And to top it off… Coronavirus showed up. Resetting the world and Argentina
Coronavirus’s Global Impacts
Central Banks and Governments to the rescue of the economy
Coronavirus in Argentina
Resetting scenarios for 2020
The complex makings of the economy with global financial markets, which had climbed to maximum levels based on increasing leverage resulting from low interest rates, now face a violent supply shock due to the measures countries have to take to constrain the spread of coronavirus. This supply shock started last January when China got drastic isolation measures underway by quarantining entire cities and bringing the supply of many global value chains to a halt. But today it is spreading at an unprecedented speed with whole countries under quarantine and a world closing borders.
Markets’ reaction began to increase as the spread of the pandemic became known and the economic costs related to the measures taken were quantified. The fall on the American stock market has accumulated 32% since mid-February, with volatility escalating to levels even unheard-of in the 2008/2009 crisis. Even assets such as gold and American treasury bonds, which at the start of the correction were used as a refuge for value, have shown drops in the past week in a world where liquidity is sought increasingly.
International political measures to attempt to contain the economic costs related to isolation had also been unthought-of not only because of their magnitude, but also because of the speed at which governments have applied them. Every day new monetary and fiscal policies are adopted, focused on keeping the economy alive, that is, maintaining banks and companies on their feet against a temporary violent supply shock and a radical change – also temporary – in the demand structure.
On the one hand, Central Banks lowered the interest rate aggressively as down as to zero rate, injecting enormous volumes of liquidity to limit the systemic contagion triggered by the dismantling of leveraged positions and announcing a new coordinated program of quantitative expansion. On the other hand, a strong reaction from governments through fiscal measures unprecedented since the Second World War that include different combinations of sending checks to families, tax reductions, deferments of the payment of mortgages, services, and rents with state compensations, tax moratoria and unlimited credit lines. There is even the possibility of the states themselves taking part in the production of critical goods, inputs and services to manage shortages throughout the pandemic and thus manage the inevitable reaction of relative prices in the face of market distortions generated by the combination of a supply restriction with a total retraction of demand in many sectors.
The monetary and fiscal injection in the developed world is unprecedented, and it will surely cause abrupt changes in the workings of the world once this story comes to an end. But while the pandemic advances, it is not enough to stop the global economy diving into a recession whose magnitude will largely depend on the extent to which “social distancing” decisions make the contagion curve reach its top, as in China and South Korea, and then start its way down. Global growth projections continue to be adjusted downward. In just two weeks, the IIF lowered its global growth projection from 2.6% to 0% with China growing only 3.2%, Europe falling 2.8%, Japan 1.5%, and the USA 0.4%, and every case includes a sudden contraction in first and second quarter and a strong rebound in three and fourth quarter.
The rapid reaction of the Argentine government, the spearhead in Latin America in taking drastic decisions to contain the contagion effect with Alberto Fernández at the helm of the situation, allows him to regain the initiative after the difficult first months of government. There is not only an external stimulus to defend ourselves from (“the Coronavirus”), but also the virus will be the culprit of the macroeconomic deterioration in the next few months labeled as “war economy”, during which anything goes to minimize costs. Until two weeks ago, this deterioration was associated with the growing default risk given the delay in the debt management, but which is now faced with such a shock of supply and demand that depending on its duration, it would add an additional fall in the economy of approximately 1.2% and 3.2%, on top of the previous scenarios we have been considering (without default and with default in 2020).
So far, the compensatory fiscal and credit measures adopted this week are prudent from a fiscal viewpoint and with little practical impact, but the fiscal deterioration will be more associated with the effective drop in collection against the recession and interruptions in the payment chain. Meanwhile, the monetary expansion to finance the higher fiscal gap may have more limited effects on inflation in the coming weeks than it may have had before coronavirus, even if the currency gap widens.
On the one hand, the tariff lag is clearly moderating with a barrel of oil at $23 and could decompress depending on how transportation and energy subsidies are managed, even in a higher-dollar context. On the other hand, a jump in the distributive struggle is not expected under these circumstances in which the unions’ priority will be focused on sustaining jobs. But also, government controls through the supply law that two weeks ago seemed anachronistic, today are beginning to be adopted by other countries and in the short term, they could work.
Shortages are likely to be managed through these measures in the transition. It does not look like a medium-term strategy once the emergency fades away, the monetary injection remains and distributive struggles and shortage emerge once again. In this context, debt should be managed quickly, prioritizing pragmatism to clear away short-term maturities by trying to bypass the default, but fundamentally limiting the growing deterioration of the Central Bank’s balance sheet if in the transition it continues to deplete reserve dollars and issue pesos aimed at the maturities which are not refinanced, in addition to financing the widening fiscal hole. Eventually, the IMF’s undisbursed credit or the swap agreed on with China could be used to rebuild reserves if speculation about the IMF capitalization or the distribution of DEGs among member countries (as in 2009) does not occur.
As in the rest of the world, the priority is to manage the emergency by taking care of all the fronts so that when the problem fades away, the economy is not shattered.
