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June 17, 2020

Argentina Economy: The Week at a Glance

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

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( 12 mins)

Editorial: Unnecessary Noise

The announcement that Vicentín was being expropriated made a lot of unnecessary noise in the economy. This could complicate both the short-term and medium-term outlook, the former because it could affect the debt restructuring and the latter due to the post-pandemic situation. In 2019, Vicentín was the main exporter of soy and sunflower oil and pellets, the eighth exporter of grains, and it was not quite relevant regarding soy grain sales. Considering the entire harvest, it was the sixth exporter in the Argentina’s farming sector. In its main market, it is one of the 16 firms that export soy byproducts.

From a legal point of view, the firm was restructuring over 1.5 billion dollars in assets in its bankruptcy proceedings. The expropriation opens up a series of alternatives in which the State has more to lose than to win. The Government could attempt to bail out and even gain access to the company as its creditor without the need to expropriate, a measure that current shareholders, players of the sector, and businessmen are admittedly reluctant to, as they have expressed more or less emphatically.

From a political standpoint, this is a victory for the most radical sectors of the Government. It was greatly evident that the more moderate Peronist sectors felt uncomfortable with this decision. The government’s arguments, a mixture of tongue slips and ad-hoc explanations, were not pacifying. Even more so when the pandemic holds promise of more bankruptcy proceedings during the coming months. The debate went on muddy tracks when allegations arose accusing the previous Government of laundering money, while the opposition revealed that Banco Nación had lent millions to Vicentín during the Cristina Kirchner administration as well.

From an economic point of view, none of the arguments that were used seem fit enough to justify an expropriation. Food sovereignty is not quite related to a firm that exports most of its production in a market with a lot of competition involving both Argentinian and international players. The “model company” concept does not seem to have any solid foundations as well. Vicentín is relevant, but it alone would not have the power to increase the supply of dollars to the economy, one of the problems that keep the Government awake up night. Less so does Vicentín seem a company of public interest that will benefit society as a whole with its expropriation.

Regarding development, Argentina is already the world’s lead soy oil and flour exporter and only China has more installed capacity than Argentina. Argentina’s mills are highly efficient since they have fast access to raw materials (Argentinian and Paraguayan) and they are mostly located on riverbanks. There is no market flaw to correct and not even the stability of jobs seems to be at risk.

The State’s management should not add value compared to the experience of international and local players who operate in this market. It is a business with low margins that needs financing in a moment in which the State cannot provide it. More so, far from building bridges with the farming sector, the Government once again gets into trouble with a key sector of the economy. Throwing YPF into the cocktail is not a harmless idea either. YPF is not the state; it has private shareholders. And the oil company already has enough going on in its own backyard in which preserving its cash has been the goal even at the cost of halting investments.

Fear of the foreign sector. According to the Government’s arguments, one of the dangers they avert with the expropriation is that the bankruptcy proceedings will result in a change in corporate control that will favor foreigners. This puts in evidence a bias which is not a good sign for the future. Argentina will need to boost investments to grow and what both the expropriation and the pro-national bias represent is not attractive for investors.

Higher exit yield. Vicentín’s expropriation will most likely increase Argentina’s exit yield, adding an extra obstacle to the already-long debt renegotiation. From an accounting perspective, the expropriation brings in more debt and more contingencies. From an economic perspective, it reduces the expectation of an economic plan with pro-market reforms, which means lower growth in any equation. From our point of view, the potential rises in Argentine risk and the reductions in growth expectations make it harder to sustain the debt in a way in which an extra year of grace or subtracting a point in coupon will not compensate.

What’s coming up this week…

  • On Thursday INDEC will release its wholesale prices and construction costs corresponding to May. Since the Wholesale Prices Index ignores services, it is very likely that it will be above last week’s CPI.
  • Today INDEC released its valuation of the basic basket for May, which fell 0.1% compared to April but rose 47.9% y/y. It is one of the main factors to determine the effect of poverty and homelessness. The households spending survey was also published today.
  • On Thursday, the Ministry of Economy will carry out the second out of four auctions of bonds in pesos scheduled for June.

Argentina Economy: The Week at a Glance 10

Softer FX Controls for Some Imports

  • The CB loosened the tight FX controls it had set at the beginning of the month: some requirements to access the FX market were softened for SMBs, and for importing certain goods, such as fertilizers and medical products
  • As a consequence of the tight FX controls, the CB was able to resume purchasing reserves during early-June, after sacrificing around USD 1.8 billion since mid-April; thus, it has so far purchased USD 88 million daily on average since May 29
  • Yesterday, the entity surprisingly increased the daily depreciation rate to 0.35%, after breaking its 28-day streak depreciating at 0.13%, before lowering it to 0.09% two business days ago

The Central Bank softened (a little bit) the FX controls it had introduced at the beginning of the month. Through Communication “A” 7030, effective as of June, the monetary entity had decreed that in order to gain access to dollars in the official FX market, importers would have to first use their own declared dollars. Only after having used their own funds, and with the approval of the CB, importers could access the FX market. With the new measures announced last Thursday, FX controls are still rigid, but some requirements increased their flexibility, particularly for SMBs and for importing certain goods, such as fertilizers and medical products.

