A dubious path

The government is on an odd operational path. The level of activity – not to be confused with the GDP – will fall in the US by more than 30% between April and June as estimated by operators on average, and in Argentina, the estimated average level fall is more than 10%.

It seems to be not possible to estimate how much the fall will be during the quarantine because it is still unknown how long it will last. In the U.S. Goldman Sachs expects a strong increase with 20% growth between July and September with another increase of 12% for the last four months when the financial aid of 2 billion dollars that would balance – without inflation – the fall produced during the pandemic begins to push the activity.

Considering that Goldman operates with stocks, the optimism is natural, it is what it needs.

In Argentina, the coronavirus quarantine did not substantially change economists’ estimates of the evolution of inflation and the value of the dollar, as we will discuss below. But it did drastically change their estimates of economic activity and the fiscal deficit.

Analysts consulted by the Central Bank for its Market Expectations Review, which until March expected GDP to fall by 1.2% this year, now estimate that it will fall by 4.3%. The most accurate forecasters in the past now expect an average collapse of 4.4%, against the 0.5% they indicated in March.

The economic downturn is expected to peak in the second quarter of the year when the paralysis/quarantine effect hits. But they assume that previously in the third quarter would begin to see an improvement suggesting that the effect of the pandemic is perceived as temporary and that soon will begin recovery of the economic activity. Something debatable and close to magical or interesting thinking.

The analysts have chosen by the BCRA estimate that between January and March, GDP would have fallen 1.6%, something much more pessimistic than the 0.5% they predicted earlier. For the second quarter is where they believe the effect of the quarantine crisis will be seen, since last month, forecasters believed that the drop would be 0.2%, now they estimate it will be 4.9%.

For the third quarter, forecasters expect a 0.7% growth. Again, debatable because we are in the middle of a crisis and we have no information at all.

By 2021 (they cross a bridge that is far away with total impunity) specialists expect a rebound in activity, with economic growth of 3% (1.3 points over then they predicted a month ago) and 2% by 2022 (the same as in March).

It is not thought to make such predictions in the middle of a perfect storm.

The market has lowered its inflation expectations for 2020 for the third time: it forecasts 40%. This is more credible because these traders put their money where their mouths are.

Forecasters have strongly modified their forecasts for the primary fiscal deficit for 2020: last month they had estimated it at $135.3 billion and now they believe it will be $696 billion.

The forecast for 2021 suggests a lower deficit than that projected for 2020, around $500 billion. It’s a real surprise: with viruses flying around and no idea how much will be spent, or what the policy will be when the pandemic hits, these forecasts are less reliable than those of the weather service.

As for inflation, the numbers didn’t vary that much. At the end of March, market analysts projected that by December 2020 it will be at 40% inter-annual, the same level that the market estimates and similar to their previous calculations. For March, they forecast 2.6%, rising to 2.8% in April.

The foreign exchange market

Regarding the dollar, Central Bank forecast participants predict that the average nominal exchange rate will reach $83 in December, $4.2 more than they expected last month and $107.7 in December 2021.

For this month, economists expect the private bank rate in pesos to be at 27.7% and falling to 26% in December (187 basis points below the level they projected in February) and 24% by the end of 2021. An extremely unserious assertion.

The recovery

The recovery in Argentina cannot have the same pace as any other, will be much slower. It must coexist locally with an ancient populist labor law with such an inflexibility that makes hiring difficult and stops layoffs, at the moment banned for 60 days, and with thousands of contradictory tax provisions, paralyzing regressive taxes, legal impunity and any will to solve anything as a whole.

The fall will be less than in other countries because everything is now very low, and the slower recovery must pay tribute to the institutional tangle that prevents the hiring of workers supported by the inflexibility of mobility laws that discourage the hiring of a worker since taxes that any company must pay for each hired worker implies an additional cost of 48% over the salary that the employee carries in his pocket every month. 

Besides, the drop in general activity, this year will have the particular distinction of having a homogeneous contraction of the economy in terms of the number of sectors affected (with growth in items related to health and community activities) and heterogeneous in the magnitude of the impact on each of them, being very robust in those related to textile production, trade, tourism and manufacturing.

On the other hand, the state has no way of generating confidence with the monetary policy, until now based only on an emission frenzy, without having resolved the refinancing or default of the external debt (having defaulted on the debt with local legislation) and therefore without a fiscal policy that indicates how long there will be a primary deficit.

As for the GDP before the infection, a fall of 1.5/2% was estimated for the whole of 2020 and if the quarantine ended in May, the reduction could be estimated at 4/4.5%.

What does this mean for the population?

