contraction of 4.8% QoQ with just 10 days of COVID lockdown. Investment ended Q1 at 14.8%, the lowest level since the 2001 Crisis, and worse still, SEIDO’s investment index another plummeted -28.3% YoY in April, with all components of the index presented double-digit declines. On the positive note, Economic indicators and foreign trade data were marginally better in May than in April (see table).
But activity outlook looks dimmer than expected as the ascending phase of the COVID advances in AMBA. Google’s mobility is no longer improving and another round of total lockdown is expected to be announced soon. With a tightening of the lockdown, economic activity will plunge even further than expected. We revise down our 2020 growth forecast from -10.4% to -11.5%, revising down our Q3 to -13.6% YoY from -9.0% YoY.
[Fiscal] May fiscal deficit was published – ARS 251 – in line with expectations. Social spending (+46% YoY in real terms), subsidies (106% YoY) and discretionary transfers to Provinces (343% YoY) are driving the expenditure 45% rise. Income, on the other hand, contracted 24%
June, on the other hand, is looking worse than expected. using daily co-participation data we estimate just +10% YoY of tax revenues in June (-23% YoY in real terms). On the other hand, the extension of the lockdown will affect fiscal accounts both on the revenue and the expenditure side.
We revise our primary deficit forecast from -5.6% GDP to -6.8% GDP, still with downside significant risks. This figure would put the 2020 primary deficit as the highest since, at least, 1960.
[Debt] Debt talks stalled due to differences over non-monetary conditions. The discussion now lies in the legal front. Bondholders are aware of the government’s intention to exploit legal loopholes of newer indentures to force the exchange in its favor (the so-called “PAC-MAN” strategy) and demand, among other things, that the instruments be issued under 2005 indentures, which have harder to reach CACs. Minister Guzmán is dead set against this idea, being contrary to what he has worked for as an academic. A political solution is still the key to work out a deal.
The (third) official proposal, bondholders’ counteroffers were released. As reported before (see here), the average NPV of creditors’ proposal ranges from USD 55-60 (compared to the USD 51-54 offered by the Treasury), depending on the bondholder group and whether the VRI’s activate or not.
How much money are we talking about? All proposals provide significant cash relief: cumulative savings would be over USD 35bn for the next 3 years. Compared to the official proposal, creditors’ counteroffers would reduce cumulative savings about USD 2-4bn until 2023 (when the president’s term expires) and USD 8-14bn until 2030, and differences would widen through time.
[Prices] Inflation remains stable at low levels. Our latest high-frequency data shows prices increased by 0.1% WoW. Monthly inflation is running at 1.7% (core inflation at 2.1%) and is now starting to decelerate. In hindsight, May’s inflation acceleration was a blip.In light of new data, we mark down our June inflation forecast to 1.7% MoM (from 2.0% MoM).
Selected Activity Indicators
[Activity]
Official GDP figures reported that the economy contracted -4.8% QoQ in Q1 (seasonally adjusted), a figure comparable to those registered during the global financial crisis (-4.8% QoQ of Q4-08) and Macri’s first currency crisis (-5.1% of Q2-18). This year’s first quarter saw a continuity of the downward trend that started in 2018, though we cannot ignore the effects of the pandemic outbreak and the subsequent lockdown imposed by the government. With just 10 days under lockdown, activity was severely affected.
Quarterly GDP (seasonally adjusted, QoQ)
Investment has dropped to historical lows and the outlook is not brighter. Investment to GDP ratio ended Q1 at 14.8% (at constant prices), the lowest level of the series (which dates back to 2004). Worse still, SEIDO’s investment index plummeted -28.3% YoY in April. All components of the index presented double-digit declines. Our index now accumulates 22 months of decrease, and April’s level of investment was the lowest of the series (since 2006).
SEIDO Investment Index (YoY)
The second quarter will be even worse than the first. Supermarket real sales decelerated to 0.2% YoY in April (from 9.6% YoY in March), as consumption patterns adjusted to the lockdown and the worsening of economic conditions. Shopping centers were harder hit, as the closing of malls translated into a sales drop of -98.6% YoY. May could show a decline in supermarket sales as household purchasing power falls deeper, while mall activity might slowly catch up in the provinces, as restrictions were partially lifted. Most economic indicators point that April was the worst month so far (see table below), as the lockdown closed most businesses.Real sales at Supermarkets vs Shoppings (YoY)
Economic indicators were marginally better in May (see table). Of those newly released, we highlight FIEL’s manufacturing production, property sales, and confidence indicators. Industrial activity dropped -19.9% YoY. All industrial blocs declined, with the smallest losses registered among blocs related to essential activities, such as Food & Drinks (-3.6% YoY). Meanwhile, there were only 681 property sales in the City of Buenos Aires, a fall of -78.7% YoY. Consumer confidence has recovered after several months of decline (associated to worsening economic conditions), while government confidence has decreased for the second consecutive month, as society has grown weary of the lockdown and its consequences.
FIEL Industrial Production (YoY)
Foreign trade data also show a marginal improvement in May. Both exports and imports seasonally adjusted data recovered last month (+8.5% MoM and +3.6% MoM, respectively), though they remain way lower than last year (-16.3% YoY and -31.8% YoY). The Covid-19 shock is affecting trade flows, as lower external demand and weak domestic activity reduce both exports and imports. As a result, the trade balance totaled a surplus of USD 1.9bn in May, which highlights problems at the forex market as the BCRA had to sell reserves during last week.
