Economic activity continues recovering, though at a very gradual pace and with sectoral heterogeneity. In fact, most of Q4-20 growth (+4.5% QoQ sa, -4.7% YoY) has come from services, particularly those most affected by the government imposed lockdown. This year started with a 1.9% MoM sa increase of economic activity, with sectoral variation ranging from -2.4% MoM sa (Electricity, Gas & Water) to +23% MoM sa (Hotels & Restaurants).
The recovery continued in early 2021, but data sends mixed signals. On the bright side, Q1 performance has been better than expected (we adjusted our Q1 growth forecast to +2.9% QoQ sa, from previous 2% QoQ). On the negative side, early indicators shows that activity is losing momentum, which deteriorates Q2 outlook even without considering the possible impact of Covid-19’s “second wave” and the official policy response.
The inflation front also surprised in Q1. Prices increased 4% MoM in January, 3.6% MoM in February and we expect March to show a 4.2% MoM. Absent any FX shock, inflation seems to run at a higher “autopilot”, possibly caused by last year’s monetary expansion and BCRA’s restrictions over both the Current and the Capital account. Most of March showed relatively low core inflation printings (about 0.5% WoW), a combination of real appreciation (REER decreased -2.9% MoM) and higher imports (import related taxes -in USD- increased 29% MoM). However, recent data shows that inflation deceleration came to an abrupt end (latest data: +1.3% WoW).
Our view already internalized the official strategy of using the FX as nominal anchor and we expected inflation to slow down somewhat. We adjusted our forecast marginally (47% YoY vs previous 48% YoY), with inflation decelerating in coming months and stabilizing at 3% MoM in H2. A downward risk to our forecast comes from weaker than expected activity, although the imposition of new restrictions and the associated policy response could change the overall macro scenario (more on this below).
Fiscal accounts started 2021 with the “right foot”, but a less superficial analysis reveals no significant change of trend. January reported a fiscal surplus (!) of ARS 24bn, which turned into a deficit of ARS 18.7bn in February. Real, seasonally adjusted data, shows that fiscal income increased but has still much ground to cover in order to return to pre-2020 levels. Meanwhile, fiscal expenditure decreased from last year’s peak, as expected considering the government has scaled down most of Covid-19 related spending. However, primary expenditure still remains relatively high compared to previous years levels. Capital spending and economic subsidies have increased substantially in recent months, even adjusting for inflation and seasonality.
March’s tax collection data was positive, with real tax collection increasing 22% YoY. Fiscal income was helped by the economic recovery, higher tax pressure (on Income and Wealth taxes), higher commodity prices (export taxes) and the FX premium (tends to increase imports and, thus, import related taxes). The Extraordinary Wealth Tax collected only ARS 6bn in March, though it is expected to increase in coming months.
Despite decent tax performance, fiscal accounts could report a relatively high primary deficit. We can “reverse engineer” March’s primary balance moving backwards through the financial program. On the one hand, we know financial sources: ARS 135bn from central bank’s monetary assistance, ARS 105bn from debt issuances and we can assume 100% debt rollover with IFIs. On the other hand, we know most of the financial needs: ARS 87.1bn of capital amortizations (including the equivalent of ARS 22bn with IFIs) and ARS 21.5bn of interest payments. The difference, about ARS 154bn, can be attributed to the primary deficit. This sum is higher than our forecast (ARS 108bn, recently adjusted upwards).
The financial program is mostly unchanged, with a heavier burden in H2. We have updated debt statistics (see our Debt Stats report here) and adjusted our monthly deficit figures (though we maintained our primary deficit forecast of 4.5% GDP). Assuming an optimistic net debt rollover rate of 150% (higher than recent performance) and that debt with IFIs is either rolled over, renegotiated or paid using the extra SDR allocation, that would still leave a financing gap of 3.8% GDP, which would have to be covered by the BCRA. Most of the assistance would be required in H2 (3.1% GDP vs 0.7% of H1), putting pressure on monetary aggregates and the forex market at a time of the year in which foreign currency inflows tend to pressure.
Monetary aggregates growth continues decelerating. In real, seasonally adjusted terms, aggregates have decreased during most of H2, a trend which continued in early 2021.
The forex market remained relatively stable. The FX premiums were either stable or decreased during March. Meanwhile, implied interest rates in the Rofex market decreased and it is estimated that the central bank’s short USD futures position continued decreasing (latest data was of USD 1,628mn in February, vs USD 4,103mn in December). The BCRA was even able to increase its stock of net international reserves, which totaled almost USD 4bn as of April 5th (+489mn MoM).
Politician’s image ratings improved marginally in our latest poll, though the President remains in red. Alberto Fernández’ net image rating was -10%, higher than the previous printing (-16%) but significantly below his best moment (69% in our mid-April 2020 poll). Economic mismanagement and discontent about how the government handled the pandemic have deteriorated the President’s image ratings and left him with scarce degrees of freedom. The economy needs a stabilization plan that could be politically costly, specially in an election year. With little or no political capital to spend, the government is trying to postpone the economic adjusted until the elections take place. Even worse, the government finds itself in a fragile position to tackle Covid-19’s second wave.
Summing up, Q1 macro dynamics were mostly in line with expectations, though activity surprised positively and inflation negatively. Looking ahead, our base scenario (presented in previous Macro Updates, see here) does not warrant major adjustments, though we have started thinking about an alternative (worse) scenario. With the pandemic’s second wave reaching our shores, the economy might deteriorate more than expected. The possibility of this scenario has increased recently, as the government is taking measures to reduce contagion without hurting economic activity. But should these measures prove ineffective, stronger restrictions might be enforced and the socio-economic damage would be greater.
What follows is an early simulation of our Second Wave scenario, in which the government reimposes restrictions, milder than those implemented in Q2-20. We simulate activity dynamic and its impact on inflation, fiscal accounts, monetary aggregates and forex market. Long story short: even if activity does not suffer much, the government would have to increase fiscal spending and the higher deficit would be monetized. This would agravate monetary imbalances even more, and the chances of a FX crisis would increase substantially.