[Activity] April’s Oficial activity was published this week, with a higher than expected contraction -17.5% MoM S.A, the largest monthly decline al least since 1970 (the second largest being last March’s drop). 26.4%, YoY decline was above our expectations (-21.5% YoY). On the other hand, high-frequency data – electricity demand, taxes, google’s mobility – point out to a partial recovery in May and June, that will most likely halt or reverse in July. Our -11.5 forecast for 2020 now has substantial downside risk and, in order to materialize, requires a faster recovery than previously thought.
We are splitting the future into two different scenarios. The “inverted ✔” scenario with -11.5% growth in 2020, where a partial recovery can be achieved once and if the Lockdown + COVID eases in Q3, and an FX Crisis scenario where it can’t, where growth becomes -14.0%
[Monetary] The Central Bank turned more hawkish in June. Minimum rates regulations have increased interest rates even with unchanged reference rates, helping explain, together with tighter capital control, why pressures on the forex market eased. With a marginally tighter policy stance, aggregates growth slowed down: Money in circulation increased 1.9% MoM S.A. vs 8.8% MoM s.a. of end-April, and Private M2 and M3 4.0% and 5.1% MoM s.a., respectively vs. 5.0% and 7.0% MoM s.a.. However, the deceleration does not blur the big overhang picture. M3 represents 22% GDP, similar to late-2015 and early-2016 when money overhang was estimated to be high.
Fiscal dominance has been partially contained with sterilization in H1:2020, pushing monetary liabilities to worrisome levels. Monetary assistance to the Treasury was over ARS 330bn in June, compensated by an increase of ARS 225bn in Leliqs. The flipside? Monetary liabilities have increased to 8% GDP approximately, a level only surpassed in 2017 and 2018, before the first currency run during Macri’s administration. The size of the monetary imbalances sends warning signals, with at least ARS 1.000bn to come in treasury financing in H2:2020.
[Fiscal] Tax collection improved marginally in June (-15% YoY in real terms, vs -21% YoY of May), slightly better than our expected -18%. Activity related taxes performance was similar between May and June (-23% YoY in both months), signaling that activity may have recovered modestly since bottoming out in April. Meanwhile, social security related taxes improved marginally (-14% vs -18% YoY), with a labor market affected by the recession and low wage increases. Foreign trade-related taxes are still falling in real terms, though at a slower pace (-11% vs -39% YoY).
June’s tax collection confirms that the primary balance deteriorated even further. We estimate the June and July primary deficit in about ARS 250 and ARS 230 respectively. The second round of the Emergency Family Income (IFE) and the Emergency Assistance to Labor and Production Program (ATP) (with an incoming third -smaller- round in July) will certainly strain fiscal accounts. June alone could end with a primary deficit of 1% GDP, accumulating 3.2% GDP in H1. For the whole of 2020, we forecast a primary deficit of 6.8% GDP, under the assumption that the monthly deficit halves since august.
[Activity]
Economic activity dropped more than expected in April, worsening an already dire situation. Official monthly GDP (EMAE) dropped -17.5% MoM (seasonally adjusted) in April, the largest monthly decline since 1970 (the second largest being last March’s drop). On an interannual comparison, last month saw an activity decline of -26.4%, more than we expected (-21.5% YoY). The Covid-19 shock and the subsequent lockdown enforced by the government have brought activity back to 2004 levels, a recession way stronger and faster than 2001’s Convertibility collapse.
Monthly GDP level (seasonally adjusted)
After dismal performance in April, our forecast for 2020 has substantial downside risk. For our -11.5% projection to materialize, activity would have to recover faster than previously thought. However, this scenario starts to look optimistic, as the lockdown impact is stronger than expected and economic imbalances keep piling up. The chances of an exchange rate adjustment increase, which would negatively affect GDP growth, at least by 2pp.
