Adjusting projections, here and worldwide
COVID-19 in LATAM
2020… GDP, Inflation and Fiscal Deficit
Pesos for everybody … also for the Treasury
How does all this continue? Fundamentals vs. Program
2020-2021 Scenarios
Amid an extremely volatile global scenario, with enormous uncertainty about the future of the virus and governments’ trade-offs that are faced withpreventing health systems from being overwhelmed or economies from plummeting, the IMF corrected global growth almost 8 p.p. (+3 in January to -4.9% in June). Meanwhile, the financial market (flooded with liquidity through measures taken by the main central banks of the developed world), went from buying “good and cheap” assets amid the brutal profit-taking in March to buying “cheap” ones in July, including emerging risk and companies directly hit by the pandemic. In this context, not only neighboring economies return to the credit market, but even Ecuador, which had been in a standstill in April, in order to prevent the default reached in the first week of July through an agreement with the same group of bondholders Argentina is still negotiating with.
While this is happening, the short- and medium-term debate in Argentina is slipping again. Far from taking advantage of the political wealth provided to the Presidentby the rapid handling of the pandemicin order to seek consensus and distribute lockdown-related costs, the divide rose from the very contradictions in the Government’s coalition. Behind an endless zigzag of announcements with no clear goals, the escalation in questions such as whether “Argentina is Venezuela” does not help reach a stabilization point.
We once again corrected the fall in GDP and inflation downwards, and the fiscal deficit upwards to -10.5% of GDP, 40% inflation and 7.5% the primary deficit in 2020. Corrections which, for the time being, are not too different from those in neighboring countries as infection cases continue on the rise, although, certainly, the lack of access to credit to finance the jump infiscal problems makes managing the post-pandemic way more challenging.
The other side of this leap in the fiscal deficit is growing financing of the Treasury, which so far this year, has accumulated $1.36 BB while the sum of the monetary base and the remunerated liabilities of the Centra Bankgo from 11.5% of GDP in October’s elections to 18% of GDP today and through this fiscal projection could reach 22.2% of GDP by year-end. This contradiction, growing monetary financing with a projection of downward inflation, coexists in the transition with a demand for pesos that is contained by the lockdown, and where also free prices (37% of the index) practically double the CPI (42% of annualized inflation of free prices in the past three months). But the balance is certainly unstable.
Today theborrowing rate at 30% set bythe Central Bank far exceeds the annualized inflation rate of the last three months (21%), is below the official devaluation rate (37% annualized) and remains balanced in a context where the exchange gap fell (from $125 to $113, the blue chip dollar), with a new twist on controls.
Meanwhile, pesos issued by the Central Bank to finance the Treasury return to the banks with no demand for credit outside of the subsidized lines (24% allocated to SMEs and 0% to self-employed) and now there are pesos for everyone. There are pesos to put pressureon the exchange rate contained with ever tighter controls, pesos to put pressure on the Central Banks’ reserves, pesos to finance the subsidized lines of the banks, pesos to finance the placement of NO of creditworthy companies and otherwise, and there are even pesos to supply loans to provide provinces’ placementsand even those of the Treasury itself (with public deposits in pesos that grow simultaneously). In fact, after having reached an agreement with PIMCO to solve the BOPOMBO maturity in late June for a dollar bond, the Treasury begins to roll maturities of pesos with short-term obligations and in July there could even get some additional financing with the expectation that, at some point, there may even be pesos to finance part of the fiscal gap. It is worth remembering that the remaining peso needs until December virtually double the Central Bank’s available profits.
In this context, we open once again binary scenarios for 2021 that we call Stabilization or Stagflation. Scenarios that depend on sustaining global liquidity and on containing the virus both in our country and in the developed world, but fundamentally on three additional variables that make the management of economic policy:
- finally reaching an agreement that promptly solves the default,
- aconcrete sign of post-pandemic fiscal consolidation,
- and a negotiation with the IMF that allows decompressing the concentration of maturities that starts in September 2021, and is concentrated in 2022 and 2023.
Starting from a violent adjustment that forcibly adapted relative prices and restored the surplus of the external accounts, and with a Government with political support to manage the bid distribution, the maneuvering room to stabilize and underpin the rebound of the economy appears once again.
Of course, if an agreement on the debt is not reached, there is no progress before the start of the election year in a postponement of maturities with the IMF, and a fiscal deficit at around 6% or 7% of GDP continues to be monetized in 2021, the risk that the exchange pressures from the monetary mismatch deepen and spawn a new price and wages spike that prevent the reboundincreases. Mentions to the New Deal or Marshal plan keep coming up in this scenario.
Of course, if an agreement on the debt is not reached, there is no progress before the start of the election year in a postponement of maturities with the IMF, and a fiscal deficit at around 6% or 7% of GDP continues to be monetized in 2021, the risk that the exchange pressures from the monetary mismatch deepen and spawn a new price and wages spike that prevent the reboundincreases. Mentions to the New Deal or Marshal plan keep coming up in this scenario.
