How will be reach the November 14 elections?
• Counting the dollars
• Counting the pesos
• Activity, Wages and Inflation
Four points for an agreement with the IMF
We are approaching the end of June, the agricultural sector’s currency settlement is diminishing, Argentina’s Central Bank (BCRA) is starting to purchase fewer dollars, and the pressure on the foreign exchange gap and the use of reserves to keep it in check is beginning. The Paris Club partially refinanced the March 2022 maturity and prevented the default and its penalties. The IMF, in turn, announced that the program is moved to 2022, due to which the count of dollars begins to run.
Even after the Paris Club rescheduling, US$ 6.3 BB is maturing until December, of which US$3.8 BB correspond to the September and December capital payments to the IMF. Between January and March an additional US$6.9 BB is due, including two principal installments and one of interests to the IMF for US$4,018 MM and the rest kicked for March of the capital maturity to the Paris Club for US$1,770 MM.
The question is not whether or not the elections will be reached, the question is with what exchange gap they will be reached, and fundamentally, with what level of Reserves. In our exercise, we only include the capital payments to the IMF for September (we assume a quick agreement between November 14 and December 22). We also include a path of gradual reduction in the pace of the BCRA’s purchases until such purchases become sales after September (the magnitude will depend on the handling of the imports flow, which in May they recorded once again a jump to US$5.1 BB) simultaneously with a growing rate of intervention in the exchange gap. In this simulation, net reserves (today at US$6.8 BB) would go down to US$3.46 BB in December including the disbursement of US$4.375 BB of the SDRs that would flow in between August and October.
The US$12 BB fallen from “heaven” resulting from the SDRs and the jump in the price of soybean would be just about entirely allocated to finance the election. Again, the cost of keeping procrastinating, in a context where the political side works once again as if there were no associated costs.
With the maturity profile that exists until March 30, 2022, by when part of the maturities with the Paris Club was postponed, after November 14 there will be no room to continue procrastinating. The agreement with the IMF should be signed before December 22 in order to prevent the payment of the second installment to the agency.
The fiscal situation and the excess pesos in the economy are significantly looser than the market forecast a few months ago. But the read now is that this is transitory given the pressure of the political side to drive the economy by boosting spending. On the spending side, even with the political wing pressing, the fiscal consolidation is unlikely to be reversed in 2021 triggered by the dilution of pension spending with revenues that rise driven by the jump in inflation, the recovery of the economy, the increased exports duties and the wealth tax. The pre-interest deficit in 2021 should be at around 3% of GDP. The risk is in the carry-forward left for 2022 when extraordinary revenues do not exist and the pension mobility recovers from the dilution suffered this year.
In our baseline scenario, the economy will reach November with a dollar at $102,5, a higher foreign exchange gap between 80% and 90%, an economy growing by 6.9% in average and an inflation rate at around 50% YoY (November at around 2.5% monthly).
A default with the IMF is no option; not only does the Paris Club demand an agreement with the IMF as a guarantee to restructure its maturities, but also China demands it to sustain disbursements to finance investments it is making in Argentina. Inside we include four guidelines the agreement with the IMF should/could include.
