In our Last Macro Update we split the forecast into two binary scenarios: On the one hand, a “Continuity scenario” where the government was successful in avoiding a collapse of its crawling peg, at the extent of lower or no growth, growing fx premiums and a monetary balance on the tipping point of explosive dynamics. On the “Shock scenario”, on the other hand, the monetary pressure is strong enough to fuel a discrete official FX, triggering a new round of inflation acceleration – risking a triple-digit scenario -, activity contraction, and overall macro instability
Over the last month, a number of news have shifted our beliefs in two directions.
- The odds of the “continuity scenario” have grown and, in the absence of major changes, is now clearly our base case scenario. We think that the Central Bank should be able to avoid the official FX depreciation at least until after mid-terms elections.
- The “continuity scenario” now looks slightly better than before, with some growth (6.0%, 2.0% of which is explained by growth within the year), the primary deficit in line with the budget (4.5%), and stable monetary and fx dynamics (not improving but at least not getting too much worse)
Global tailwinds. The global outlook has shifted favorably in Q4:2020.
Two combined effects are benefiting Argentina. On the one hand, COVID’s vaccine is already being deployed and the growth outlook is improving worldwide, the global dollar is weakening and financial conditions are more supportive for emerging markets,
On the other hand, Eastern Pacific waters are getting colder, and a “La Niña” season is building up, anticipating dry weather in South America and Commodities prices have soared. Corn, wheat, and Soybeans are +30% / +25% + 30% respectively vs august prices, and soybeans, in particular, are in the highest value since July 2014.
The negative: Commodity Driven Inflation shock
The Positive shock: USD 9bn of fresh dollars
Spill overs of a USD 9bn Terms of Trade Shock
- Export taxes + 2.5bn (0.7%) + Indirect taxation (0.3%). We assume 50% of this is saved, 50% spent.
- USD 9bn is 21% of 2020 imports. Trade balance may not improve but there will be room for some growth in a dollar constrained economy.
- 1.5/2.0% higher growth
- Higher money demand and lower money financing. 0.5% of GDP = 4% of the money base and y 2% of M2
Word of warning: Money demand seasonality
Some monetary updates:
- Another homeopathic interest rate hike, dwarfed by the acceleration of inflation.
- FX intervention have dwindled in December and are now running at USD 500 per month
- Faster Crawling peg. Interest rates mismatches have been reduced.
- Money demand is already falling both in real terms and as % of GDP and inflation acceleration is starting to liquify the money overhang
- The government is not being accommodative with seasonal money demand rise. Beware of reversal in January/February
Summing up, muddling though the stanflationary path
The mana from heaven, if persistent throughout the harvest season, should be enough to avoid a discrete jump in FX and linger the crawling peg, and allow for inflation to do the dirty work.