Abstract
Available activity indicators suggest that June / July would also show a significant decline in GDP.
However, more frequent indicators indicate a very long recovery period in productive activity, since the government appears to be attempting a deal-breaking situation with foreign creditors.
Given these trends, and assuming that more compulsory social confinements are being implemented, the second semester will be the most complicated one in decades.
It was appropriate to implement expansionary policies to mitigate the suffering of people however the unforeseen impact upon future monetary inflation
The – nevertheless dangerous – expansionary monetary policy will help to lower the financial burden on companies and households by helping them to better navigate the situation
The central forecast for the year of a 12% annual contraction in GDP, and an unknown rebound – if any – by 2021 will not be enough to recover the size of the economy that we had at the end of last year.
Keep the distance, but carry on, so say world´s developed countries
The unprecedentedly rapid and large monetary and fiscal stimulus put in place by the major global economies has fueled a sharp rebound in assets. At the same time, recent data also raise hopes of a swifter economic recovery than expected only a few weeks ago.
The relevant events of the last two weeks have been that the outbreak of infected people in the developed world decreased, quarantines in Europe and much of the USA began to be lifted and the economy in that part of the world was set in motion. Meanwhile, in poor countries, infections began to grow and this asymmetry prevents the relaxation of quarantines and postpones the reconstruction of those economies, generating more inequality. Here’s what a truly shocking revelation would sound like.
With core central banks strongly signalling that their accommodative policies will not be reversed anytime soon, the ground seems prepared for catch-up trades – indeed, some initial evidence points to some of the global “walls of money” finding its way back. Further waves of the pandemic are a risk to this scenario, in particular as many emerging markets lag in controlling the virus and their fiscal and monetary policy space is limited. On balance, we expect increased focus on RV and differentiation in EM FX and credit, while the outlook for EM local rates looks less positive.By early April, the developed world was in a health crisis, imposing restrictions on the internal movement of its citizens and closing borders. As of 15 June, this has largely been lifted. The Central Banks acted and managed to create a gap between the financial and the real economy employing appropriate safety gear to do a task that required said safety gear, using special instruments that simplified operations and injected liquidity into the system. Therefore, in a breath more than 88 days, stocks returned practically to pre-pandemic values, commodities stopped losing price, the credit market was opened for indigent countries – except for Argentina – and the currencies of those countries made sudden stops in their process of devaluation. except for Argentina. The Real went from R$6 per dollar in April to R$4.7, and the countries of the region placed debt in the international market at rational rates: Brazil, Chile, Colombia, Peru, Mexico and Paraguay. Argentina did not. This is no longer surprising, but still disappointing.
Argentina Debt Restructuring: time for pragmatism, not for ideological turns.
A potentially successful debt restructuring is a necessary but not sufficient condition for economic recovery. The pragmatic policy approach of Fernandez’s first months in office was interrupted by the pandemic, considering the unnecessarily protracted debt negotiations, sharp monetary easing, and tighter capital controls. Steps towards an agreement with the IMF and the announcement of a consistent fiscal and monetary plan will be of the essence to anchor expectations. The risk is that the government’s room to detour back to pragmatism is compromised by a weak economic recovery post lockdown. It is to be expected an 11% GDP contraction in 2020 and a 7% of GDP primary deficit that will have to be monetized. Macro imbalances will hinder a faster GDP recovery (forecast 3% y/y in 2021). Tighter capital controls, credit contraction and/or a devaluation will likely be needed to rein in the monetary overhang.
To be done
Credit Strategy: Remain Overweight. Argentina must reach an agreement with creditors in the immediate future. A debt restructuring outcome would likely reduce default probabilities in the next few years. Under the May 28 offer, which must be improved, markets are pricing in a c.1200bp exit yield., not the 1000bp exit yield requested. Therefore, in the current supportive markets, exit yields have further room to compress.
The COVID-19 monetary overhang and the need to rein in fiscal deficits demand a hands-on pragmatic policy approach. Potential positive catalysts include proper handling of the post-COVID lockdown monetary overhang, the drafting of a 2021 budget that returns to fiscal prudence, and progress in negotiations with the IMF.
