[Activity] March, with just 10 days of quarantine, and April’s early activity data is worst than expected and looking like a 2001 crisis kind of contraction. The government is stepping up its assistance to the private sector and the coronavirus outbreak announcements now total 3.2% GDP. Fiscal cost is about half that figure, but likely to increase as several measures will continue (like the Emergency Family Income). The lockdown is gradually easing but still is very strict.
[Monetary] April ended with ARS 310bn of transfers from Central Bank to the treasury, equivalent to 78% of the total fiscal revenue, and since December it accumulates ARS 910bn or 3.3% of GDP. Loans to the private sector are also growing significantly and raise concerns about monetary expansion.
[FX] Despite the tightening of capital controls, the Central Bank had to intervene in the official FX market, and as a result, net reserves continued falling and now stand at the lowest level in three years. Since April the CB has sold USD 0.7bn in the FX market.
[Prices] Inflation remains stable and at low levels. Distribution of price changes continues tilting in favor of lower increases (and even reductions!). We find that 47% of our monitored prices decreased. Inflation is expected to remain subdued.
March data, with just 11 days of quarantine, shows signs of activity collapse. INDEC’s manufacturing production decreased -17% MoM (seasonally adjusted) and -16.8% YoY, while construction activity dropped -32.3% MoM and -46.8% YoY. Private estimates for both sectors (released earlier) showed significant contractions, but official data was worse than expected. Combining these figures with the fact that March only had 10 days with full lockdown, activity is very likely nosediving.
Monthly GDP, Manufacturing Production and Construction
Early reading of April’s data confirms worst expectations. Activity related tax revenues dropped -31.6% YoY, and sectoral indicators are very negative as well. Private estimates of construction report that activity plummeted -74% YoY, while auto production dropped to zero units for the first time in history (both domestic sales and exports fell -88% YoY) and retail sales decreased -57.6%.
Activity related tax revenues vs Monthly GDP
Government is stepping up its assistance to the private sector. AFIP announced that 158,000 companies, which employ 1.6m people, qualified to receive official assistance to pay workers’ wages (up to ARS 33,750 per employee). Requirements to receive compensation were relaxed and it is estimated that 30,000 more firms will benefit from this measure. This policy involves nearly ARS 35bn and the policy reponse package to the coronavirus outbreak now totals ARS 941bn (3.2% GDP). Fiscal cost is about half that figure, but likely to increase as several measures will continue (like the Emergency Family Income).
Apple Mobility Report (7-day moving average)
The lockdown is gradually easing, but still is very strict. Aggregate data from Apple shows mobility is 20-27% of pre-lockdown baseline level (depending on the mean of transportation), However, these figures have been increasing since the enforcement of the lockdown, which can be explained by the lifting of some restrictions and some “lockdown fatigue”. Nevertheless, mobility in Argentina remains far below levels seen in other countries of the region and even those most affected by the pandemic (such as Italy or Spain). Though a strict lockdown might help in “flattening the coronavirus curve”, it certainly imposes costs on economic activity. If it were to be extended to end-May (press is informing this as a real possibility), growth estimates for 2020 are going to be revised down (currently at -6.6%).
April closed with ARS 310bn of transfers from Central Bank to the treasury which represented 78% of the total fiscal revenue. Since December it accumulates ARS 910bn or 3.3% of GDP, we believe that this significant expansion will have consequences as we mentioned in our May short term macro update.
Transferences to the Treasury from the BCRA as a % of total fiscal revenue
Loans to the private sector continue to grow significantly and raise concerns about monetary expansion. As we had commented in our March Short term Outlook the slowdown in loans to the private sector was the last dam to the significant issue of pesos to the Market as money stayed in banks. Since the COVID, loans to the private sector, particularly companies have increased sharply, growing 6.1% MoM in April after 5.5% in March. In this way, money starts circulating and rising pressure on the FX market.
