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August 25, 2020

ARGENTINA: The Week at a Glance

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

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( 18 mins)

The Economy Recovers Faster, but It Will Leave Less Carry-Over for 2021

The Economic Activity Index with a seasonally adjusted 7.4% monthly growth showed that the recovery is somewhat better than originally expected. Even though INDEC does not release seasonally adjusted figures by sector, the data allows us to see that the two main areas of the economy, industry, and commerce, grew more than 20% m/m.

July’s released data so far let us guess at another month of recovery with some bright and dark spots. Cars, steel, cement, and other construction materials performed well. CAME’s trade data (+10.6% m/m) were not close to June’s record (+31% m/m), but they clearly displayed an improvement. Home appliance chains also recorded improved sales, partly favoring from the FX spread. Having closed the worst quarter in history with a 16.6% drop against the first quarter of the year, the third quarter could show a recovery of around 10% q/q seasonally adjusted. However, revenues and the production of some food products do not give rise to excessive optimism. More than two-thirds of industrial firms sold less in July than at the start of the pandemic. With all this data, our most likely case is that the economy will fall “only” 11.6% this year, compared to 12.8% in our previous baseline scenario.

But this improvement will partially affect 2021. In our previous mapping, activity would grow more during the last part of the year than now, due to the earlier normalization of some areas. This means that the carry-over effect (the difference between December’s GDP and the year’s average) will be reduced to around 5% and therefore next year´s activity will improve by 7% instead of 7.5%.

Apart from somewhat better data, the economy is still very uncertain. From a macro perspective, the monetary imbalance and the possibility of a balance of payments crisis causes a lot of concern in businesses and households. From a micro perspective, the latest survey of the Industrial Union revealed that, although there are improvements, there are tons of problems. 6% of the industries are still paralyzed and 32% produce with falls over 25%. Added to this are the unexpected costs of the pandemic. 14% of the staff are on leave, personnel transportation and all the necessary sanitary protocols that are mostly covered by the firms are a drain of profitability or eventually inflation. More than 30% of firms are behind on taxes, more than 20% are behind with banks, and more than 15% are behind with vendor and employee payments.

There are many things that we know we do not know. This crisis’ uniqueness makes some of the trends of activity hard to model on past events. How many of the firms or households that were hard hit by the pandemic managed to reinvent themselves, even partially, and thus sustain supply from elsewhere? How many of the families that were able to sustain income (especially formal employees in essential firms or in the public sector) substituted consumption and spent on goods that they would not have bought in a normal scenario? Some of this is clearly happening, but it is difficult to quantify at this point. Another uncertainty that makes the analysis challenging is what the elasticity of imports to GDP will be for the recovery at a time when the Government seems to be leaning towards an import substitution model, perhaps due to a combination of reserve depletion and ideological pattern. Our view is that while supply shifts and a changes in the consumption basket can help towards a faster recovery, while an iron fist on imports as well as new price freezes bias our analysis towards a less favorable outcome.

Is the Real Exchange Rate Overvalued?

The nominal exchange rate is under pressure due to the increase in the FX spread, product of the huge issuance of pesos over the last few months

– Although the real exchange rate does not appear to be overvalued compared to other episodes of exchange rate crises, it is under pressure due to the constant loss of net reserves

– The implicit real exchange rate in the Blue Chip Swap exceeds 2002 levels

– Emerging currencies corrected their losses due to the COVID-19 crisis almost completely, although some, such as the Brazilian real and the Turkish lira, showed greater relative weakness.

The real bilateral exchange rate against the US dollar has depreciated slightly so far this year. Proof of this is that inflation up to August will be 19.3% (contained via regulations and price freezes), and the exchange rate depreciated 24.4% (2.8% per month) on average managed by the CB, which has already moved it this year.

Picture 3

Thus, there has been a slight real depreciation (4%) so far this year, and the real bilateral exchange rate has remained at 1.7 (Dec. 01=1). In historical terms, it does not seem to be as misaligned as it was in previous exchange rate crises. For example, in 2013 prior to Juan Carlos Fábrega’s devaluation it had reached Convertibility levels, as well as in 2015 before the exit from the cepo. On both occasions there was an abrupt correction of the variable by means of an exchange rate leap.

Although it currently appears considerably less overvalued in real terms, the truth is that the official exchange rate is being managed by the Central Bank, and without its intervention it would tend to be located at a level closer to that of the free exchange rate. Measured in real terms, a blue chip swap dollar at 135 implies a higher level than the one at the exit from Convertibility.

The monetary imbalance ended up manifesting itself sooner rather than later, and overshadowed the higher expectations generated by reaching an agreement with external creditors to restructure the debt. The level of the exchange rate spread has grown around 15 points since the closing of the agreement on August 4, to current levels of more than 80% and with falling net reserves. So, although the real bilateral exchange rate is not severely delayed, the excess of pesos keeps it under pressure, particularly because of the acceleration in the purchase of the solidarity dollar this month. Expectations of more issuance in a context where it will take time to reduce the deficit do not help to stabilize the exchange rate.

At a global level, the weakness of the US dollar helps the performance of emerging currencies, which are now only 3% below their pre-COVID-19 level. However, there are some peculiarities. In the case of the Brazilian real, on Friday it reached its weakest level in 3 months, hitting 5.61 per dollar, and so far this year it has weakened almost 40%. Another currency that has experienced a lot of pressure is the Turkish lira, which depreciated 24% this year to 7.38 per dollar.

