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June 2, 2020


BY Miguel A. Kiguel, Andrés Borenstein, Lorena Giorgio, Mariela Díaz Romero, Rafael Aguilar, Isaías Marini

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( 19 mins)

Editorial: What Does a Good Deal on Public Debt Entail?

We must call a spade a spade: we are in default. Neither technical nor anecdotal, simply in default. It could be an anecdote if there is an agreement with creditors in the next few weeks. This is the ninth default in the Argentine history, the third in the last 20 years.

✓ The government seems eager to reach an agreement and, above all, it feels like the president has understood that the consequences of a long period of default with legal battles included are incompatible with recovering confidence and a good economy. And, in the long run, it also entails a political cost.

✓ We still believe that Argentina has an enormous liquidity problem rather than a solvency one. This debt renegotiation equals somewhat over 18% of GDP, though when the local law is added the figure gets closer to 26%

✓ The international situation helps coming to an agreement given that the risk-free rate and the emerging market primes have gone down during the last two months. The EMBI+ fell 150 basis points since March’s peak. The 10-year rate is below 1% and it does not look like it will get out of there any time soon.

✓ On the other hand, the market is reluctant to buy the sustainability of the Argentine debt. No one has seen an economic plan. Less so one that contemplates growth with a balanced budget. There are no reform prospects such as a migration to a much more efficient tax structure, a trade liberalization, more modern labor laws, or an idea on how to lower inflation to one digit in the medium run.

✓ The gap between the financial expectations of the Government and the bondholders do not seem so big, but it must be settled. There would be between 8 and 10 dollars per bond, for which they could split the difference. But they could also throw in some kind of payment related to Argentina’s growth (a sweetener) to help bring both parties closer.

✓ Both parties have incentives to come to an agreement. For Argentina, a prolonged default would threaten economic recovery and could spike inflation, while for bondholders a default would force them to the legal path and would lower the value of their assets. But we also know from experience that a very aggressive offer will not pull Argentina out of default.

✓ Getting out of default implies being able to restructure all bonds issued under foreign law, both the so-called Macri bonds (issued from 2016 onward) and the bonds from the swap (Par and Discount). In other words, it requires significant approval. Bonds in dollars under local law will surely receive an offer similar to the foreign-law ones.

As famously said in the movie 1983 movie “War Games”: “The best strategy is to not go to war.” In this case, the best strategy has to be solving the default to avoid greater damage to the economy.

What’s coming up this week…

On Wednesday 27 th INDEC will release April’s foreign trade data. Until now, the surplus has almost always been 1.1 billion dollars monthly. We expect that number to drop down to around 700 or 800 million in April. The agricultural sector has maintained their exports levels, but industries will have most likely shown great falls. Imports probably kept falling in y/y terms as in the previous months.

Yesterday, the Ministry of Economy released its fiscal results for April. In line with what we expected, the report shows a primary deficit of ARS 229 billion, around 0.8% of GDP, while primary expenditures rose 97%, boosted by the stimulus package for families and businesses, revenues grew only 14%. In our next “The Week at a Glance” report, we shall go into detail on these numbers. May’s primary balance will probably exhibit similar results.

On Friday 29 INDEC will present data on wages for March. We expect a nominal increase of around 1%.

CB’s Assistance via Profits Could Reach up to 6.9% of GDP

  • The CB’s financial statements were released: in 2019, the entity had ARS 1.6 trillion in accounting profits (5.6% of GDP) thanks to the depreciation results on the valuation of Non-Transferrable Bills
  • Thus, up to 6.9% of GDP in profits could be transferred to the Treasury, considering last year’s profits plus not-distributed profits; in addition, taking into account the already-granted temporary advances (which have reached their cap), total assistance could escalate to 8% of GDP
  • However, the monetary base will not grow as much, since the CB will surely sterilize part of what has been issued

The CB’s 2019 financial statements have been released. Within the statement of income, the entity had ARS 1.6 trillion in book profits, mainly due to the depreciation results on the new valuation of Non-Transferrable Bonds, from market value to technical value.

These accounting profits will be the main source of monetary assistance to the Treasury this year. Thus, the CB could potentially transfer 5.6% of GDP in concept of profits according to the results obtained last year. In addition, the entity has ARS 380 billion of not-distributed profits (1.3% of GDP), making the total of maximum assistance 6.9% of GDP this year.