On the other side, Argentina has not reached the peak of COVID-19 infections; a protracted lockdown would mean the building of additional monetary imbalances, as the sovereign’s sole funding source remains the central bank. Investors will be inclined to trim positions in strength, given Argentina’s high-beta properties and the macroeconomic outlook.
An ideological turn or just a detour?
The debt restructuring process could be closer or not to the finishing line, according to confusing press reports. A successful debt restructuring process is a necessary condition to improve sentiment, ease some of the pressure in the FX markets, and prepare the terrain for much-needed economic recovery. But the restructuring in itself is not enough to put the economy back on track post lockdown. Much more clarity is necessary on future macroeconomic policymaking to reset expectations and lengthen investment horizons, particularly considering the macroeconomic imbalances that have built up as a result of the pandemic.
During Fernandez’s first months in office, the plan seemed to be to reset expectations through political and policymaking moderation to restart the economy after two years of recession. The announcement of a fiscally conservative budget in December, a relatively prudent monetary easing (coming from tight credit conditions), the President’s trip to Europe, income policies (social pact supported by unions and business leaders), income redistribution towards sectors with higher propensity to consume, all seemed to point in this direction.
But that initial plan seems to have been interrupted by the economic impact of the COVID-19 pandemic and as of yet inconclusive debt negotiations. Monetary easing has accelerated, capital controls have been significantly tightened, price controls have strengthened, and tariffs have been frozen indefinitely. It is unclear if the implementation of such measures could be just a temporary fix meant to buy some time while the debt restructuring process advances and the lockdown is in effect, or if it is a more permanent shift in policymaking.
In other words, will an eventual successful restructuring initiate a return to the more pragmatic policymaking of the first months of the Fernandez administration? Or has the pandemic shock, by significantly deteriorating the economic outlook, limited the economic upside of political moderation, and cornered Fernandez into more dogmatic policymaking from the hawks of Mrs, Fernandez?
It is too early to tell if we are confronting a detour or a turn to the left, but the market will likely turn increasingly focused on policy decisions such as the takeover of Vicentin, as signals of what’s to come. Steps towards an agreement with the IMF and the announcement of a consistent fiscal and monetary plan will be of the essence to anchor.
expectations. The risk is that the government’s room to detour back to a pragmatic approach is compromised by a weak economic recovery post lockdown. The sharper the contraction, the weaker the political capital of the Fernandez administration, and the higher the chances of dogmatism.
Argentina will suffer the largest downward revision across Emerging Markets – cutting down 2020 GDP forecast 9pp, to a decline of 11%, although with a slight increase during 2021 with a forecast with a modest 0.5pp, to an expansion of 5.1%. Fiscal deterioration and inflation could tighten financial conditions and affect demand, eroding the potential for a stronger recovery.
A potentially successful debt restructuring is a necessary but not sufficient condition for economic recovery. The pragmatic policy approach of Fernandez’s first months in office seems to have been interrupted by the pandemic, considering the unnecessarily protracted debt negotiations, sharp monetary easing, and tighter capital controls. Steps towards an agreement with the IMF and the announcement of a consistent fiscal and monetary plan will be of the essence to anchor expectations. The risk is that the government’s room to detour back to pragmatism is compromised by a weak economic recovery post lockdown. We expect an 11% GDP contraction in 2020 and a 5% of GDP primary deficit that will have to be monetized. Macro imbalances will hinder a faster GDP recovery (we forecast 5% y/y in 2021). Tighter capital controls, credit contraction and/or a devaluation will likely be needed to rein in the monetary overhang.
To be done
Credit Strategy: Remain Overweight. We think Argentina will reach an agreement with creditors in the immediate future. A debt restructuring outcome would likely reduce default probabilities in the next few years. Under the May 28 offer, which will be likely improved, markets are pricing in a c.1200bp exit yield. Therefore, in the current supportive markets, we think exit yields have further room to compress. The COVID-19 monetary overhang and the need to rein in fiscal deficits demand a hands-on pragmatic policy approach. Potential positive catalysts include proper handling of the post COVID lockdown monetary overhang, the drafting of a 2021 budget that returns to fiscal prudence, and progress in negotiations with the IMF. On the other side, Argentina has not reached the peak of COVID-19 infections; a protracted lockdown would mean the building of additional monetary imbalances, as the sovereign’s sole funding source remains the central bank. While we do not expect bond supply after the deal, we think investors will be inclined to trim positions in strength, given Argentina’s high-beta properties and the macroeconomic outlook.
