[Fiscal] The Treasury finally published April’s fiscal results, in line with our expectations: Primary Deficit of ARS 228 and a total deficit of ARS 266. Revenues increased 14% YoY (-17% in real terms), and primary spending shot up to 97% YoY (43% in real terms). Besides Social spending, (+100% YoY, +45% real) financial assistance to Provinces is gaining relevance, with discretionary transfers multiplying by 10.
The cumulative primary deficit totaled 1.3% GDP in April, and for 2020 we expect a primary balance of 5.6% GDP, with downward risks associated with higher (negative) impact on revenues, stronger policy response, and worsening of Provinces’ fiscal health.
ARS Gross Financial needs for the remainder of 2020 total 7.4% GDP (including 0.5% in interests and 2.6% in ARS Bonds and Bills amortization). The primary deficit will weigh on monetary imbalances and fiscal dominance of monetary policy is the most relevant short-term risk for the economy, as imbalances pile up and the forex market sends warning signals.
[External] April’s foreign trade shed some light to explain the continued tensions of the FX markets. Both INDEC’s (accrued) data and BCRA’s (cash basis) information show falling exports and imports. However, the ratio of cash basis to accrued basis imports has increased since the imposition of capital controls. While imports were falling 30%, import payments were growing 36% in April. The accrued trade surplus was USD 1.4bn, but USD 0.3 on a cash basis. BCRA reacted to this by announcing, on Thursday night, a restriction on the access to MULC for this kind of commercial debt repayment.
April’s import dynamic was in line with local economic activity and exports strongly affected by Brazil. Agro exports performed better than expected, but the industrial export performance was dismal, showing the deepest fall since (at least) 1992 (-58% YoY). Industrial products exports to Mercosur decreased by 69% YoY.
[Activity] April’s latest indicators show a contraction in line with expectations. Private GDP estimates (OJF-IGA) contracted 20% YoY surpassing even December 2001’s collapse. Industrial activity decreased -4.0% MoM (S.A) and -26% YoY in April, according to FIEL’s estimate. Since the previous peak (2017), activity has dropped -24% and stands now at 2006 levels.
Economic activity is likely to suffer a double-digit fall in 2020. We revise down our 2020 GDP growth forecast from -8.5% to -10.4%. After two months of quarantine, Argentina is now on the ascending phase of the virus. As mentioned in previous reports (see Weekly Report N 29: Leaks in the FX Dam), the extension of the lockdown postpones economic recovery beyond our previous expectations, while damage already inflicted is higher than previously thought.
April’s foreign trade data helps explain the continued tensions of the forex market. Both INDEC data (accrued basis) and BCRA’s information (cash basis) show falling exports and imports. However, the ratio of cash basis to accrued basis imports has increased since the imposition of capital controls. Though there are some caveats about this ratio, the indicator signals that there is less import financing, increasing USD demand at the official forex market.
Exports and Imports – Cash basis vs Accrued
Despite the increase in MULC import payments, the accrued trade balance was positive in April, with a surplus of USD 1.4bn. Exports decreased -18.9% YoY last month, combining a drop of quantities (-13.7% YoY) and prices (-6.7% YoY). Meanwhile, imports decreased -30% YoY, also combining a fall of quantities (-27.5% YoY) and prices (-3.6% YoY).
Export performance showed differences across sectors. Agro exports performed better than expected, as quantities increased in annual terms (13,9% YoY for primary products and -2.2% YoY for agro manufactures, both improving compared to March) and mitigated the price fall. On the other hand, industrial export performance was dismal, showing the deepest fall since (at least) 1992 (-58% YoY), much of which was due to a decrease in volume. External demand is suffering from the Covid-19 shock, especially for non-agricultural products. For instance, industrial products exports to Mercosur countries (mostly, Brazil) decreased 69% YoY.
Export, Imports and Trade Balance – YoY Change and USD bn
Import dynamic is in line with economic activity. With the economy nose-diving, all types of imports decreased. Vehicles, capital goods, and their parts suffered the most (-58%, -35% and -44% YoY, respectively), which was expected considering the fall of demand for durables. Imports of consumption goods also decreased, but at relatively lower rates (-20% YoY).