Monthly GDP (YoY change)
Sectoral performance in April varied between bad and very bad. The first month under complete lockdown saw activity fall in all of sixteen economic sectors. As previous reports already showed, the only areas with single digit declines were Finance (-3.3% YoY), Agriculture (-6.3% YoY) and Electricity, Gas & Water (-8.3% YoY). On the other extreme, Hotels & Restaurants saw activity decline by -85.6% YoY, while Construction collapsed -86.2% YoY.
Monthly GDP by Sector (YoY change)
Mobility was stagnant but will decrease as the lockdown tightens in Buenos Aires’ Metro area. Google’s data shows that mobility increased from -79% (trough) to -33% of pre-pandemic levels, with figures ranging from -50% in CABA or -33% in PBA to -24% among the rest of the Provinces. However, the government had to resort to a new “hammer” (severe lockdown) in order to flatten the contagion curve and avoid the collapse of the health system. The lockdown tightening will widen the mobility gap between districts, reflecting diverging activity paths.
Electricity Demand by region
High-frequency activity proxies show partial recovery since April. Electricity demand has followed a similar path than mobility and activity data, with heterogeneity seen not only across sectors (non-essentials harder hit than essentials) but also across districts (PBA-CABA vs Rest). This year started with electricity demand below the 3-year average for each month, a downward dynamic that deepened since the lockdown enforcement and hit rock bottom in April. As restrictions were gradually (and partially) lifted in May, electricity demand increased, though it still remains way below what could be considered a normal level (see table below). We expect demand to decrease as the lockdown was tightened (at least) until mid-July.
Electricity demand by sector
[Monetary]
Regulations have increased interest rates. After the BCRA imposed a floor for term deposit interest rates, both the Private Badlar and the TM20 interest rates increased, stabilizing between 28-30%. The spread with the reference rate narrowed, as the Central Bank has kept the reference rate unchanged since March. This helps explain why pressures on the forex market eased somewhat (the other part of the explanation being tighter capital controls).Interest Rates: Reference vs Badlar & TM20
With a marginally tighter policy stance, the growth of monetary aggregates slowed down. Money in circulation is increasing at a pace of 1.9% MoM (seasonally adjusted, vs 8.8% MoM s.a. of end-April), while Private M2 and M3 are increasing at 4.0% and 5.1% MoM s.a., respectively (vs 5.0% and 7.0% MoM s.a.). However, the deceleration should not blur the “big picture”, as money aggregates stand at relatively high levels. For instance, M3 represents 22% GDP, a level similar to that observed in late-2015 and early-2016, when money overhang was estimated to be high.
Growth of Monetary Aggregates (MoM, seasonally adjusted)
Fiscal dominance is partially contained with sterilization, pushing monetary liabilities to worrisome levels. Monetary assistance to the Treasury was over ARS 330bn in June, compensated by an increase of ARS 225bn in Leliqs. As a result, base money expanded “just” 7.5% MoM. The flipside? Monetary liabilities have increased to 8% GDP approximately, a level only surpassed in 2017 and 2018, before the first currency run during Macri’s administration. The size of the monetary imbalances sends warning signals.
Monetary Liabilities (% GDP)
[Fiscal]
Tax collection improved marginally in June (-15% YoY in real terms, vs -21% YoY of May). Activity related taxes performance was similar between May and June (-23% YoY in both months), signaling that activity may have recovered modestly since bottoming out in April. Meanwhile, social security related taxes improved marginally (-14% vs -18% YoY), with a labor market affected by the recession and low wage increases. Foreign trade-related taxes are still falling in real terms, though at a slower pace (-11% vs -39% YoY). This despite higher taxes on exports and a more depreciated exchange rate. Real Tax Collection (YoY change)
June’s tax collection implies that the primary balance deteriorated even further, as fiscal income decreases in real terms and the spending is being driven by social expenditure, aimed at mitigating the economic impact of the Covid-19 shock. The second round of the Emergency Family Income (IFE) and the Emergency Assistance to Labor and Production Program (ATP) (with an incoming third -smaller- round in July) will certainly strain fiscal accounts. June alone could end with a primary deficit of 1% GDP, accumulating 3.2% GDP in H1. For the whole 2020, we forecast a primary deficit of 6.8% GDP.