Loans to the private sector – Monthly variation
Despite the new FX restrictions, Central Bank had to intervene in the official FX market and as a result, net reserves kept falling and now stand at the lowest level in three years. This occurred despite the restriction to sell Blue Chip Swap USD bonds by companies who have asked for subsidized loans to deal with the COVID consequences. Since April the CB has sold USD 0.7bn in the FX market.
Gross and net reserves
Accumulated net FX purchases since capital controls episodes
Term deposits increase after lockdown eases but they are still below the previous level. After the relief of the lockdown for banks, some companies were able to renew their term deposits. In this way, private term deposits increase during the previous weeks.
Private term deposits
USD deposits also returned to their previous trend and continue to fall. Since mid-April USD private deposits have fallen USD 570mm and on May 4th (last available record) stood at USD 17.5bn, a year ago they stood at 29.7bn. However, it is important to mention that USD liquidity remains high thanks to a significant decrease in USD private loans.
USD private deposits
[Debt & markets]
The rising BCS Premium motivated further tightening of capital controls. The government has enacted new regulations. Companies, institutions or individuals who buy foreign currency on the official market will not be able to buy dollars from stock and fixed income market operations for the next 30 days. Additionally, companies who have USD credits will need Central Bank authorization to access the official exchange market, unless the company previously states that it has no ARS debt with the government and will not ask for any other credit of that type for the following 30 days.
Blue Chip Swap (BCS) Premium
New regulations practically had no impact on the forex market. The BCS premium increased to 78% (as of May 6th), with the BCS FX rate at ARS 119 and the official rate at ARS 67.1. Fiscal dominance of monetary policy is flooding the market with ARS, while interest rates remain at low levels (negative in real terms) and uncertainty is high, motivating portfolio dollarization. With very limited access to the official market, monetary imbalances are being channeled to parallel markets, widening the BCS premium despite tighter capital controls. If the upward trend continues, that would put the premium at levels comparable to those seen prior to the 1990s.
Price change of eligible bonds since April 2nd
The BCS Premium cannot be analyzed without considering debt negotiations. The exchange offer for USD denominated foreign law debt was aggressive, and bondholder groups have publicly rejected the terms. The government has tried to increase the credibility of their position by issuing press statements and by promoting declarations of support from political groups (governors, business associations, unions) and leading Economic academics (including two Nobel Prize in Economics Laureates). Despite this, the market price of bonds eligible for the exchange has dropped (except PARY, which would suffer the least with the current offer), reflecting market pessimism. The possibility of a debt default on May 22nd (when due Globals’ grace period ends) is higher than we previously thought
Inflation remains stable and at low levels. Latest high frequency data shows that inflation is running at 0.4% WoW (vs 0.3% WoW of previous week), with core inflation at 0.4% WoW (vs 0.5% WoW). Meanwhile, last printing of monthly inflation was of 0.8% MoM (vs 1.0% MoM of previous week), with core inflation at 0.9% MoM (vs 1.0% MoM) 4-week monthly inflation and Official FX Rate
General vs. Core Inflation
Distribution of price changes continues tilting in favor of lower increases (and even reductions!). We find that 47% of our monitored prices decreased (!), while 20% of them increased less than 1%, 8% between 1-2% and 2-4%, meanwhile 17% increased more than 4%. Tight price controls and closed businesses (due to the lockdown) help explain why the distribution of price changes has shifted in favor of smaller increases. Regarding controls, the Ministry of Productive Development is evaluating the possibility of easing them, which should have an impact on the CPI.
Inflation is expected to remain subdued. Regulated prices incidence is minimal, while the depreciation of official FX rate is low and decreasing. Thus, we consider that May could end with inflation around 1.5% MoM. From June onwards, inflation dynamic will depend mostly on the ability of the Central Bank to control the official FX rate. In this regard, sustained real appreciation, the inability of the BCRA to purchase USD, a BCS Premium at very high levels (close to maximums of the previous episode of capital controls) and overall high uncertainty are warning signs that a currency crisis could come sooner rather than later.