The day came… CACs were triggered and the default is over
Unviable gap… Does the dollar jump or is the CCL compressed?
July and August. Fiscal Adjustment with anti-adjustment
4.5% of GDP in 2021. Recalculating the scenario
The countdown on the Central Bank’s reserves, which in August sold US$1,250 BB, and another US$430 million in the first three days of September, with an exchange gap of 70%, a blue-chip swap dollar 10% higher than the 2002 overshooting in real terms, surplus of external accounts and net reserves (Swap with China of Reserves, of Basel, of Repos with Local Banks and Sedesa) in US$6.9 BB, takes place simultaneously with:
1) A world with abundant liquidity. Last week the Federal Reserve announced a flexibilization in its scheme through an average inflation target, so that it may be above 2% per year for a while before starting to raise its interest rates, extending the risk on the global scenario.
2) A debt swap that reached 99% of the bonds under international law (triggering CACs), and which decompressed the concentration of maturities in dollars until, including 2024.
3) A Government’s letter, sent last week, to the IMF requesting to begin negotiations to decompress the US$44 BB of capital maturities with the agency starting in September, 2021 (just a month before the mid-term elections) and are concentrated in 2022 and 2023.
4) An incipient short-term fiscal consolidation that, along with a Treasury that starts to obtain pesos in an “oversupplied” market at very short terms, significantly reduced monetary financing and accumulated an increase in “cash” via an accelerated rise in public deposits. Of the $430 BB that the Central Bank (BCRA) transferred in May and the average $210 in June and July, in August the BCRA’s check rose to just $40 BB. This with a fiscal deficit that in July accounted for almost $100 BB below the average $240 BB in the previous three months, consistent with an 59% increase in the primary spending (32% when spending to make up for COVID damages are excluded) vs the y.o.y. April’s and May’s 100%, and a projection for August even better considering that financing between the BCRA and net placements on the market totaled $100 BB.
It is true that, on the other side of the $1.5 BB transferred to the Treasury since early this year, the excess of pesos in the economy is very high; the sum of the monetary base and the BCRA’s remunerated liabilities is twice as much as that in last October’s elections ($5 Tr vs $2.5 Tr) and in GDP points it goes from 11% to 19%. And this occurs with a demand for pesos that begins to get decoupled with the lifting of the lockdown and with an interest rate in pesos that is disassociated from the inflation expectations.
But starting from these exchange gap levels, with a high official dollar and a restructured dollar debt, the BCRA’s maneuvering room to win the battle in the short term is significant. At current parities, the BCRA has US$6 BB (US$13.7 BB in binaries that would be exchanged for the 2030 and 2035 bond) with which it could intervene in the blue-chip swap dollar market simultaneously withdrawing pesos from the economy, reducing the exchange gap and rearranging upwardly the peso rates. Additionally, the Treasury and the BCRA could offer exporters instruments indexed to the exchange rate as a mechanism to accelerate settlement and alongside moderate the devaluation expectations implicit in the Rofex.
The dynamics described above progresses – with shades – and incorporates the four conditions, which we claimed in our previous monthly report, were required to stabilize the macroeconomy in the short term: global liquidity, the debt agreement, the agreement with the IMF, and fiscal consolidation. But all this coexists with a political side that hides “the adjustment” while preaches against fiscal austerity and, far from attempting to “calm the economy”, adds fuel to the fire with a battery of decisions that generate enormous confusion. Not only with respect to Argentina’s growth path if recovery consolidates and the increase in imports dilutes the current account surplus (what we call a long-term agenda underpinning systemic competitiveness), but also with fronts that open weekly and which certainly stop any consensus that might allow taking advantage of the alignment of relative prices to readjust the inflationary inertia by maintaining a balance between signals to investors and clarifying who pays the costs in the face of the need to adjust fiscal imbalance.
This takes place simultaneously with a spike in the number of COVID cases country-wide, but especially in several provinces that until now were on the sidelines, while the lockdown is being de facto lifted with a logical rebound in activity and an acceleration of the inflation rate. For the first time in June, the rebound in activity was grater than that included in our path (7.5% s.a. monthly vs the expected 5%) and July’s first data show that the brake through the return to the “virtual” phase 1 of the lockdown in AMBA was very limited (between 1% and 2% seasonally adjusted monthly decline consistent with a year-on-year drop in activity of around 15% compared to 26% in April). On the other hand, according to our Retail Price Survey (RPM) the 1.5% monthly increase in prices in April/ may would move to 2.6% in August with flexible prices rising to 4% and the dollarized ones to 10%.
We maintain our scenario for 2020 of a fall between 11%/12% of GDP (with a positive carry-forward of between 5% and 6% for 2021). An inflation rate of around 38% at the end of of the year with an official dollar close to $83 (consistent with the crawling peg at 2.7% per month) and an exchange gap falling back to 60%. Starting at the 4.5% of GDP announced for the fiscal deficit, the 2021 dynamics will depend on the ability for the market to build a post-restructuring situation that decompress country risk, moderates monetary financing and prevents a spike in nominality via an exchange gap that does not compress and ends up forcing the BCRA to devalue faster. As when a ball hits the net in a match point and fate defines the match, for the moment global liquidity helps it to fall on the right side, but paradoxically – and against its needs – politics pushes it towards the wrong side. For the time being, on the first day of listing of the new bonds, dollar-denominated securities under foreign law trade with an average IRR of 11% (10.5% for the shorter ones and between 11.5% / 12% for the longer ones), still with little volume traded.
