Report #153 – November 14th of 2019
The Inheritance after the shock
The urgency of a stabilization plan
The “MUST DOs”
“No cooperation on sight, as far as we know”
Focusing on:
Fiscal consistency
Monetary consistency
The reprofiling
After almost three months of coordinated anomie due to the Primaries outcome, on October 27 the election year came to an end confirming Alberto Fernandez as President, but with more balanced forces than in August.
However, there is still no cooperation window on sight, which should be expected with a lame duck in power until December 10, and the sure risks that the inheritance will worsen if no decisions aimed at stabilizing the economy are taken in a country with no credit and decreasing reserves to finance the transition.
The political rationale of not announcing a minister so as not to “erode” him, goes counter to the uncertainty and costs triggered by companies and families seeking to protect themselves in the face of contradictory news and an exchange gap at a lingering 20.3% with the MEP dollar and 29.3% with blue chip swaps. This takes place in an economy with full-blown dollarization, but which lives alongside plummeting demand for pesos after the dilution of debts resulting from the exchange jump from $17 in late 2017 to $60. And which, depending how the future economic policy is managed, faces a potential shock of pesos (due to the looming end of LELIQs, the muturities of debt in pesos, and December’s fiscal deficit) with a central bank (BCRA by its initials in Spanish) with lower and lower reserves.
From importers speeding up payments, exporters registering and paying dues set at a fixed amount, families buying air tickets for trips abroad and making use of credit cards in dollars, individuals with a certain level of net worth setting up trust funds to absorb the risk of a huge tax impact, companies readjusting prices preventatively, and speculative purchases of very short-term papers with a Treasury that is still paying debt in pesos and dollars with reserves and issuing pesos with prices that factor in a potential agressive restructuring.
The political side also shows the reaction to a lack of a roadmap over the transición. In the very-short term, and after the fact that over the week before the elections, US$3 BB out of the US$23 BB drop in reserves after losing the Primaries was lost – from US$66.5 BB as of August 9 to US$43.5 on the previous Friday -, the BCRA responded, literally, to the demand Alberto Fernandez made on the Media in previous weeks. Such demand included: taking care of reserves, keeping the dollar at $60, and lowering the interest rate by accelerating the end of LELIQs.
In order to make progress on this tripod, impossible without a viable plan that generates trust in an administration with no horizon, the BCRA set up exchange controls virtually preventing any dollar purchase by individuals that still could do it from a monthly US$10,000 limit as of August 30 to only US$200. The rusticity of the first announcement came with a “kafkesque” information regime for imports higher than US$2 MM per month and the obligation of customs clearance before 90 days, attempting to keeping the incentive to accelerate imports payments in check and some subsequent measures to cover gaps basically by the use of dollars in credit cards.
Amid this uncertainty, the economy adjusted: the drop in GDP would accumulate 11% by year end since the onset of the crisis in April 2018 (half as much as that in 2001), the current account deficit would drop from 5% of GDP in 2017 to a balance point by late 2019 and the 4% fiscal deficit of GDP before interests in 2017 (5% if the extraordinary revenues from the tax amnesty are not considered) to a deficit of around 1.5% in 2019.
But given the 60% indexation of the Nation’s public spending (the pensions mobility adjustment) and the plummeting of tax collection (deeper recesión, Macri’s fiscal measures post- Primaries and the dilution of the taxes on exports set at a fixed amount), the fiscal correction starts to show a rapid gap unless inflation continues to soar year over year and indexation comes to an end. All this in an economy in which, as we said before, the demand for pesos plummeted against an inflationary jump that might reach around 60% by year-end.
If the incoming administration does not carry out a stabilization plan that positions the debt negotiation within a program which, in addition to the prices and wages agreement, breaks the inflationary inertia and simultaneously sustains fiscal and monetary consistency, it is not possible to even think of starting up the economy.
Fiscal consistency requires that the pension scheme, rates and the exchange scheme (including the logical recomposition of tax rates) be into the nominality aimed at in the prices and wages agreement without the exchange rate gap soaring.
The monetary consistency, in addition to primary equilibrium signs (before interests), will call for a definition about the debt considering that 2020 faces the maturity of about US$30 BB on the market, half of which in dollars, half in pesos. And it is not clear that the demand for pesos can absorb maturities for the equivalent to 80% of the monetary base in 2020. Such maturities are added to the LELIQs stock and Repos, which despite the accelerated end after the Primaries, they still amount to 70% of the Monetary Base, and are the flip side of the peso deposits at banks. The interest rate is the fourth price to include in this scheme, but it should be the result of the consistency of the program and not an ex ante definition as some propose in order to boost credit.
Stabilization is not the solution to Argentina’s problems, but in the face of financial dynamics like today’s, with a credit event risk, problems with banks, and inflation with recesion spiraling, it would provide the political side at the very start of the process with some leeway to face a longer-term agenda. The margin to start up the economy without previously destabilizing it looks very risky.
For the moment, and even when 18 days have spanned since October 27, we still seem to be running a campaign with opposite proposals in each front and without a roadmap on sight to coordinate them.