Year to date, ARS 600 billion have been transferred in concept of profits from the CB (2.1% of GDP), with up to 1 trillion left to be transferred, equal to 4.8% of GDP. As for temporary advances, ARS 312 billion have been granted so far this year (1.1% of GDP), having reached its cap according to the CB’s Charter. In sum, considering both items (profits and temporary advances), assistance to the Treasury could escalate to 8% of GDP.

Nonetheless, the monetary base would grow less since the CB will most likely sterilize part of what has been issued. For the monetary base to grow 75% by the end of the year and have seigniorage of 4.5% of GDP, 3.5% of GDP would have to be sterilized in a scenario in which profits are transferred up to their top limit. On the contrary, the need to sterilize would not be as much.


Greater Demand for Imports and Hoarding Dollars in April

  • According to the FX Market-CB, the FX current account displayed a USD 155 million deficit in April after recording five consecutive surpluses during the previous months
  • The balance in concept of goods was a USD 292 million surplus, its lowest one since March 2018 (the great drought); this performance is explained by the weakness in exports dollars proceeds (-11% y/y) and an acceleration in import payments (46%)
  • As for the FX financial account, the USD 616 million currency outflow in concept of financial and other loans stood out, while there were inflows for USD 244 million in loans with IFI’s; the private sector’s dollarization was still limited by the cepo, but the USD 200 monthly that individuals can purchase accelerated
  • In this context, international reserves (accounting, net of valuation adjustments) fell USD 221 million during the month, reaching a USD 43.3 billion stock

The FX balance (MULC-CB) sums up foreign currency operations for the group of entities authorized to operate in the FX market and for the CB regardless of their different places of residence. Records are made on a cash basis, that is to say, movements that are effectively liquidated in the FX market. Its main differences with the balance of payments by INDEC are that the latter takes into account the operations between residents and the rest of the world, also including operations that do not go through the FX market, and also that transactions are recorded on an accrual basis, which is to say, at the inception of the collection right/payment obligation.

In April, the FX current account displayed a USD 155 million deficit, after recording five consecutive surpluses during the previous months amounting to USD 2.1 billion. This way, it has accumulated a scarcely USD 19 million positive balance so far this year, way below 2019’s USD 957 million.


Generally, April tends to be a month in which dollars flow in from grains and oilseeds exports. However, this year the agricultural sector’s FX proceeds were poor, affected by the COVID-19 outbreak and the great FX spread. The currency balance in concept of goods resulted in a USD 292 million surplus, its lowest record since March 2018 (when the great drought from that year had started to take its toll). April’s poor performance was due to the weakness in the FX proceeds of exports, which amounted to USD 3.9 billion (11.4% y/y fall), and, particularly, from the “Oilseeds and Grains” sector, which sold scarcely USD 1.7 billion, a low value for this month. Foreign currency proceeds had also been made in advance in the sector during the previous months since people were expecting export taxes to increase (which eventually happened in February), and also the great increase in the FX spread makes it quite unattractive to sell dollars in the FX market, despite that the gross harvest happens between April and June. As for import payments, they totaled USD 3.6 billion (46% y/y rise, their fastest pace since 2011), as imports were made in advance due to the pressure of the FX spread on the official exchange rate. Year to date, the currency balance in concept of goods has been positive, USD 3.3 billion versus USD 6.4 billion during the same period in 2019. The CB has purchased scarcely USD 112 million in reserves from the trade surplus between January and April this year.


We expect exports currency proceeds to remain low over the coming months due to the COVID-19 impact and the high FX spread, which discourages selling dollars at the official exchange rate. As for imports, there could be lower pressure on the FX market as of May, since the CB has set out strict regulations for the access to dollars of businesses which had made operations with blue-chip or MEP dollars during the month. However, there will be the effect of trying to make imports in advance as much as possible, due to the already-commented pressure of the FX spread on the official market.

As for Services and the “Tourism and Other Payments with Cards” item in particular, a USD 76 million deficit was verified, its lowest record since at least 2016. The introduction of PAIS tax at the end of December had already affected this sector significantly, and now the total interruption of tourism due to the COVID-19 outbreak will affect significantly. The only expenses that will remain within this item are expenditure from tourists that have not been repatriated and the payment of some air tickets. Year to date, the “Tourism and Other Payments with Cards” deficit has reached USD 564 million, way below the USD 1.9 billion deficit during the same period in 2019. Commercial air travel is still suspended until September.

