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The Spread Hops Back on Stage
By the end of last week, the dollar exchange rate in its MEP and Blue Chip Swap versions surpassed the 120-peso barrier again and closed with a spread over 70% against the official rate. This week, the market opened on the rise with BCS over 126 pesos to then go back to the 122 zone after the possible agreement with creditors hit the news. As we have already pointed out in other occasions, a spread this high is very hard for the economy since it creates all the wrong incentives. Underinvoicing of exports, overinvoicing of imports, more appetite for imported goods (with their price theoretically based on the official exchange rate) and with more dollar purchases corresponding to the USD 200 monthly quota. In June, 3.3 million people purchased them, and that number seems to have risen to 4 million in July.
What is the root of the spread? We consider there are two sources. On the one hand, the monetary question and, on the other, the institutional situation in which the seemingly eternal sovereign debt restructuring is framed with international law ─ over which an agreement was finally reached, as stated early today by the Government and bondholders.
Monetary wise, it is clear that there is a significant liquidity excess. The M2 is growing over 100% annually, the monetary base stands 66% over its level one year ago, and the public’s cash holdings grew 83% y/y amid a recession. On Thursday, the Central Bank took a step in the right direction by increasing the minimum rate for time deposits of up to 1 million pesos from 30.02% to 33.06%. The CB is looking to discourage individuals from purchasing their monthly USD 200. However, this increase seems insufficient. In the first place, it is unclear how many wills it can bend when the profit of purchasing USD 200 is still more tempting. In the second, there is a great deal of liquidity in the corporate sector that has no extra incentive to make time deposits in a moment in which inflation seems to be preparing to take off.
From an institutional standpoint, solving the debt restructuring sets a foundation to start recovering credibility. Which means the recently announced agreement is good news to start shrinking the spread.
Apart from the debt, the Government has taken some steps that hurt their credibility. The (now revoked) intention of nationalizing the grain company Vicentín, the abstention regarding the blocking of Mercadolibre, among other events, have not contributed toward creating confidence in the eyes of pesos holders, including families.
Reducing the spread is key for the economy, but solving the institutional and monetary issues is a must. Dealing with neither source is easy. From a monetary perspective, there is a lot of emission left to do. Although the Treasury has been relatively successful during recent auctions, the CB will need to distribute much more dividends. The logical solution would be new increases in rates and/or depreciating the official exchange rate at a faster pace (in a continuous fashion or taking a leap). The Treasury’s placements show a certain will to increase rates. We will have to wait and see whether the CB also finds the courage to take that road. Our base scenario is consistent with Leliq rates at 44% and the Badlar rate at 35%, 6 and 5 points over their current values, and the official exchange rate at 89 pesos per dollar. In this scenario, the FX spread has some room to go down.
- July’s revenues will be released on Tuesday 4th. We expect nominal increases over 20% compared to last July, completely different from a real-term tie as we have been seeing since the pandemic began.
- On Wednesday 5th INDEC will release the industrial production and construction records corresponding to June. In both cases, forecasts show y/y falls, but improvements compared to previous months.
- On Thursday 6th, the industry quality survey will be released by INDEC, in which they examine the impact of COVID on the manufacturing sector.
- On Friday 7th the CB’s Market Expectations Survey will portray the economists’ expectations regarding inflation, rates, exchange rate, activity level, and primary deficit.
- Also, on Friday 7th, May’s employment data will be released by SIPA, including the average wage and the level of formal employment per sector and province. In parallel, the Ministry of Labor will publish its EIL (Labor Indicators) survey with data corresponding to a dozen urban centers in June.
The CB Purchased Scarcely 34% of June’s Trade Surplus
– According to the FX Market-CB, the FX current account displayed a USD 1.5 billion surplus in June, after recording two consecutive deficits the previous months
– Despite that the currency balance in the FX market in concept of goods resulted in a USD 1.9 billion surplus, the CB could not take advantage and acquired scarcely USD 672 million
– Import payments went from growing 30% annually during the previous months to contracting 2.7% in June, consequence of the greater restrictions to gain access to dollars through Communication “A” 7030
– It stood out that more people bought their monthly dollar quota, helped by mid-year bonuses, the greater liquidity in pesos in general, and the FX spread staying above 43% in June
– In this context, international reserves (accountable, net of valuation adjustments) went up USD 331 million in June, standing at a USD 43 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 June (helped by the introduction of the strict FX controls for importers through Communication “A” 7030), the FX current account displayed a USD 1.5 billion surplus, after recording two consecutive deficits during the previous months that amounted to USD 477 million. This way, it has accumulated a scarcely USD 1.3 billion positive balance so far this year, way below 2019’s USD 2.1 billion.