Nothing good, by the way. It is worth remembering that GDP is an abstract indicator of the value in some currency of all the final goods and services produced by a country in a year (or another period). It is a measure of a country’s wealth. The fall in GDP is therefore negatively crucial to our economy.

A decline is a drop in economic activity. With less economic activity, unemployment is even higher than today and the income of all inhabitants’ decreases. This, in turn, means that economic agents (companies and the private sector in general) will stop spending instead of consuming and producing. Moreover, after a fall in GDP, the State’s tax revenue decreases because the State collects less tax and therefore cannot meet its basic obligations without falling into debt. This is where we are heading.

Who better and who worse

A little more than 40% of the population has more or less steady work and semi-protected savings and can temporarily overcome the emergency.

Lower production will lead to the liquidation of stocks, but when these reach a level of replacement, the only possible solution will be to install a mechanism for the real redistribution of goods and money from those who produce them to those who are in need.

When the economy functions smoothly, income is distributed through the exchange of goods and services, but with this isolation, a food producer, as an example, cannot buy equipment or have a tooth implanted, and the agricultural manufacturer does not receive fertilizers and cannot travel or move to negotiate effortlessly in the smaller domestic markets.

Very few have millions of acres in the humid pampas and sell to accumulators, however, hundreds of thousands raise pigs, sheep, and goats, a few or many cows or have small farms spread over all over one of the largest national areas in the world.

But isolation means that food, medicine and some necessities have to go from the producer to the consumer without a genuine way of generating a value-added chain.

When money is issued – for any purpose, in this case, to support the neediest – the money supply increases but the number of goods produced does not, and to supply the demand for products the stocks are reduced and at a certain point, the producer imposes new prices.

Supposedly that would have happened when ¨ …three food producers (regular suppliers to the state) stall in front of the government – on April 5 – and forced the government to pay more than the price cap in the supermarkets, for larger volumes of food destined to the vulnerable population.  Those responsible in the government recognized their ¨ disability ¨ to control the situation.

Investigating the protagonists of this corruption, it can be read in the Official Information from the government that the beneficiaries of the purchase at prices inflated by 200%/300% are three habitual suppliers of the state (belonging to the same person) and that those who made the direct purchase are members of La Campora, one of which, despite having been accused of bribery some years ago and having been filmed receiving bribes personally, is an active and relevant part of high positions in the current government…in charge of those purchases…

Another part of the government has had to concentrate on protecting the health and basic services by postponing less pressing obligations, but that is no excuse for neglecting the economy because the economic team does not have much to think about in terms of health.

Government incomes

The private sector, which is largely paralyzed, cannot pay its taxes, and for that reason is why March’s revenue was 15% lower than inflation. This is a real drop in revenue, clearly reflecting the very low activity in February when there was no quarantine. Therefore, the situation will be much worse in April when a March with almost total drop inactivity and a historically unprecedented drop in consumption will lead to even lower collections in real terms.

For this reason, the government is trying to resort to extreme measures – it is already short of them – such as imposing an extraordinary tax on large assets to deal with the emergency caused by the coronavirus, something that impacts large companies at a time of severe economic recession and could make it difficult to overcome the crisis.

Such a tax on large assets held by human or legal persons would attempt to directly help alleviate the consequences faced by the sectors most affected by this crisis. It is a proposal of a direct and overcoming transfer of resources to continue issuing.

The debt negotiation

In a very negative global environment, the Ministry of Economy is trying to make progress in the negotiations with private creditors. This week a new presentation was made, to the creditors with an economic scenario that tries to explain that there will be future growth and déficit without taking into account – unusually – the effect of the COVID-19 on those variables.

However, they tried to convince that the short-term effects do not override the long-term projections on which the assumptions about Argentina’s public debt sustainability should be based. This is indeed unusual because the duration of the infection is not known.

Creditors’ claims differ from those of the government but, despite everything, they insist on paying the maturities (at least of the NY Law) before announcing the offer to the creditors. So it was announced the payment of a bond whose parities are around 30%, that is, in default.

The panorama is very dark for the rest of the year and facing the crisis without access to any market makes the situation difficult, generating the risk of fiscal and monetary disruption.

The measures aimed at boosting aggregate demand are not suficientes for the scenario of contraction of supply that is already present in Argentina. The fiscal relief for the companies is vital so that from this fall it will be possible to get up, something that the government does not seem to take for granted.

In any circumstance and spite of any measure, the fiscal numbers for 2020 will be very bad and during the year the debt restructuring will have to be reordered since it is impracticable to generate any kind of surplus to even pay interest during 2020 and 2021.

The government will have its first success only by maintaining a slightly increased level of activity if the pandemic ends as expected, if it manages to avoid social outbursts and if its members privilege political concord over personal ambitions.