Fiscal dynamics deteriorated even further in April. Affected by falling economic activity, revenues increased 14% YoY (-17% in real terms), down from 31% YoY (-7%) of March. Meanwhile, the policy response to the Covid-19 shock shot up primary spending growth, which went up from 70% to 97% YoY (or 21% vs 43% in real terms). As a result, the fiscal deficit widened to ARS -229bn.
National Government: Total Income vs Primary Spending – YoY change, in real terms
Primary spending is showing the early effects of policy reaction. Social spending increased 100% YoY (45% in real terms), mostly due to the implementation of the Emergency Family Income. It should be noted that not all EFI beneficiaries got paid, transferring part of the cost to May and that the payment will be extended for (at least) another month. Meanwhile, economic subsidies increased 158% YoY (87%) as a result of the freezing of public services tariffs. Financial assistance to Provinces is gaining relevance, with discretionary transfers multiplying by 10 (!). Provincial fiscal accounts are deteriorating and put additional pressure on the national government, who will have to act as lender of last resort.
Cumulative Primary Deficit – % of GDP
The effort put in balancing fiscal accounts is long gone. The cumulative primary deficit totaled 1.3% GDP in April, almost the double of 2016’s cumulative deficit (the recent year with worst fiscal results). Considering the lockdown impact on revenues and spending response to the shock, the fiscal balance is tilted to the downside. For 2020 we expect a primary balance of 5.6% GDP, with downward risks associated with higher (negative) impact on revenues, stronger policy response, and worsening of Provinces’ fiscal health.
Financial Program in ARS – In ARS bn
The primary deficit will weigh on monetary imbalances. Financial needs for the remainder of 2020 total 7.4% GDP, with the primary deficit accounting for the largest part (see table above). With limited ARS financing in the local market, most of the financial needs will end up being covered by money printing. In this regard, BCRA’s 2019 profits (due to an accounting maneuver) allow a transfer of almost 5% GDP to the Treasury for the remainder of the year. Fiscal dominance of monetary policy is the most relevant short-term risk for the economy, as imbalances pile up and the forex market sends warning signals.
March’s lagging data are negative, as expected. Economic activity was far from soaring, but the lockdown weighed heavily on different sectors. Supermarket real sales increased 10.7% YoY in March (up from 5.2% in February), while Shopping mall sales dropped -56.6% (down from 10.8%). The lockdown (and the subsequent drop of household income) shifted dramatically consumption patterns, now mostly restrained to basic goods. For instance, INDEC reported that sales of household equipment increased 5.8% YoY in nominal terms (down from 48.4% in February), equivalent to a real fall of -28.7% YoY (vs -1%).
Supermarket vs Shopping Malls real sales – YoY change
April latest indicators show activity deteriorated further. Private estimates (OJF-IGA) report GDP decreased -20% YoY last month, in line with our own projection. April’s performance is now the worst of the IGA series (which goes back to 1993), surpassing even December 2001’s collapse. Since the previous peak (2017), activity has dropped -24.2% and stands now at 2006 levels.
Economic Activity Level (OJF-IGA) – Seasonally adjusted
Early sectoral data paint a similar picture. Industrial activity decreased -4.0% MoM (seasonally adjusted) and -25.6% YoY in April, according to FIEL’s estimate. The impact of the lockdown varies greatly between essential and non-essential sectors. Unsurprisingly, non-durable goods (-9.8% YoY) present the only single-digit decline, while intermediate (-26.1% YoY), durable goods (-27.1% YoY) and capital goods (-82.6% YoY) evidence a severe contraction. Private Industrial data is in line with evidence from Construction (Construya), Retail Sales (CAME), Real Estate and Foreign Trade (see table below).
Selected activity indicators
Economic activity is likely to suffer a double-digit fall in 2020. We revise down our 2020 GDP growth forecast from -8.5% to -10.4%. As mentioned in previous reports (see Weekly Report N 29: Leaks in the FX Dam), the extension of the lockdown postpones economic recovery, while damage already inflicted is higher than previously thought. Aggregate mobility data shows that the country is slowly returning to normal, but the City and the Province of Buenos Aires, which weigh heavily on the economy, are districts with tighter lockdown conditions than the rest. Thus, we consider activity will recover slower than aggregate mobility data suggest.
Google Mobility Data – Workplace, 7-day moving average