Mobility is no longer improving. Google’s report on mobility to workplaces remained stable last week, at -32% from pre-lockdown levels. CABA (-54%) and PBA (-38%) remain as the districts where social distancing is being enforced the most. Minor Covid-19 outbreaks in other provinces, together with tougher controls, stopped improvements observed in prior weeks. The government is to announce a tightening of the lockdown for Buenos Aires Metropolitan Area (AMBA), aiming to drastically contain the contagion before it overwhelms the health system.
Google Mobility Data (7-day moving average)
With a tightening of the lockdown, economic activity will plunge even further than expected. We revise down our 2020 growth forecast from -10.4% to -11.5%, as higher restrictions in AMBA will negatively affect an already weak activity. Even with the activity recovering by December to the same level we previously forecasted, a continued lockdown will drive Q3 activity to -13.6% YoY (from -9.0% YoY). Aggregate supply will contract as more firms close for good, while aggregate demand will suffer from lower household income and overall higher uncertainty.
Monthly GDP (% YoY)
[Fiscal]
Fiscal dynamics are worsening fast. Primary expenditures increased 45.4% YoY in real terms during May (up from 43.1% YoY in April), while fiscal revenues dropped -24.4% YoY (down from -17.1% YoY). As a result, the primary deficit totaled ARS 251bn (the overall deficit was of ARS 308bn). Fiscal income is suffering from a depressed economic activity, while expenditures are skyrocketing as policy response to the Covid-19 shock relies mostly on transfers to families or firms.
Real primary Expenditure vs Real total Income (YoY)
At least 3 central ideas can be seen clearly from fiscal data. First, the policy response to the coronavirus outbreakand the effects of the lockdown. Social spending, which includes both the Emergency Family Income (IFE) and the Emergency Assistance to Employment and Production (ATP) programs, increased 46.1% YoY in real terms. Second, the decision to avoid adjustments of regulated prices to subdue inflation, as economic subsidies increased 106% YoY. Third, the President’s intention to gain political support from governors, as discretionary transfers to Provinces increased 343% YoY in real terms.
Cumulative Primary Deficit by year (% GDP)
Fiscal deficit will inevitably widen in the coming months. A depressed economy will keep income low. In fact, using daily coparticipation data we estimate an increase of just 10% YoY of tax revenues in June, which would translate into a drop of -23% YoY in real terms. On the other hand, there is a social and political need to keep up spending to mitigate the shock. In this regard, the extension of the lockdown will affect fiscal accounts both on the revenue and the expenditure side. Thus, we revise our primary deficit forecast from -5.6% GDP to -6.8% GDP, noting that there still remain significant risks. This figure means that the National Government would end 2020 with the highest primary deficit since, at least, 1960.
Historical Primary Deficit (% GDP)
| [Debt] Alongside the (third) official proposal, bondholders’ counteroffers were released. As reported before (see here), the average NPV of creditors’ proposal ranges from USD 55-60 (compared to the USD 51-54 offered by the Treasury), depending on the bondholder group and whether the VRI’s activate or not. In terms of the debt profile, differences imply payments would start earlier than the government would have wanted and would generally be higher throughout the next 30 years (see graph below). USD Private Debt Service: Official vs Bondholder proposals  Notes: We assume that the offer is extended to USD debt under local law and that the VRIs included in all proposals are activated at every possible period at the maximum coupon. How much money are we talking about? All proposals provide significant cash relief: cumulative savings would be over USD 35bn for the next 3 years. Compared to the official proposal, creditors’ counteroffers would reduce cumulative savings about USD 2-4bn until 2023 (when the president’s term expires) and USD 8-14bn until 2030, and differences would widen through time. Cumulative Savings between current vs proposed USD Private Debt Service  It seems that debt talks stalled due to differences over non-monetary conditions. Both sides disagree about the legal protection that the new bonds should have. Bondholders are aware of the government’s intention to exploit legal loopholes of newer indentures to force the exchange in its favor (the so-called “pac-man” strategy) and demand, among other things, that the instruments be issued under 2005 indentures, which have tighter CACs. The idea is that they are willing to forego some dollars of NPV in exchange for legal conditions that would increase the costs of future defaults and, thus, secure an exit yield of about 10%. Of course, Minister Guzmán is dead set against this idea, being contrary to what he has worked for as an academic. A political solution is still the key to work out a deal. |
| [Prices] Inflation remains stable at low levels. After some acceleration registered in May, the latest high-frequency data shows that consumer prices increased 0.1% WoW (vs previous 0.1% WoW). Monthly inflation is running at 1.7% (core inflation at 2.1%) and is now starting to decelerate (see graph). In light of new data, we mark down our June inflation forecast to 1.7% MoM (from 2.0% MoM). Weekly and Monthly inflation rate: General Level vs Core   In hindsight, May’s inflation acceleration was a blip. Probably, explained by relative price adjustments after 2 months of lockdown and some regulatory changes that affected dollarized goods (importers’ access to the official forex market was limited, though the BCRA is trying to amend the regulation). As reported before (see here), we consider that short-term inflation should remain subdued due to tight controls, “frozen” regulated prices and lockdown induced effects. Over a longer horizon, however, inflation dynamics could change if macro imbalances force a correction of the official FX rate. |