Argentina Economy: The Week at a Glance 11Concretely, last Thursday the CB announced it would simplify the protocol to access dollars for importers. First, it rose the minimum amount to gain direct access to the FX market, from USD 250,000 to USD 1 million to pay for imports. Second, now there is more tolerance to dollar holdings. Thus, the “Foreign Assets Holdings” item (which were previously forced to be used before accessing the FX market) will not include freely available liquid assets of up to USD 100,000, and the amounts which cannot be used because they are reserve funds or guarantee funds for requirements in contracts of indebtedness with a party abroad, or funds that act as a guarantee of operations with derivatives made with a foreign party. Also, dollars from goods/services exports with less than 5-days since their collection will not fall under this category.

Argentina Economy: The Week at a Glance 12

Third, importers of fertilizers and medical supplies (finished drugs and materials for their production), will have access to the FX market without prior authorization to pay for obligations generated in future imports.

Argentina Economy: The Week at a Glance 13

Lastly, regarding buyers of MEP or BCS dollars and them being excluded from the FX market, it was determined that the 90-day timeframe without selling securities in foreign currency within the country or transferring them to depository banks abroad, will be counted starting on May 1.

Argentina Economy: The Week at a Glance 14In this way, FX controls in the official market remain very tight, blocking any significant demand for foreign currency for the time being. Therefore, since the beginning of June the Central Bank has been able to resume FX purchases, after sacrificing around USD 1.8 billion since mid-April. Since the 29th of May, the CB has already bought some USD 88 million daily (on average). Yesterday, the entity surprisingly raised the daily rate of depreciation to 0.35%. The scores for Thursday the 11 th and Friday the 12 th had lowered to 0.09%, breaking a 28-day streak of a daily depreciation of 0.13%. Meanwhile, the FX spread between the official dollar and its free variants have narrowed in the last two weeks: the blue-chip swap fell from 67% to 58% and the MEP dollar’s from 57% to 52%, while the spread with the parallel dollar has shrunk from 80% to 75%.

Inflation Remained at 1.5% in May

  • During the second full month in lockdown, national inflation was 1.5%, in line with April’s
  • Unlike the previous month, inflation in Food and Beverage decelerated strongly from 3.2% to 0.7%
  • Core inflation was 1.6% and seasonal inflation was 4.7%, while regulated prices recorded a 0.1% negative variation
  • In y/y terms, national inflation went down to 43.4%, while the accumulated inflation so far this year has reached 11.1%

Argentina Economy: The Week at a Glance 15

May was the second full month affected by the quarantine imposed by the Government in order to face the Coronavirus pandemic, though some activities gained flexibility, especially in the interior of the country, which allowed for a better and wider-reach price survey. During the last two weeks of April, inflation had been really low, and it left a low carry-over effect for May. This, in addition to the weakness in economic activity and the relative calmness in the FX market, helped the national CPI made by INDEC reach a 1.5% monthly variation, in line with the previous month’s and one of the lowest records since November 2017, when inflation had been 1.4%.

Argentina Economy: The Week at a Glance 16

 

With some stores still closed and scarce economic activity, core inflation moderated slightly from 1.7% in April to 1.6% in May. Likewise, inflation in seasonal products was 4.7% (vs 4.8% in April), while regulated prices were still limited by the tariff freeze for services and public transportation, recording a 0.1% negative variation (-0.66% during the previous month). Indeed, inflation in “Education” was the only one with a negative monthly variation (-0.4%), as a result of the lower fees in all levels of education, affecting the general inflation by -0.02 percentage points. As for “Clothing and Footwear,” it recorded a 7.5% rise, being the item that most affected general inflation during the month (0.59 pp.). As both online and in-person commercial activity started opening up in some provinces, rises were observed in seasonal clothing, which greatly accounted for the rise in “Seasonal Products.” Considering all this, inflation in goods (2.0%) was again well above the one in services (0.6%).

Argentina Economy: The Week at a Glance 17

Although May’s monthly national inflation was in line with April’s, there is a substantial difference between both records. Inflation in “Food and Beverage” was 0.7%, way below April’s 3.2%, as it had been the one that most affected the general indicator. In addition to the “Price-Cap” program, which forced stores to take the prices of 2,300 products conforming the basic basket back to their prices from March 6th, inflation in F&B was also moderated by the weakness in economic activity and especially private consumption, and by an exchange rate which is still acting as a nominal anchor even though it is slowly depreciating.

It is worth mentioning that, just like the previous month, the item “Restaurants and Hotels” was assigned the variation of the general level, since most of them remained closed.

This way, national inflation moderated from 45.6% to 43.4% in y/y terms, while the inflation accumulated so far this year has risen to 11.1% (it had been 19.2% one year ago). As for the Greater Buenos Aires, its monthly inflation was 1.5% and its y/y record went down to 42.1%, while in the City of Buenos Aires, where the quarantine is much more stricter, CPI-BA recorded a 1.0% monthly variation and a 39.2% one in y/y terms.

Argentina Economy: The Week at a Glance 18

Moving forward it will be important to monitor what goes on with the exchange rate, which has started to slowly react during the last few weeks, and the same goes for the still-frozen public services tariffs. Another impact on inflation could arise from a new regulation of the CB forcing importers to use the dollars they have declared in order to make payments instead of resorting to the FX market, since this increases how relevant the parallel exchange rate is as a reference price, increasing restocking costs.

Also, it will be fundamental to see whether the CB decides to sterilize or keep the money it is issuing to compensate for the fall in revenue and to finance the increase in the necessary spending to alleviate the economic effects of the lockdown. The second semester seems much more challenging regarding inflation, so we expect it to accelerate and take December’s y/y record to around 50%.

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