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.