Reviewing contrary viewpoints, Argentina is anguished from accelerated contamination, or more precisely it is beginning to identify contagion very late – there are no details on this – with 90% concentrated in the AMBA area after 85 days of unprecedented confinement and almost certainly another 40 days for the entire population of that area. This happens for the reason that when more evaluations are carried out, more infections are discovered, something quite obvious and doubtfully handled from the very beginning and it will become an escalation, which will have in our country a progression in the economic costs much higher than those observed in the rest of the world; because of the quarantine, and because of the inability of the fiscal and monetary policy to react since in Argentina there is no currency, no savings and – obviously – no credit because the tiny financial system resources are almost all absorbed by the government, with or without a pandemic.
In recent days, a growing concern around the world was born about a possible second wave of contagion causing a new recession before it could even recover previous levels of activity. Argentina still seems not to have reached the peak of the first wave and its economy is already badly damaged, so the horizon looks much darker considering the latent global and local risks.
So far, management is focused on the disease and much less on the economic risk derived from the measures to stop the advance of the virus. One of the longest and most intense quarantines in the world is still in place in urban Buenos Aires. Consequently, the pace and depth of the country’s economic decline – 60% of manufacturing activity is there – is also one of the most worrying in the world, far greater in economic drama than the impact on the economies most affected by the pandemic in Europe.
There is no agreement about the flooring of the recession. There was an expression of desire, a magical thought without foundation at first, which assumed that the lowest level of economic activity would be recorded in the second quarter of the year and that the third would initiate a recovery whose intensity depended on the number of people infected and the possibilities of continuing to relax the isolation measures and incorporating more activities into the operation. The opposite happened: infections increased and it was not possible to relax measures or reactivate the economy, at least until the end of July, more than half of 2020.
Of course, there will not be a quick recovery, let alone a return to the previous level. It will take the Argentine economy more than three years to reach the previous level of functioning, which was already low.
But there is the greater risk: the macroeconomic imbalances generated in the last three months may prevent the eventual recovery to start in the third quarter of the year.
The country’s macroeconomic situation – before the pandemic – was one of profound weakness, with no other financial savings than reducing genuine pensions, total isolation from credit markets, high inflation tripling the world average, with a contraction that weakened labile fiscal revenues and a pandemic that multiplied spending. Thus, the fiscal deficit went in a few months from a less than precarious balance to the largest deficit in the last 30 years.
The financing of the Treasury’s needs comes exclusively from the issue and in the last 12 months, it reached 5% of the GDP, unprecedented values in history.
Fiscal deterioration is a common phenomenon in countries that saw their income reduced and injected resources to sustain the productive system during the paralysis of activity. The natural counterpart is an increase in public debt. It was only issued in those countries whose currency is strong and has demanded from the population that absorbs surpluses and does not cause inflation.
In Argentina, the fiscal imbalance is compounded by the monetary imbalance and causes an exchange rate disorder because the demand for money (that is, the population’s interest in keeping pesos) is zero, aggravated by the impossibility of investing at positive rates, thus permanently pushing the value of the dollar up. This is in a context of very high uncertainty regarding the resolution of the conflict with creditors, which has been going on for long enough to qualify it as malpractice. The government, with its inconsistencies, internal power struggles and delays, has generated a considerably higher risk scenario than other countries in the region and the world.
It is this scenario that will delay – and greatly delay – the recovery of economic activity. This is so because there is no intention among politicians to agree, give up positions and draw up an agenda that will at least stop the fall. It seems that there is a set of independent self-employed people working with personal goals in charge of the government.
If the exchange rate gap were to continue to grow because there is a surplus of pesos in the market without people’s demand for their currency, and it was necessary to correct it at some point in the coming months, there would be another reason – out of the many accumulated – for further acceleration of inflation that already guarantees levels of 40/45% for 2020.
