Boosting full throttle
The Short Blanket … Chapter III
Available Funding
Trade Balance … different versions
Fiscal and quasi-fiscal gap (accrued)
Vulture Funds … E ngland vs. Griesa
The appreciation of the dollar leads to greater exchange rate lag
The financial calm reached in December is comfortably held at the start of the year. The recovery of Reserves thanks to the “water canteens” which the government obtained (Swap with China, dollar linked bond matched with advances of currency settlement of cereal exporters and 4G tender) added to the “normative” restrictions on banks and the use of the exchange rate as a semi-anchor, have allowed interest rates again to overrun in the economy. The rate of Lebacs at around 26/29% depending on the term allowed to withdraw 40% of the peso issuance to close the weight gap for the fourth quarter of 2014 and sustain the growth of the monetary base at around 23% yoy. At the same time, the use of the exchange rate brake starts validating an improvement in real incomes (wages, pensions and social plans) and a consistent increase in demand after the adjustment seen early last year when the attempt to gain competitiveness through to devaluation (first slowly and then suddenly) collapsed through inflation the purchasing power of wage sectors. This increase in demand will be more evident in the next two / three months after the union joint wage negotiations are launched together with the strong increases (some already announced) in public social spending.
But this “strategy” to boost the economy in the election year again collides with supply constraints which in the short term can only be managed with financial currency if Reserves are to be protected to an extreme. In the absence of an external agreement, which seems to be delayed waiting for a definition of the English justice to unlock the default next March, the Government faces the following options: 1) place debt in the market validating higher rates (at current prices of assets, the failed attempt in December to swap the Boden 15 and issue Boden 24 could work today, even at a lower rate than the 9.7% offered then), 2) issue debt internally; or rather debt in pesos adjusted to the dollar for exporters (dollar linked) or rather debt in dollar for importers and 3) advance in the use of the swap with China, an operation which is already in full effect. This is topped with debt placements that are already being made by YPF (US $ 500 million at 8.75%) and which will surely be addressed by the Provinces to cover their dollar maturities for year-end (US $ 1.5 billion between Buenos Aires and CABA almost simultaneously to the expiration of Boden 15). Our forecast is consistent with placements of US $ 8 billion in 2015 (US $ 1.5 billion for the National government, US $ 1 billion for the provinces, US $ 1.5 billion for the private sector -including US $ 1 billion for YPF- and US $ 4 billion remaining for the swap with China). 5 billion between Buenos Aires and CABA almost simultaneously to the expiration of Boden 15). Our forecast is consistent with placements of US $ 8 billion in 2015 (US $ 1.5 billion for the National government, US $ 1 billion for the provinces, US $ 1.5 billion for the private sector -including US $ 1 billion for YPF- and US $ 4 billion remaining for the swap with China). 5 billion between Buenos Aires and CABA almost simultaneously to the expiration of Boden 15). Our forecast is consistent with placements of US $ 8 billion in 2015 (US $ 1.5 billion for the National government, US $ 1 billion for the provinces, US $ 1.5 billion for the private sector -including US $ 1 billion for YPF- and US $ 4 billion remaining for the swap with China).
This availability of funding (even at high rates) and almost US $ 4 billion less in maturities in the scenario without agreement than under the scenario with agreement with the vulture funds (including the payments locked by Griesa plus new debt flows), is what leads us to sustain a growth scenario of 1.5% in 2015 and an inflation at 25% with the dollar moving 15% ($ / US $ 9.9 as of November 30th) and union wage agreements closing at around 30/32%. Despite the higher growth (1.5% vs. 1.8% drop estimated for 2014), a scenario with lower inflation and lower devaluation is consistent with a significant moderation in the evolution of tax revenue (26% projected for 2015 vs. 36% obtained in 2014). And, counter to the virtuous fiscal rule, we have maintained since 2005, where Public Expenditure should systematically grow below Resources, for 2015 expenditure will most likely grow again well above resources. With resources growing at 26% and expenses growing at 30.4% (pensions at 38% would be partially offset by lower nominality of subsidies which should reflect the fall in oil prices and lower depreciation), the fiscal deficit would increase from 4.5% of GDP in 2014 to 5.2% in 2015. Even with the currency closed, the monetization of deficit in 2015 will require additional efforts from the BCRA consistent with an interest rate probably higher than the current one.
Once the government decided that it would not make a new adjustment through prices and with available funding to prevent further adjustment by amounts, it is not understood why the government would not use it to supply the increased demand that the policies themselves generate. Indeed, we believe that the shortage of liquidity in the third quarter of 2014 mutated to restricting payments to importers, will be handled in 2015 by resorting to borrowing. After all, the implicit financial cost will be paid by the next administration which will receive an economy with distortions (delayed exchange rate and tariffs, exchange rate gap, a central bank with high interest-bearing liabilities and less Reserves and the pending arrangement with vulture funds, which at the beginning of the year would accumulate arrears for debt restructured in 2005 for US $ 3 billion) and a level of popular that can only be financed with more debt. The logic of politics in an election year is always so.
Paradoxically, a significant stabilization of the economy in the short term is given by the expectation of corrections at the end of 2015, in a context where currency restrictions and regulations limit the adjustment through quantities and where stabilization of prices of local assets at high levels ( even without an external agreement) keep open the availability of funding to sustain. However, the stability of this scenario at some point, as we approach the elections, could mutate depending on the outlook for management of the outstanding problems in the next administration. It is in this context that we consider that the import (DJAI and access to MULC for prearranged payments) will loosen sooner rather than later.
