The Trial in NY: The government improves its negotiating position
2015: Readjusting Scenarios
2014 Inflation: neither 40% nor 24%
Income tax: Misapplied progressive tax
The drop in Crude Oil:
Impacts on the Global Economy
Impacts on Argentina’s economy in short and medium term
In the past month, the dollar shortage scenario improved. On one hand, some of the sources of income we mentioned in our last monthly report came into effect (swap with China, 4G Bidding, Agreement with cereal producers, etc.) driving Reserves back to around US $ 29 billion while starting to slowly lift the restrictions on access to FX for net importers. On the other hand, the discursive noise against the Vulture funds has moderated and the expectation of initiating negotiations in January after the expiration of the RUFO clause has begun to emerge, while in parallel deciding to open up to credit markets validating high rates through the announcement of the swap of the Boden 15, which in fact included a veiled issue of up to US $ 3 billion in Bonar 24.
This financial calm allowed the break in devaluation expectations implicit in the futures market while -through a recovery in prices of financial assets in dollars- also dropping sharply the exchange rate gap down to around 36% in the cash settlement market and to 50% in the marginal market This allowed to moderate the sharp fall that was envisioned for the level of activity in the last quarter of this year (from -5% yoy to -4%), and the closure of 2014 (from -2.5% to -2.2%) and The consequent negative statistical carryover for (from 2.2% to 1.7%).
Simultaneously, the dynamics of commodity prices with a 15% increase in the price of soybeans up from its minimums, and an oil price which accumulates to a decline of nearly 40% from its maximums, contribute -and not by little- to stabilize the scenario for 2015. The rise in the price of agricultural products sustains our exports scenario which had always been incorporated into soybean price of US $ 380, and never included the minimum values reached by the US harvest. Meanwhile, the drop in oil prices has certainly favorable short-term in the context of strong disequilibrium in the foreign exchange and energy “fiscal” balances and the huge backlog in domestic energy prices (excluding liquid fuels whose prices are already above international ones) . In other words, although the fall in oil prices is not good news for some of the investment projects in Vaca Muerta (especially those associated with oil, it is not necessarily so for those with gas, where the import parity keeps increasing to multiply by five the average local price received by the producer without government subsidies), it has three very significant short-term effects: 1) it reduces the energy currency gap by approximately US $ 2.7 billion, from the US $ 7.7 billion forecasted initially for the 2015 baseline scenario; 2) it contributes to moderate the fiscal gap. With a currency semi-anchor and with an assumption where only 70% of the drop in the price of oil is transferred, energy subsidies (13% of Public Expenditure before interest) would remain virtually stable in pesos in a context where income from export taxes on fuels have lost all relevance after the plummeting of exports and the drop in rates of 2013; and 3) it dampens inflationary pressures due to the stabilization in the price of gasoline (unlike what happens in USA where the transfer to the final consumer is immediate with a decline of over 20%, in Argentina the news is that gasoline prices have stopped after accumulating an increase of almost 40% so far this year) and due to the lower pressure implicit in the pending readjustment of relative prices. The magnitude of the distortion is still huge,
As a result of the fuel policy being short-viewed in recent years and of the loss of self-sufficiency, in the short term Argentina remained “short” in oil, now benefiting from the fall in price, similarly to what happened in the US , Europe and Japan among developed countries and in China, India, Indonesia and Turkey among the underdeveloped ones, which have extra leeway to manage monetary policy in a context of lower inflationary pressure. Of course, in Argentina the magnitude of the fiscal gap only cushions the range of fiscal dominance marginally, transferring the pressure onto the Treasury’s financing strategy and onto the management of the rest of the public spending, a key issue in the election year. Different are the cases of Venezuela,
The combination of news about the attempt to open the capital account (via the announcement of the placement of Bonar 24) with the new set of international prices, led us to modify the scenarios we stated in our previous report. On one hand, we revised downwards the level of imports in all three scenarios, considering that at the current price of fuel imports (17% of the total) are expected next year to show a drop in their prices of around 27%. On the other hand, we redefined scenario 3 (no agreement) to an intermediate point where the government attempts to open the capital account almost parallel to the end of the RUFO clause and the possibility to offer better terms in the negotiations with the holdouts. Validating higher rates does not have immediate costs and -if it succeeds- it has quick profits in terms of availability of dollars.
What is clear is that the government has already decided that debt is the only option that can finance a political transition in 2015 without further adjustment of the level of activity. And if this is the case, it will increase the ability of the economy to achieve during 2015, through the use of the dollar as a semi-anchor, to moderation of inflation and an improvement of the level of activity, depending on the current availability of dollars. In any case, the combination of an overvalued exchange rate and decline in reserves leads to a situation where it is likely to see a recurrence of exchange rates pressures as we approach the elections and the change of government, in parallel to a recovery in prices of local assets.