Interested, wrong untimely decisions
Even though Argentina is one of the countries in the worst situation – if not the worst – and in a slightly inopportune act, a project of expropriation of an important, old, indebted and badly managed cereal company arises, which – as it was obvious – has become a national political issue for Mr Fernandez’s government, which has been left out of the interests of Mrs Fernandez, who has nothing to lose (the unconstitutionality or the rejection in the Congress will fall only on Mr Fernandez).
The initiative of political origin was presented by a senator named Sagasti, leader of the Campora, one of the many supposed «favourites» of Mrs Fernandez.
But the opposition’s resistance was greater than expected: protests by workers and producers linked to the company, the situation of the governor of Santa Fe which was not easy, has become complicated and in the urban centres’ pots and pans were made against expropriation.
The opposition, which has no leadership, found a point of convergence. The business community’s rejection has been almost unanimous. Rural entities – concerned about the «export-tied bond» that has been included in the debt negotiation – have criticized the measure.
The conflict now has political consequences of different kinds. Ms Fernández put a company whose credits granted by Banco Nación link it to the last phase of the previous government because, in November 2019, it was granted 28 credits that did not pass through the Board of Directors of the entity. They found a way to initiate a legal case accusing the former president and the former president of Banco Nación, among many others. But the opposition’s reaction has materialized, noting that the government is acting with a certain amount of carelessness.
The judicial decisions of first and second instance, probably favour the position of the Executive. As for the expropriation project, the government has a majority of 41 seats in the Senate to approve it, as was the case last week with the rent law and the elimination of the quick procedure for the approval of new companies from the previous government.
The situation is more complex for deputies. The ruling party is missing 10 seats and there are 11 that answer to Roberto Lavagna, who took a stand against the bill, as did former President Eduardo Duhalde. The president’s spokespersons say that if he loses seats in Congress, the company will become mixed, with a corporate form similar to that of YPF. But Congresswoman Fernanda Vallejo’s project proposed transforming financial assistance to companies during the Pandemic into state actions in them and the ambiguous definition of the chief of staff. Santiago Cafiero, saying that «all» companies in insolvency proceedings will not be nationalized, raises concerns about whether Vicentin is an isolated case or a fact that sets in motion a long-term policy. A prolonged impasse is likely: a judge in the area where the company operates may declare the expropriation attempt unconstitutional and – as the Supreme Court took an indefinite vacation – a resolution will probably take a long time. In the meantime, the contest will continue, with an auditor without functions, but receiving a high salary, even if he does not work because he is being operated on and a long convalescence awaits him.
Although in public opinion the majority supports a greater presence of the State (because of the pandemic) in this case, those who have an opinion are concerned.
As for the level of activity
Energy consumption during May and so far in June shows that the economy has fallen by more than 41% in the last 30 days alone. If this economic dynamic is projected for the whole second quarter and assuming some kind of opening in the interior of the country, the accumulated fall until the end of June would be over 60%. If the level of activity were to recover gradually from July onwards (which is highly unlikely), the average fall for the whole year would be more than 15%, leaving a negative carryover for 2021 of more than 5%. This is provided that two central issues are resolved: 1. stabilizing the demand for pesos in the face of the monetary issue made (that is, that people do not start spending quickly – who can obviously – in the coming months to avoid an inflationary flash and 2. the speed and location of the release of activities.
For the next 60 days, inflation will continue to be contained while the new greater interest of the population in keeping the demand for pesos high in a precautionary manner (demand for pesos means that people keep pesos because those who can do so do not spend them as a precaution, others because they are locked up and the great majority because of the strict exchange control), which for the time being avoids putting even more pressure on the purchase of free dollars, more than the demand for dollars.
However, it is unlikely that the April CPI, which was 1.5% and for May, which was 1.5% (accumulated 11.5% for the year), is a trend because it reflects the retraction by demand shock (demand shock is when people suddenly stop buying) that prevented moving anything to prices. The rate for the months of the second semester will not be at all benevolent because tariffs will be adjusted (or the record fiscal deficit will increase), the fuel price freeze will not be complied with, price agreements will fall, and the cost of both food and manufacturing and agricultural inputs will be transferred to free dollar values.
