[FX and monetary] Another week of the “new normal”. BCS pressure eased this week and BADLAR and TM20 rates have been forced up 500 and 800bp respectively. However, the official FX market is still under pressure: Even with USD 400m in agro sales, the CB had to sell USD 280m in the spot market and USD 600m in futures, pushing net reserves to USD 9bn, down from USD 9.4bn. Meanwhile, the official FX is advancing in an unrealistic crawling peg with 0.13% daily depreciation. A first-generation currency crisis seems to be on the making.
[Fiscal] The treasury has skipped the publishing of the April – cash-based – fiscal result on May 20th and results may be worst than the – accrued based – ARS 263bn anticipated by the National Budget Bureau of the Congress. Downside risk on our 5.5% primary deficit forecast for 2020.
[Debt & Markets] Despite the likely trigger of the default event later today, Foreign Law debt negotiations are back on track, and bonds have rallied on positive signals from the government. On the Peso side, the government has been able to raise ARS 54bn in net issuances local markets.
[Activity] Activity is, once again, on the disappointing side. With just 10 days under lockdown, official data reported a -10% MoM S.A. contraction in March and -11.5% YoY, the largest drop of the entire EMAE series, and it looks even worse than comparable monthly data of 2001-02. Activity now stands at the lowest level since late 2009, roughly 18% below the previous peak (2018).
The lockdown is gradually easing, though the contagion curve has not flattened yet. With Covid-19 about to reach the 10,000 cases threshold (and with increasing daily new cases) a new extension of the lockdown (with regional differences) is expected to be announced this weekend, which would complicate economic activity for longer than expected.
The extension and the damage already inflicted might prove higher and more permanent than previously thought. Thus, we might revise our yearly forecast, down to a double-digit fall.
The official forex market remains under pressure and net reserves are now just above USD 9bn. Even in a period in which dollars should be flowing in due to seasonality in agro exports, Central Bank intervention is negative. Agro sales totaled around USD 400m in so far this week, but the BCRA had to sell around USD 280m, and in addition, it had to sell around USD 600m in USD non-delivery forward. This occurred even with tight capital controls, a substantial fall of imports, and a service balance that has eliminated its deficit. In this way, net reserves are slightly above 9bn compared with 9.4bn of the previous week.
The Central Bank, meanwhile, has maintained the crawling peg of the FX rate virtually unaltered. The official FX rate stands at ARS 68,1, having increased 0.13% daily since end-April. Though the BCS Premium decreased somewhat (to 73.8%, -6pp WoW and -9pp since peak), monetary imbalances and uncertainty about the debt exchange maintain pressure on the forex market. A first-generation currency crisis seems to be in the making, as negative real interest rates are combined with slowly increasing FX rate, wide FX premium, and loss of international reserves.
Official FX Rate: Daily increase
[Debt & markets]
Despite the debt exchange uncertainty, the ARS debt management strategy is moving forward without many problems. The Treasury issued 4 instruments this week (3 discount bills -Ledes- and a bond with maturity in 2022 -Bonte-) and raised ARS 73bn. The amount was higher than this week’s debt service (ARS 19.2bn of 2020 Bonte).
ARS net debt issuances, exchanges, and payments
Issuances are having good acceptance levels, as tight capital controls leave limited investment options (especially, for institutional investors). Recently, the Treasury was able to exchange reprofiled USD Bills (USD 2.6bn) and the Dual bond (USD 176mn). Furthermore, it raised ARS 24bn in short term bills (3 Ledes and 1 Lecer), which helped to pay maturing debt (ARS 28.2bn). Rollover rates for ARS denominated debt are relatively high (see graph), considering the uncertainty regarding the USD denominated debt exchange and the overall macro scenario.
Changes of Debt Profile: Original proposal vs Alternative simulation
The Secretary of Finance will work 24/7 for the remainder of 2020. We estimate that net debt service totals ARS 20.8bn next week and ARS 860bn for the rest of the year, with June (Botapo) and November (Bonte) as the most complicated months.
Economic activity performed worse than expected in March. With just 10 days under lockdown, official data reported that activity decreased -9.8% MoM (seasonally adjusted) and -11.5% YoY. This represents the largest drop of the entire EMAE series, and it looks even worse than comparable monthly data of 2001-02. Private estimates (IGA-OJF) released earlier painted a similar picture, though with relatively better numbers (-9.5% YoY). Activity now stands at the lowest level since late 2009, roughly 18% below the previous peak (2018). With the exception of electricity, gas and water (+6.7% YoY), all sectors presented YoY declines, with Fishing (-48.6%), Construction (-46.4%) and Hotels & Restaurants (-30.8%) hit the hardest.
Economic Activity: Level (seasonally adjusted)
Forecasts are being revised down as the situation is worse than expected. LatinFocus panelists now expect -6.9% growth for 2020 (mean, with range -3.7% / -10.7%), down from -5.5% of the previous forecast (with range -2.7% / -8.5%). We maintain our growth projection at -8.5% for 2020, but with increasing risks. The possible extension and tightening of the lockdown might postpone economic recovery, while damage already inflicted might prove higher and more permanent than previously thought. Thus, we might revise our yearly forecast, down to a double-digit fall (which would be the first since 2002).
Economic Activity: YoY change (%)
The COVID-19 shock is eroding consumer confidence. The UTDT index decreased to 38.4 points (-2.2% MoM), the fourth consecutive monthly drop. Consumer confidence decreased 9.3% since the change of administration, though it still stands 5.3% above last year’s printing (affected by the political cycle). Short term expectations have turned south since the pandemic outbreak, dropping to the lowest level since late 2014. However, long term expectations remain at a high level (see graph below), reflecting that the worsening of expectations is (so far) a temporary phenomenon.
Consumer Confidence Index: General vs Expectations
The lockdown is gradually easing, though the contagion curve has not flattened yet. With Covid-19 about to reach the 10,000 cases threshold (and with increasing daily new cases), mobility in Argentina has recovered partially, standing now at 27-35% of baseline level depending on the mean of transportation (+4.8pp WoW). The metropolitan area remains as the most complicated region and activity is relatively more limited than in other districts, which were allowed to ease lockdown conditions. A new extension of the lockdown (with regional differences) is expected to be announced this weekend, which would complicate economic activity for longer than expected.
Apple Mobility Report: 7-day moving average