As for the FX financial account, a USD 616 million currency outflow in concept of financial and other loans and USD 244 million were disbursed in loans with IFI’s in March. As for the private sector’s foreign assets purchases, a scarcely USD 183 million net outflow took place, but the

outflows accelerated remarkably. Individuals made greater use of the USD 200 monthly purchasing limit. Net dollar purchases of individuals amounted to USD 195 million, the highest record since last December. So far this year, the FX financial account has accumulated a USD 1.3 billion negative balance, below 2019’s USD 2.2 billion surplus. Starting in May, more restrictions will be imposed on the access of individuals to dollars for saving purposes, which will depend on whether they made BCS or MEP operations within a 30-day timeframe.

In this context, international reserves (accounting, net of valuation adjustments) fell USD 221 million during the month, reaching a USD 43.3 billion stock.

Economic Activity Fell to 2009 Levels in March

  • EMAE-INDEC plummeted 9.8%, recording its greatest monthly fall in the historical series
  • In y/y terms, the official indicator recorded its greatest fall since May 2009: 11.5%
  • Among the sectors that displayed the greatest negative effects, the industry (-15.5% y/y) and construction (-46.5 y/y) stood out
  • During the first quarter, EMAE fell 5.4% compared to the same period in 2019 and 4.8% compared to the previous quarter; we expect a 10% fall for the entire year

The social isolation measures that have been effective since March to face the Coronavirus deepened the recession that economic activity had already been recording and took it back to the levels from July 2009, amid the subprime crisis and when the conflict with the farming sector paralyzed the USD sales from the gross harvest. In this scenario, EMAE-INDEC slumped 9.8% in March compared to February’s record ─seasonally adjusted series─ and displayed the greatest fall of the series that started in 2004. Thus, the economy accumulated five consecutive months without growth in real terms.


In y/y terms, the official indicator recorded its eighth consecutive fall in March (11.5%), its greatest one since May 2009 when the contraction had been 13.7%. Fourteen out of the fifteen sectors of activity measured by the indicator displayed y/y drops, “Electricity, Gas, and Water” being the only one that managed to grow (6.7%). Conversely, the branches that showed the greatest negative effect on EMAE’s y/y variation were the “Manufacturing Industry,” which fell 15.5% and had a -2.32 pp impact, “Construction,” with a 46.5% fall and a -1.47 pp impact, and “Wholesale and Retail Trade and Repairs,” which had a -1.43 pp impact on the general indicator with an 11.2% fall.

During the first quarter, economic activity accumulated a 4.8% fall compared to the last quarter of 2019, while the contraction rises to 5.4% when compared to the same period one year ago. We expect the economy to reach a floor in April with a monthly fall in line ─at least─ with March’s to then remain stable or with trepid growths during the rest of the second quarter. In this scenario, April’s y/y fall could surpass the ones recorded in 2009 and even be similar to the ones during the 2001 crisis, which averaged 15%.


We have recently revised and lowered our yearly growth projection, from 8.0% to -10.0%. This fall entails a strong contraction of around 14% q/q during the second quarter, and a recovery during the second half of the year. However, the performance of the economy during what is left of the year will depend on how long the quarantine ends up being and the way in which activity starts rolling in the various sectors.

Supermarkets and Wholesalers Spared from Plunge in Sales

  • While real consumption in shopping centers sank 56.6% in y/y terms in March, the beginning of the quarantine brought a boom in sales for supermarkets (10.7%) and wholesale stores (21.2%)
  • Retail trade collapsed for the second consecutive month: according to CAME, sales decreased 57.6% in April compared to one year ago
  • ADEFA reported that new car sales to dealerships ─in units─ plummeted 73.6% in April compared to the same month in 2019, while used car sales decreased 86.4%

INDEC’s monthly sales report provides the first official data on trade during the quarantine, and adds to the reports made by sectorial chambers, such as CAME or ADEFA. Falls in non-essential sectors such as shopping centers were unsurprising, but supermarkets and wholesalers’ boom was remarkable.

