The account in dollars and pesos, a month later
Activity hits a low, inflation reaches a ceiling?
Elections: two readings
Finally, the Government decided to go through the months leading up to the elections without an agreement with the IMF that might decompress maturities, betting on maximizing the use of the additional US$12 BB which, like a “heaven’s gift”, will flow in this year from the issuance of the IMF’s SDRs and the jump in the price of soybean.
What was supposed to happen finally materialized. As in “chronicle of a run foretold”, the pressure on the exchange rate gap starting in mid-June went deeper in the seventh month of the year with a rise of just about 10% in the black-market dollar. The cross-capital controls between the CNV (local SEC) and the Central Bank (BCRA) in mid-July barely “worked” for a few days, and the demand for financial dollars came back in full force. Despite the fact that the agricultural sector’s settlements remained high, net reserves hit a cap and accumulate a drop of almost US$1.3 BB from the record high of US$7.3 BB in mid-July.
Lower purchases on the MULC, the growing use of dollars to intervene in the exchange rate gap and the ticking clock of payments to international agencies explain the drop in net reserves and feed back expectations in the face of the concentration of maturities in dollars with international agencies in the months to come.
The $179 SENEBI dollar is “insanely high” and contrasts with a dollar of $160 at today’s prices at the 2002’s record high, only explained by the lack of a horizon after November 14; while the BCRA starts to systematically lose reserves and the Treasury finds some difficulties to refinance maturities in pesos. Specifically, $225 BB matured this week, of which 17% were held by non- residents. The bidding of indexed instruments (including the extension of two dollar-linked issuances) attempting to extend terms into 2022, was not enough. It only managed to place $146 BB, due to which the difference will surely have to be covered by transfers from the BCRA that it will later have to sterilize and the Treasury will have to offer more appealing instruments in future biddings that factor in a rise in rate on short-term placements.
In the second half of the year, we expect a brake in the fiscal correction observed in the first half. Partly because the extraordinary revenues are gone, partly because the dilution of pension payments resulting from the jump in inflation with the new mobility formula begins to be reversed, partly because of the very electoral dynamics. For the moment, the announcements of higher spending are moderate. As if politics had also been trapped in the implicit monetary delusion at “amounts with many zeros”. For now, the expansion of social programs announced so far amounts to $275 BB, 0.64% of GDP, against the almost 3.4% of GDP spent in 2020.
We are still considering a primary deficit at around 3.1% of GDP for the whole of 2021, 2.6% of GDP in the second half of the year. The deficit might amount to $1.4 BB (not all that different from that included in the budget for SPNF). With this projection, the remaining deficit in the following five months would amount to $1.05 BB. To this, we should add capital and interest maturities on the market for $0.8 BB. The rollover and the ability to finance part of the fiscal gap on the market of pesos is beginning to be tested and pressure the monetary program, which will eventually require more pesos from the BCRA (which should be redeemed with LELIQs and/ or Repos).
The exchange rate pressure coexists with an acceleration of vaccination and a decompression of the health system. At the same time, it coexists with a rebound of the economy since June that coincides with the reopening of activities, and the electoral impulse that put pressure on the exchange rate gap, the inflation, but also has some effect on quantities. The slowdown of the inflation is slower, as a counterpart of the boost on wages, the reduction of the income tax and the widening of the exchange gap that encourages “getting rid of pesos”. In our scenario, the year ends with 49% inflation and 7.3% growth (basically due to the carry-forward).
For now, Argentina “continues” after November 14, and the concentration of maturities in dollars in the first quarter turns a prompt IMF agreement imperative. Such program should be passed at Congress, which calls for easier agreements to reach if leadership in the different spaces align after an election which, a priori, looks quite even and will not define relevant changes at Congress. The Government is unlikely to lose its majority in the Senate (today it has another 5 senators) and it is unlikely to obtain its own quorum in the lower house (it is missing 10 representatives).
Lastly, we include an early sketch of the program and the 2022 scenario on whose consistency and sensitivity exercises we are working and will present shortly in another report.