It must be noted that the exchange rate policy devalues the peso at the same rate as inflation or somewhat more. It is a fact, proven by economic theory and practice, that the speed of transfer of the devaluation of the peso to prices is instantaneous under high inflation -as in Argentina-, slower in medium inflation (of the order of 10/15% annually) and takes months, or never happen when inflation is low.
After a May similar to April in terms of inflation, June started with price increases, especially in electronic and agricultural products due to the impact of the new import dollar and in domestic products.
Exchange market
To control reserves, access to the exchange market was limited to companies that paid the commercial debt or those that have dollars declared abroad, a measure that worked well in the short term and the BCRA was able to replenish almost U$S 600 million. The counterpart is that importers valued all their stocks of imported products at the cost of the free dollar and this was transferred to prices, especially in the agricultural sector, which requires these inputs seasonally. It is also possible that, if small and medium producers were not in a position to pay the new values, the first shortage would occur in some way.
During the compulsory isolation, there was a non-quantifiable, although visible, increase in operations ¨on line¨ that will not be able to compensate for the damage to the level of employment following the restrictions on jobs in traditional sectors. The textile and footwear sector is the most punished – zero sales – despite the government’s compensatory programs to pay salaries and decompress social charges, while there was a suspicious transfer of sales from clothing companies and shops to supermarkets authorized to sell textiles and footwear in one of the government’s most unjust messes.
The economy amid power building
Having not yet resolved the management of the foreign debt and with the political risk of not being able to resolve the debt with local creditors, something that the population does not yet take into account, the government has to resolve the unprecedented monetary issue of the next 90 days and will have to have the capacity to maintain a minimum of fiscal consistency and the management of a redistributive bid that will be presented at the same time that it lifts any operational restrictions. Considering the opposing interests of both sides of the government, this will be a huge confrontation where Mrs Fernandez has everything to gain.
In the general context, Ms Fernandez is systematically advancing in her power building. Progress in the justice system is systematic: the judicial reform project initially proposed by Mr Fernandez underwent some curious mutations and ended up being Ms Fernandez’s project, which incorporates novel and surprising initiatives for the entire world, such as the creation of ¨algo¨ that will oversee the Supreme Court’s rulings. A real novelty.
The lady’s complaint about the handling of telephone tapping in the previous government advances and the possibility of increasing the number of members of the Court remains open, for which only a simple majority in both chambers is required. Electing them and approving them will be another story.
The appointment of the founder of Justicia Legitima as an auditor in the National Penitentiary Service is a demonstration of Ms Fernández’s strength, as are the appointments of all the directors of the ANSES in the companies in which she holds shares without even informing Mr Fernández.
The intervention in Vicentin seems to be appreciated by Mrs Fernández – according to her statements – as a state advance in the grain trade. The judicial offensive against the previous government by «illegal intelligence» is intensifying. While Mr Fernandez does not confront Mrs Fernandez’s initiatives, and even less so her political current, the president of the Chamber of Deputies, Sergio Massa, aligns himself with Mrs Fernandez, for now, although with Mr Massa one never knows.
The fiscal problems
The minimal fiscal consistency disappeared with the COVID. In April the primary deficit was $230 billion, 0.7% of GDP since expenses grew 100% and revenues 14%. In May, revenues will rise by only 10%, marking a trend whose end can only be projected by assuming a limit to isolation, a very uncertain hypothesis. The prolongation in time of the isolation will generate more compensatory measures (impossible to quantify because the duration variable is ignored) and will increase the fiscal deficit taking it over 7.5% of the GDP without a doubt
The endless negotiation of foreign debt.
As for the debt negotiation, after the rejection of 75% of the creditors to the first offer, the negotiating team focused on the three groups of creditors that concentrate 40% of the U$S 63 billion to be refinanced. There was a good first reception to the second offer that brings the positions closer, in the order of US$ 55 vs. US$ 58 with a later rate of 10% that is high. The final decision was scheduled for June 12, but there was an attempt to expropriate the company.
