[Fiscal] Fiscal data surprised (positively) in July, but 2020 is headed for a record deficit. The above expectations results were especially driven by the expenditure side. Even though we consider that these short-term positive dynamics still need to be reconfirmed in August data, our primary deficit forecast (7.8% of GDP) now faces upside risk.
How can the fiscal deficit develop into 2021? We designed a “continuity scenario” where the government is successful in avoiding the FX adjustment before the mid-term elections. This baseline 2021 scenario also has the following features (a) Average inflation between 3-3.5% per month (47% YoY) (b) Slow economic activity recovery: GDP to end 2020 6% below pre-pandemic level and 4.1% average growth in 2021 (c) Total income increasing by 5.8% in real terms (d) a real decrease of -5.1% of expenditures
Against this backdrop, fiscal accounts can improve in 2021 but the deficit will be significant. The primary deficit would fall to 5% GDP and the overall balance to 6.1% GDP.
The financial program of this fiscal scenario is highly demanding. Gross needs for 2021 would climb to 13.0% GDP in 2021. An optimist roll-over scenario (150% of the maturing debt) would leave a financial gap of about 5.4% GDP for next year. Most likely, this gap will be financed by the BCRA with (more) money printing.
Additionally, Cuasifiscal financing needs will also be a source of endogenous money growth in 2021. We estimate – more on this on forthcoming macro update – that interest payments of Central Bank remunerated liabilities will imply between 2.0%/2.5% GDP of additional financial needs in 2021.
[Activity] June activity (+7.4%) moved in line with expectations. INDEC reported that activity increased 7.4% MoM (seasonally adjusted, s.a.) in June (-12.3% YoY), in line with our forecasts (7% MoM and -13% YoY). Activity now stands almost 13% below pre-pandemic levels.
July’s data shows signs of slower, more heterogeneous recovery. Sectors such as Construction and, to a lesser extent, Manufacturing Production are still improving, whereas Commercial Activity and Real Estate show signs of stagnation. Consequently, we expect activity to have grown another 2% MoM in July (-12.5% YoY). August’s early data, on the other hand, suggests a lateral behavior for industrial electricity usage and a very modest recovery of mobility
[Fiscal]
Fiscal data surprised (positively) in July, but 2020 is headed for a record deficit. Total income improved last month, though it still showed a real decrease (-20% vs -24% YoY in June). Meanwhile, the real growth of primary expenditure decelerated from 45% to 28% YoY (items not associated with Covid-19 moved from 22% to 8% YoY). As a result, the primary deficit totaled ARS 156bn, accumulating 3.8% GDP in so far 2020. Official figures were better than our expectations (ARS 276bn), especially on the expenditure side (difference of about ARS 100bn). Even though we consider that these short-term positive dynamics still need to be reconfirmed in August data, our primary deficit forecast (7.8% of GDP) now faces upside risk.
How can the fiscal deficit develop into 2021? We designed a “continuity scenario” where the government is successful in avoiding the FX adjustment before the mid-term elections. This baseline 2021 scenario also has the following features:
- Average inflation between 3-3.5% per month, which would translate to a 47% YoY inflation rate by the end December.
- Slow economic activity recovery: GDP to end 2020 6% below pre-pandemic level and practically flat next year, as damage from the lockdown/pandemic, may prove more permanent and foreign trade restrictions will stall any potential recovery. Thus, due to statistical carryover average GDP would increase by 4.1% in 2021.
- Total income increasing by 5.8% in real terms, an improvement explained by statistical carryover and higher tax pressure.
- On the expenditure side, a real decrease of -5.1%, mostly associated with a partial unwinding of the fiscal stimulus (items associated with the Covid-19 response would fall -31% in real terms).
Against this backdrop, fiscal accounts can improve in 2021 but the deficit will be significant. The primary deficit would fall to 5% GDP and the overall balance to 6.1% GDP.
(real terms, seasonally adjusted)
The financial program of this fiscal scenario is highly demanding. Treasury’s financial needs total ARS 1,902bn or 7% GDP for the remainder of 2020 and ARS 5,205bn or 13.0% GDP in 2021. The debt exchange practically eliminates financial needs in foreign currency, but local currency payments will remain high. An optimist roll-over scenario (150% of the maturing debt) would leave a financial gap of about 3.5% GDP for 2020’s final months and 5.4% for next year. Most likely, this gap will be financed by the BCRA with (more) money printing.
Cuasifiscal financing needs will also be a source of endogenous money growth in 2021. We estimate – more on this on forthcoming macro update – that interest payments of Central Bank remunerated liabilities will imply between 2.0%/2.5% of additional financial needs in 2021.
Mounting macro imbalances and fiscal budget restrictions put the government between the rock and a hard place. The economy requires a stabilization plan that addresses inconsistencies and anchors’ expectations. But such a plan could prove politically costly, especially if implemented in an election year, as it involves reducing the fiscal deficit. With a “tax-less recovery”, that can only be achieved through higher tax burden, expenditure cuts, or a combination of both. More likely, the government will try to procrastinate. The chances of success of this strategy will depend critically on the ability of the Central Bank to keep the forex market under control.
[Activity]
June activity moved in line with expectations. INDEC reported that economic activity increased 7.4% MoM (seasonally adjusted, s.a.) in June (-12.3% YoY), in line with our forecasts (7% MoM and -13% YoY). Activity now stands almost 13% below pre-pandemic levels and July’s data shows signs of slower, more heterogeneous recovery. Sectors such as Construction and, to a lesser extent, Manufacturing Production are still improving, whereas Commercial Activity and Real Estate show signs of stagnation. Consequently, we expect activity to grow another 2% MoM in July (-12.5% YoY).
Private estimates report that industrial recovery is slowing down. Orlando Ferreres’ manufacturing production indicator reported an increase of 1.7% MoM in July (vs previous 6.3%) and a decrease of -9.4% YoY (vs -10.1% YoY). On a similar basis was FIEL’s Industrial Production Index, which increased 0.7% MoM and contracted -7.9% YoY. Heterogeneity among industrial blocs has reduced, but all of them are still contracting.
Other sectors’ data shows mixed signals. Cement sales fell -13.2% YoY last month (see table), more than in June (-6.9% YoY), while Construya index grows 13.6% YoY. On a similar basis, property sales in July suffered from the restrictions imposed on Buenos Aires’ Metro Area at the beginning of the month, affecting CABA (-82.1% YoY) relatively more than Buenos Aires Province (-37.1% YoY).
Mobility improves in Buenos Aires but stagnates in other provinces. As Covid-19 contagion increases nationwide, mobility differences between Buenos Aires’ Metro Area and the rest of the country is narrowing. Up to August 23th, workplace mobility was 49% below pre-pandemic level in CABA (+6pp during last month), -35% in Buenos Aires province (+5pp) and -26% in the rest of the country (-1pp). If the contagion curve does not flatten and leads to further tightening of mobility, this could prove an additional challenge to the economic recovery.
August’s early data suggests a lateral behaviour for industry. High frequency data suggests electricity demand for industry is no longer recovering. Up to August 20th, industrial electricity demand standed -13% below the previous August level, a decline similar to July´s. This goes against the official discourse: industrial production seems to be stagnating below pre-pandemic levels and its recovery will not be neither fast nor linear.