Generally, June tends to be a month in which dollars flow in from grains and oilseeds exports, whose peak season takes place between April and June. Thus, the currency balance in concept of goods resulted in a USD 2 billion surplus, its highest record so far this year and way over May’s USD 316 million record. June’s performance was due to the greater proceeds of exports dollars, which amounted to USD 4.3 billion (10.2% y/y fall, but marginally decelerating compared to the previous -27%). Particularly, the “Oilseeds and Grains” sector sold USD 2.4 billion, its highest record so far this year. As for import payments, they totaled USD 2.4 billion in June, falling 2.7% y/y and decelerating strongly in the y/y comparison, as they had been growing at a 30% average during the previous months, reflecting how importers had an incentive to make imports in advance with the official FX rate under tight controls and a big FX spread. This way, June’s numbers reflect the full impact of the access restrictions to the FX market dollars experienced by importers through Communication “A” 7030, which was made effective in early-June. During the first half of the year, the currency balance in concept of goods has been positive with a USD 5.6 billion record, way below the USD 11.4 billion from the same period in 2019. Given that the CB prioritized containing the exchange rate with mini devaluations, it purchased scarcely USD 672 million in reserves from June’s trade surplus and accumulated just USD 105 million during the first half of the year.
As for the exports foreign currency proceeds in the FX market , the heavy-inflow months have already passed, as they extend from April through June, and during the second half of the year the inflows will surely be smaller than those from the first half. As for imports, we expect restrictions to continue in the short run. In fact, the CB has already announced that it will uphold Communication “A” 7030.
As for the financial account, it totaled a USD 1.2 billion deficit, its greatest one since last October, accumulating USD 3.2 billion in dollar outflows so far this year. Particularly, it was remarkable how dollar purchases accelerated in June, helped by mid-year bonuses and the increased liquidity in pesos in general. Thus, the currency outflows in concept of foreign assets purchases totaled USD 529 million, their highest record since last October, when the first “hard” cepo had been introduced. Individuals used their USD 200 monthly purchasing limit, especially since the FX spread did not drop below 60% during the month, encouraging speculation.
In this context, international reserves (accounting, net of valuation adjustments) grew USD 331 million, standing at a USD 43 billion stock.
With a Slump in Imports, the Trade Balance Scored Yet Another Surplus in June
– Exports amounted to USD 4.8 billion and fell 8.6% compared to one year ago; primary product exports (46.3%) were the only ones that grew
– Imports totaled USD 3.3 billion, 20.8% below June 2019; consumption goods imports were the only ones that grew (7.1%) after 22 falls in a row, boosted by the wide FX spread
– In this scenario, the trade surplus reached USD 1.5 billion, its second greatest this year, and its highest June record since 2009
– During the first half of 2020, the trade balance accumulated an USD 8.1 billion surplus as imports slumped 23.3% and exports fell 11% compared to the same period in 2019
As a consequence of the Coronavirus pandemic, the recession the Argentine economy had already been plowing through, and the great FX spread, the trade balance scored another surplus in June, its twenty second one in a row. Thanks to the good performance of primary product exports and to the hard fall of productive imports, June recorded its greatest trade surplus since 2009.
Exports amounted to USD 4.8 billion during the month and fell 8.6% compared to one year ago, recording their lowest June value since 2006. This fall was the result of a 2.1% drop in exported numbers, while prices dropped 6.7%. Among the main sectors, primary products were the only one with a positive y/y record (46.3% in value and 51.5% in volume), hand in hand with the greater sales of soybeans. In total, exports of the main soy products and byproducts recorded a USD 302 million increase, with China as their main destination. Industrial manufactures recorded the worst performance among exports, slumping 45.9% in value and 42.8% in volume, greatly affected by the drop in the sales of vehicles used to transport both goods and passengers, their main destination being Brazil. As for fuel exports, they contracted 27% in value, despite growing 39.4% in volume, while the value of agricultural manufacture exports went down 8.2% and their volume shrank 6.6%.
Imports were still affected by the weakness of economic activity and amounted to USD 3.3 billion, falling 20.8% compared to their value a year ago and recording their worst June since 2006. This contraction was the result of a 14.6% fall in imported numbers, while international prices went down 7.3%. The only sector that grew compared to June 2019 was consumption goods (7.1% in value and 8.8% in volume), led by food, beverage, and textile goods, boosted by the wide FX spread.
The greatest relative fall was recorded in car imports (-53.8%), which scarcely totaled USD 85 million. Behind came fuels and lubricants (-50.6%), spare parts and accessories for capital goods (-37.7%), capital goods (-26.8%), and intermediate goods (-4.3%).
Our main trade partners (considering the sum of exports and imports) were China, Brazil, and the US. Particularly, exports to Brazil totaled USD 462 million while imports hit USD 583 million, resulting in a USD 121 million deficit, our third one in a row.
In this scenario, the trade balance accumulated a USD 8.1 billion surplus during the first half of the year (accrual basis), as a consequence of imports slumping 23.3% and exports falling 11% compared to the same period in 2019.