Regardless of the state of the company and whatever the behaviour of its shareholders, and taking into account the potential fragility of the legality of the debt with the banks, an attempt to expropriate a large agricultural company and already in a meeting with a judge and trustee acting, enters an untimely and legally nebulous terrain that should have been postponed until the trustee, creditors and eventually the judge resolved it within the existing law.
For any observer of the subject, it was aggression to the negotiations of the foreign debt – which included an adjustable bond for exports and which now has no value because few creditors will believe in it – also contrary to the previous announcements of Mr Fernández. This will cause difficulties because it is a demonstration of disrespect for the enforcement of the legal processes that were already in place. It also caused internal repudiation by some businessmen, because the company – with serious problems, and management to be investigated – had already entered the judicialization process.
The most competitive sector in the country is the agricultural sector, which, despite delivering 33% of its income through withholdings and operating within a strong exchange delay, will now have greater precautions against new risks of expropriations, confiscations or interventions in addition to the laws in force.
Refinancing the debt is a necessary and insufficient condition to avoid a more complex situation for the economy, but it would be sterile without a stabilization program and some minimal coordination in the government, which is not perceived today.
Pandemic, Greater Buenos Aires and the Autonomous City
Meanwhile, the measures against the Pandemic are generating increasing political tension and the influence of Mrs Fernandez is relevant. Until two weeks ago, those infected were climbing in the city of Buenos Aires (Caba) and kept under control in the conurbation. Now it’s the other way around: they are increasing rapidly in Greater Buenos Aires and have stabilized in the Buenos Aires district. In this context, the influence of Mrs Fernández supports the position of the Governor of Buenos Aires in terms of increasing the restrictions in the AMBA (the suburban area plus the capital, where a third of the national population lives), which implies going backwards in the relaxation of the last few weeks. To reinforce the position of the Governor, ¨recommended ¨ – through his doctor – has asked Mr Fernández not to leave Olivos.
In the Autonomous City
The Buenos Aires head of government is resisting pressure from the national and Buenos Aires governments to impose further restrictions because if he does so he will pay a cost in public opinion in the capital. Not only does the governor of Buenos Aires want to return to more restrictions, but Mr Fernández also has the same position. As a transitional measure, transportation will be the area where restrictions will be reinstated in both districts. As for the provinces, they will move forward or backwards according to the increase or decrease of those infected. Three have reopened for tourism (Jujuy, Río Negro and Neuquén) but the two that had no cases (Formosa and Catamarca) have now been hit by the virus.
The level of activity
The impact of the pandemic on the economy was strong and it will take no less than 4 to 5 years to recover the already bad level of activity in 2018.
The economy fell by more than 40% compared to the previous year in the last ten days of March alone with the disparity between sectors: 88% in Construction, 75% in Hotels and Restaurants, 40% in Industry, 35% in Commerce, 100% in clothing and less in activities such as Financial Intermediation, Electricity, gas and water, Agriculture and Teaching.
The absolute isolation in the whole country every day meant a loss of U$S 500 million, in the phase of some commercial freedom it went down to U$S 380 million per day and as of June 10th, it can be estimated in U$S 300 million per day.
The assumptions made about how the pandemic affects GDP do not take into account the damage caused to the production chain, the incremental cost of logistics and working capital in an environment without credit. Therefore, they should be taken as a quantitative reference because industrial and service productivity has suffered incalculable damage. On the other hand, the attitude of producers and consumers to the real fall in wages and employment must be taken into account. Nor does it include the high and still unquantifiable number of calls for tender and bankruptcies following the resumption of activities because the payment chain does not function properly.
In the best-case scenario, assuming that the pandemic will allow the resumption of activities almost completely from July (this is more a magic thought than anything else), in no case will the fall be less than 20% in the year, leaving a drag for 2021 of no less than 4 points of GDP.
In all cases, recovery can only take place – in the case of lifting all restrictions – if the government manages to stabilize the demand for pesos (that is, if people do not buy foreign currency at any price) against the monetary issue that will be produced in the next few months to stop the inflationary flash that is so great – moreover – because of the indispensable suspension of the subsidies that generate the increase in the rates of essential services and, above all, the necessary and insufficient condition of the settlement of a debt whose negotiation is already in the realm of suspicion.