In March, shopping center sales decreased even measured in current prices (-32.9%): translated into constant prices, they recorded a 56.6% slump compared to one year ago. Even before the quarantine, consumers tended to avoid shopping centers’ large crowds, and as of March 20 their activity was practically entirely shut down.

The counterpart of shopping centers were supermarkets, which, being essential stores, saw their sales increase both in current prices (69.7%) and constant prices (10.7%), with the odd fact that it was their best y/y result since 2008. Wholesale stores recorded a similar yield, growing 85.3% in current prices, which translated into a 21.2% real rise in sales. It is yet to be determined whether this rise in sales was an isolated event, caused by the hoarding of goods during the first days of the quarantine, or if the tendency will keep beyond March.


According to CAME’s survey, retail sales continued sinking in April and plummeted 57.6% compared to 2019’s record. Just like in March, the sectors with the lowest relative falls were food and beverage dispensaries (16.6%) and pharmacies (-26.9%), while the situation was critical for houseware stores, jewelry stores, furniture and home appliances, and clothing and footwear: they all recorded y/y falls over 70%. This month, the

sectorial chamber did not provide statistics for online trade, which expands rapidly amid the mobility restrictions.

The automotive sector also felt the halt in activity: ADEFA’s report detailed a 73.6% slump in new car sales to dealerships ─in units─ compared to April 2019. According to the CCA’s numbers, used car sales halted almost entirely, recording 86.4% less transactions than a year ago.

After recovering in the beginning of 2020, strengthened by the bonuses in January and February and lower inflation, real wages fell again in March (1.4%) compared to one year ago, according to the RIPTE index by the Ministry of Social Development. The precarious situation caused by the pandemic and the greater risk of layoffs has led many unions to settle for temporary wage reductions. Over the coming months, the decline in income can be an even greater determining factor than the logistics problems imposed by the lockdown, in the complex framework of 2020’s private consumption.


Consumer Confidence Decelerated its Monthly Fall to 2.2% in May

  • The indicator published by UTDT recorded a 2.2% drop in May, reaching its fourth consecutive monthly fall
  • The restrictions on mobility did not prevent confidence from standing 5.4% over its level from May 2019

The quarantine adopted a binary logic in May: with very low infection rates, most of the country is gradually returning to normal, while the Metropolitan Area of Buenos Aires had to tighten controls after a botched attempt at reopening stores (this reflected on consumer´s confidence data by area, which fell 3.8% in the Greater Buenos Aires and scarcely 0.4% in the rest of the country). The financial world is also experiencing mixed emotions: the optimistic views on an agreement with creditors led to a reduction in country risk, but the FX spread between the official dollar and its parallel variants increased, despite the CB’s efforts at containment.

In this scenario, consumer confidence decreased 2.2% in May and accumulated its fourth consecutive monthly fall, although this slump was less pronounced than previous ones. Even with the uncertainty revolving around the debt and the lockdown, the indicator released by UTDT is 5.4% over its level from a year ago.

The surveyed cohort perceived a 14.7% improvement in their present conditions in May, a number possibly due to a better implementation of the

federal assistance package and to a certain degree of regional loosening of the quarantine, but nonetheless surprising given the low activity levels and the fall in the income for a vast percentage of the population. Said subindex recovered 35% compared to May 2019. Conversely to what happened during the last few months, future expectations declined 7.6% during the month and are now 3.1% over its level one year ago.

With the economy haunted by the Coronavirus, the pessimistic views are concentrated on short-term expectations, which sank 10.8% between April and May, meaning a 22.3% y/y slump. The fall was less steep in long-term expectations, which worsened 5.3% during the month, but are 1.5% over May 2019, despite the grim regional outlook.

The consumption of durable goods and real estate recovered strongly in May: it grew 88.1% after slumping 55.1% the previous month. The subindex recovered 9.3% in y/y terms. This recovery was mainly influenced by an increase in the FX spread, which caused people to purchase goods which have their prices anchored to the official dollar.

This way, during the first five months of the year, consumer confidence accumulated a 9.3% contraction. June will be a key month for Argentina: significant advances are expected in restructuring the debt, while on the sanitary front specialists warn that contagion could accelerate in Buenos Aires during the coming weeks.


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