The economy is finally pricing in the positive soybeans price shock and financial markets have stabilized. FX premiums have dwindled to a six months-low, implied FX rates have plummeted and the CB is buying dollars in the financially repressed MULC.
The local economy has proven resilient to a worsening of the international financial conditions. Macro dynamics are mostly idiosyncratic.
An obvious question then raised: How long can these macro Pax last?
Based on our macro consistency framework we believe that positive conditions may prevail during the first half of the year, but macro imbalances will show up again in H2.
We base our belief in the following ideas:
1. Fiscal conditions have improved but there is no real fiscal consolidation effort in place, beyond raising taxes (i.e. wealth tax), good luck with soybeans export tax and some unwinding of COVID expenditure.
2. Seasonality of revenue and expenditure implies that the financial program is easy to deal with in H1, but more challenging in H2. With an optimistic assumption of a 4.5% primary deficit and 150% rollover of ARS debt then the financing gap is 0.6% in H1, but 3.4% in H2.
There is a downside risk on our deficit forecast (higher deficit) that is based in a somehow moderate increase in expenditures (only 5.6% in real primary expenditure seas. adjusted).
Political expenditure already is sticking its tails on tariffs and income tax reliefs and will most likely rise in H2, more so with the government popularity on a record low and high inflation lingering.
Goods Trade seasonality also follows this H1:H2 pattern. Agro exports dollars are already flowing in and will do so until Q3, allowing for some relaxation on imports restrictions (and, to that extent, to growth).
But the pressure will reappear on H2. If the Central Bank prioritizes reserves above imports (and growth), as was the case in the last year, then the import will mirror the export pattern, or a pressure of about USD 2bn will show up.
The recovery of services imports and tourism, still on historical lows, is a source of FX risk.
The fiscal dominance of monetary policy has easened in Q1:2021, but looking forward we also expect monetary dynamics to follow this pattern.
Under our basic set of assumptions (CPI 48%, Growth 7%, stable money demand) excess money printing can be sterilized by issuing 2.2% of new Debt to banks (on top of 1.7% already issued by the treasury).
If deposits remain stable in real terms this implies that (Leliqs + Pases) / deposits ratio would climb from 55% to 69%
What if inflation is 29% (1.8% per month between march and December). In that case segniorage on money and leliqs fall 1.3% and more debt is needed, increasing the Leliqs to deposits ratio to 78%