After a convulsive Q2, a high uncertainty third quarter has begun. We highlight in this report how June’s data has updated our view of the near future and how and why the road to 2021 is turning more and more into bimodal scenarios:

  • [FX] The late May tightening of FX Controls delivered a transitory relief in the pressure on Central Bank’s reserves. During June’s first half, the CB bought USD 1bn reserves, or USD 88m per day for 12 days. However, since then, net sales intervention resumed at an average rate of USD 30bn in spot markets plus a similar figure on future markets.
Central bank intervention and Net Reserves (USD bn)

The CB has been losing reserves even under highly anomalous conditions – i.e. Imports payments at only USD 3.1bn per month and USD credit card stocks at only USD 120m, down from about USD 4.1 and USD 270 respectively one year ago, or USD 5.6bn and USD 560bn two years ago. 

Exports and Imports (USD bn, seasonally adjusted)
  • A new Central Bank strategy seems to be appearing, shifting to a “Zero Net Reserves change” while advancing at the same time with an unsustainable crawling peg. The inconsistency of trying to manage, simultaneously, quantity and prices is managed by an erratic tightening and loosening of the access to the official FX to avoid reserves depletion. This strategy already tried and failed during the 2012-2015 period, activates a new trade-off between Reserves and Growth. The good old “stop and go”, but this time without the go part, that will probably become binding soon when and if the growth resumes, as the idea of an import-less growth is a chimera. 

  • This combination of a growing monetary overhang and a very thin FX balance is the breeding ground of a first-generation currency crisis that, in our belief, looks unavoidable given the size of the imbalances. We forked our base case scenarios in two on whether this FX correction happens in 2020 – the “FX Crisis scenario” – or, alternatively, in 2021 – The “inverted ✔” scenario”. 
    • In the first case, the CB is able to maintain its current crawling peg, and the pressure translates to the Blue Chip Swap (EOP ARS 82 and ARS 160 respectively).
    • In the second scenario, a discrete FX adjustment is seen during H2 (EOP ARS 110 and BCS ARS 150), which triggers inflation acceleration and another round of activity contraction.
    • A third scenario – not fully analyzed in this report – may be described, in which the CB prioritizes reserves rather than growth, cripling any chance of activity recovery beyond some dead cat rebound.
  • [Activity] Mixed signals in Activity. On the one hand, April turned out to be worst than expected – EMAE was -27% YoY vs our expected -20% YoY and 30% vs EOP 2020 -. On the other hand, May and June early data – electricity demand, taxes, Google’s mobility – showed signals of partial recovery, and about 50% of that contraction may have reverted. However, Argentina has yet been unable to “bend the curve” of COVID-19, and its pervasive effect will linger into Q3. 
Selected Activity indicators

In line with this new data, our -11.5% forecast for 2020 has substantial downside risk and, in order to materialize, requires a faster recovery than previously thought. The “inverted ✔” scenario has -11.5% growth in 2020, where a small 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 -14.5% 

Monthly GDP under different scenarios (YoY)
  • [Inflation] Our estimate for June inflation is 1.9% and we expect July inflation to be below 1.5%, with two very low printings in the first two weeks of the month. The acceleration of the dollarized prices after the tightening of FX controls proved transitory  – they peaked at 3.3% in mid-June – and was not enough to offset the deflation (!!) of non-dollarized prices. Inflation scenarios are also forking in two. If the Central Bank is able to sustain the 2.5%/3.0% current crawling peg until the end of the year, then inflation will most likely end 2020 in the 30%/35% range – with downward risk -, but above 50% if is not.
Inflation: Dollarized vs Non-dollarized (MoM)
  • [Fiscal] Tax collection improved marginally in June (-15% YoY in real terms, vs -21% YoY of May), slightly better than our expected -18%, but the overall correction of the activity outlook compared to early June worsened our prognosis for fiscal dynamics. We estimate the June and July primary deficit in about ARS 250bn and ARS 230bn respectively. June alone could end with a primary deficit of 1% GDP, accumulating 3.2% GDP in H1. For the whole of 2020, we now forecast a primary deficit of 7.8% GDP, under the assumption that the monthly deficit halves since august and that the economy recovers to the -11.5% scenario. On the “FX Crisis” scenario, on the other hand, the deficit could be lower – 6.8% – with income responding faster to inflation acceleration than expenditure. 
Cumulative Primary Deficit (% GDP)

This adjustment increases our gross financing needs’ estimte for H2 to ARS 2.022bn (7.4% of GDP), or ARS 1.303bn (4.8% of GDP) if we assume full (voluntary or mandatory) rollover of ARS denominated debt amortization.

Gross Financing Needs for 2020 (ARSbn and % GDP)
  • [Monetary] The Central Bank turned more hawkish in June. Minimum rate regulations have increased interest rates even with unchanged reference rates, helping explain, together with tighter capital controls, 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.
Monetary Base decomposition (ARS bn)

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 and ARS 1.250bn in January-June, compensated by an increase of ARS 225bn in Leliqs and Repos in the last month, and ARS 1.194bn since January. 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.

BCRA remunerated liabilities (% GDP)

The size of the monetary imbalances sends warning signals, with at least ARS 1,000bn to come in Treasury financing in H2:2020, as we stressed in our last macro update – That ’70s show. End of period LELIQs and REPO would grow to 10.1% GDP, implying an average endogenous money growth in interests of about 75bn per month in H2 and about 10% growth in cash, m2 and m3 real stocks.

Monetary Aggregates (Index)

The following table summarizes the forecast of our new forked view of the near future