Employment will not recover at the same pace as the rest of the economy because the new e-commerce jobs are far fewer than those that will be lost once the imposition of no layoffs is lifted. Formal jobs in April fell 1.4% in March and 4.3% from a year earlier, with 100,000 fewer jobs in March, 65% of the total job losses were in mini- SMEs.
6% % of the workers accepted salary reductions between 25% and 305 representing a 50% reduction in labour costs.
Government Wages
In the public sector, all employees continued to receive the same salaries, with the only exception of the bonus being paid in instalments. In the public sector, in the provinces and even less in the municipalities, there were no reductions in salaries or suspensions of any nature or differentiation between sectors that work (health and safety) and those that do not work and remain at home without working. There was not a single case in the whole country of a politician having his income reduced. On the contrary, Ms Fernandez has requested that an additional privilege pension be added to the two she already receives.
While she claims for herself, in April the Emergency Assistance for Work and Production (ATP) program, which consists of the payment of up to two minimum wages, reached 2.3 million formal workers in the private sector with an estimated fiscal cost of $50 billion per month. In June it reached 1.8 million workers with a fiscal cost of $39 billion.
In April, the formal private sector wage bill published by AFIP grew by 41.4% year-on-year, 3% below inflation with a drop in the level of activity of over 20% per year. There were an increase informal workers’ savings, which shows that the drop in consumption was the result of the closure of activities (a supply shock) rather than a drop in income (effective demand).
The fiscal accounts
Giving a part of the income to those who cannot work implied a significant impact on the fiscal accounts. and simultaneously there was a drop in income due to less activity that is already reaching the provinces. In April 2020 there was a primary deficit of $228 billion (0.7% of GDP), to get an idea of the magnitude of the deterioration it is enough to remember that in April 2019 there was a surplus of $500 million.
In May, revenues will fall more than 23% in real terms (below inflation) and spending will rise again by 100%.
Not only are the amounts of tax revenues and government expenditures distorted and will be very difficult to recover to normal levels; the big problem is the inelasticity of expenditures. This can be seen in the following graphs
The actual increase in April’s expenditures was less than announced, given the delay in implementing part of the programs, so it was only $132 billion for the month. Aid for business salaries did not have an impact due to poor implementation; financial aid payments were delayed due to the failure to adequately transfer the amounts to registered or banked people. Of the 9 million, only 7 were distributed for a total of $70 billion, but only 3 million people had their accounts paid. There were higher subsidies to transport and energy despite the fall in the marginal cost of generation or the lower use of fuels, something that should be investigated.
In May, the incidence of the programs will be much higher, because the social monetary support began to be paid. In June the impact of these programs will be intense because it includes the extension of the PTAs to all sectors and the payment of the second instalment of the IFE. In July the aid for salaries should be less if there was a gradual opening of the economy – something that does not happen – and the return of the subsidy by some companies that do not wish to have rare people on their boards. The IFE will continue at least until July. Since August, there will be an attempt to eliminate the ATP, although at the moment there has been no opening of the economy in the AMBA or CABA, which makes it doubtful. The situation is extremely complex. Expenditure is 96% inelastic and 64% should be indexed, while income is not at all controllable by the government. After all, it depends on the level of activity that it cannot decide because it has been decided to place isolation above any economic circumstance.
Corporate income and wages will consequently be below inflation because inflation will grow significantly as controls and agreements are relaxed by gradually lifting activity rather than the speed of money circulation.
There is a divergence between the potential behaviour of resources and expenditures, because as these are inelastic they will have to be reduced by liquefying them, starting with the pensions of those who have contributed and receive more in favour of those who have not and receive less, and the privileged pensions that everyone continues to receive.
Therefore – ceteris paribus – a primary result with these characteristics can be projected for 2020:
INCOME AND EXPENSES
Minimum pensions will increase by 46% in 2020 and those of those who have paid 30/40 years will increase by 39%, well below inflation. Both pensions are impossible to liquefy exaggeratedly and exceed 43% of total primary public spending, in other words, they are the most sensitive element in bringing spending closer to income, but only by liquefying it. That is why it was sent to Congress to maintain the discretionary decision of the executive to manage the amount that will be paid to retirees.
The monetary program
When there are no savings in the private sector and no access to credit, the only resource is the issuance and this had to be done to – since before the beginning of the pandemic – cover the permanent fiscal deficit, the maturities of bills in pesos that were not renewed to start alleviating the payment chain.
To be able to offer subsidized loans, banks were forced to sell Letras, which is why the placement rate in the financial system was lowered, causing a movement in the exchange rate gap during April while, besides, an agonizing negotiation of foreign debt continued (and continues).
Already in June, the government had to be financed much more and the objective of ending the Letras has left aside. Banks were made easier to improve the placement rate for savings in pesos, which was even lower than during March. Since March 21, $1,052 billion has been issued so far in 2020, indicating that in 150 days the equivalent of 3.6% of GDP has been issued.
The fiscal deficit between June and December will be over $1.3 billion and as mentioned before, to cover it, an issue of 7.5% of the GDP will be reached. If to the deficit we add the necessary purchases in the exchange market plus the payment of 50% of the maturities in pesos with the private sector and the issue that requires the interest of remunerated liabilities, the issue reaches $2.4 billion, more than 8% of the GDP, in addition to what was already issued between January and May.
FOREX MARKET
As for the reserves, the outlook is bleak and the negotiation of the heterodox, delayed and politicized debt, which generates stress that can lead to major macroeconomic social problems.
In the graph, it is clear why the delay in the debt renegotiation: the net free reserves do not reach U$S 7 billion in free fall since May from the result of the PASO.
Inflation
It has been mentioned above that inflation is around 1.5 because there is a containment of spending (precautionary demand for pesos – people stay with pesos and do not spend and have nowhere to spend either), tariffs are anchored, the pandemic temporarily contained the distributive bidding, and price controls that are ironclad but cannot last, do not facilitate the transfer to costs. But 1.5% in April and the same in May is not a real figure, not even approximately. When restrictions are loosened with a monthly devaluation of almost 3% and a gap changes to over 60%, inflation is barely restrained and will – at the slightest oversight – jump uncontrollably. There are enough unsterilized issued pesos to trigger an inflationary flash. It is impossible to know when or how much because the pandemic objectively and subjectively prevents it, but it will happen irremediably.
Minimum pensions will increase by 46% in 2020 and those of those who have paid 30/40 years will increase by 39%, well below inflation. Both pensions are impossible to liquefy exaggeratedly and exceed 43% of total primary public spending, in other words, they are the most sensitive element in bringing spending closer to income, but only by liquefying it. That is why it was sent to Congress to maintain the discretionary decision of the executive to manage the amount that will be paid to retirees.
The monetary program
When there are no savings in the private sector and no access to credit, the only resource is the issuance and this had to be done to – since before the beginning of the pandemic – cover the permanent fiscal deficit, the maturities of bills in pesos that were not renewed to start alleviating the payment chain.
To be able to offer subsidized loans, banks were forced to sell Letras, which is why the placement rate in the financial system was lowered, causing a movement in the exchange rate gap during April while, also, an agonizing negotiation of foreign debt continued (and continues).
Already in June, the government had to be financed much more and the objective of ending the Letras has left aside. Banks were made easier to improve the placement rate for savings in pesos, which was even lower than during March. Since March 21, $1,052 billion has been issued so far in 2020, indicating that in 150 days the equivalent of 3.6% of GDP has been issued.
The fiscal deficit between June and December will be over $1.3 billion and as mentioned before, to cover it, an issue of 7.5% of the GDP will be reached. If to the deficit we add the necessary purchases in the exchange market plus the payment of 50% of the maturities in pesos with the private sector and the issue that requires the interest of remunerated liabilities, the issue reaches $2.4 billion, more than 8% of the GDP, in addition to what was already issued between January and May.
FOREX MARKET
As for the reserves, the outlook is bleak and the negotiation of the heterodox, delayed and politicized debt, which generates stress that can lead to major macroeconomic social problems. It seems that the negotiators are intentionally thwarting his opportunity.
In the graph, it is clear why the delay in the debt renegotiation: the net free reserves do not reach u$s 7 billion in free fall since May from the result of the PASO.