In conclusion, despite the fact that the impact of the Coronavirus is still latent, today the context is somewhat more favorable for emerging countries. The excess of extra fiscal spending caused by the pandemic is being financed in different ways. Some countries were able to place debt in the international market at low rates. In the case of Argentina, the only option was to resort to monetary issuance, with a closed external credit market and a very small local one to absorb the magnitude of financing needed. Thus, although the real exchange rate is not as appreciated as on other occasions that led to an exchange rate crisis, the spread definitely tested the functioning of the crawling peg and caused a loss of net reserves.

Spending Keeps Soaring and Primary Deficit Has Already Hit 4.0% of GDP

– In July, the total revenues of the National Government grew scarcely 16.1% compared to the same month in 2019; primary spending grew 59.2%.

– Social spending climbed 74.7% in y/y terms, and included just over ARS 72 billion for the Emergency Family Income (IFE) and Emergency Assistance to Labor and Production (ATP) programs

– The primary deficit amounted to ARS 155.5 billion in the month (0.6% of GDP), after having recorded an ARS 4.3 billion surplus in July 2019; the fiscal deficit was ARS 189.1 billion, around ARS 111 billion higher than a year ago

– Year-to-date, an ARS 1.045 trillion primary deficit has been recorded, equivalent to 4.0% of GDP, while the fiscal deficit has amounted to ARS 1.376 trillion

The National Government’s fiscal accounts added another large deficit in July, with primary spending growing over 50% year-on-year for seven months in a row. While it is true that the gap between expenditure and revenues has been narrowing since the May peak, when it reached 94.4 percentage points, spending to sustain production and employment in the midst of the pandemic sets a floor for the growth of expenditure. Transfers to the private sector through the Emergency Family Income (IFE) and the Emergency Assistance to Labor and Production (ATP) Programs totaled ARS 252 billion in the last three months, 15% of total primary spending.

Picture 7

The difference between the growth rates of primary spending and revenues continued to exceed 40 percentage points in July. Revenues accelerated their year-on-year growth rate slightly, from 7.8% to 16.1%, while primary spending grew 59.2%, down from 72.7% in June, although still around 10 points above the pre-lockdown growth rate.

Among total revenues of the non-financial public sector, tax revenues grew 25.6%, in line with the previous month’s record. The weakest performances were those registered by Profits (0.2%) and VAT (5.3%), while Social Security grew slightly below its recent months´ records (17.9%), which were around 20%. Conversely, the best relative performances were those displayed by Personal Assets (315.1%) hand in hand with the increase in rates, along with domestic taxes (227.4%) which include the new P.A.I.S. tax, which collected a total of ARS 20.0 billion in July, favored by the purchase of dollars for hoarding, which was around 800 million. Regarding taxes linked to foreign trade, revenues from export taxes grew 14.5%, while import taxes grew 10.8%.

Revenues not linked to taxes were the weakest: rents on assets fell 47.7%, capital inflows contracted 25.1% and “other current revenues” fell 20.3%. They were affected, among other factors, by the suspension of the payment of loan installments granted by ANSES to the private sector, the lower amount of resources available from ANSES to finance the Historical Reparation program, and the greater comparison basis from a year ago, which included extraordinary resources from the dissolution of the Argentine Hydrocarbon Fund for around ARS 8.5 billion.

Among the various items of expenditure, social benefits stood out again and grew 74.7% in y/y terms. Transfers to the private sector through the IFE and the ATP amounted to just over 72 billion, the Alimentar program and the benefits in the area of Labor Support jointly accounted for ARS 9.8 billion, and around ARS 10 billion expenditures of the Superintendence of Health and PAMI were financed. While the entry “other social programs” jumped 759.4% y/y, retirements and contributory pensions added up to a 33.4% y/y increase, after the previous 6.12% increase granted in June.

While gas, electricity and water rates are still frozen, and transportation has also not undergone any increases in recent months, the exchange rate continues to move slowly but surely, increasing supply costs. As a result, economic subsidies grew 43.5% in July, with energy and transportation subsidies climbing 33.7% and 82.5% respectively. There was higher financial assistance to CAMMESA, Yacyretá and IESA, which were partially offset by a decrease in expenditures under the Gas Plan.

Aimed at offsetting the lower revenues from provincial taxes and automatic nationwide transfers of tax revenues, current transfers to provinces grew 61% year-on-year. It is worth remembering that the taxes that most contribute to the transferrable mass (mainly VAT and Profits) continue to be those that show the greatest real falls, which is why federal automatic transfers grew only 22.7% y/y in July, which meant a real fall of 13.8%.

On the other hand, transfers to universities grew 48.2% compared to the record a year ago, while operating expenses advanced 34%, with salaries growing 41.4%. As for capital spending, it increased by 27.6% year-on-year, slightly supported by the execution of water and sewage works, water sanitation works and other works in the energy sector.

In this scenario, an ARS 155.5 billion primary deficit was recorded in July, equivalent to 0.6% of GDP. This result implies a strong decline when compared to the ARS 4.3 billion surplus in July 2019, although we must consider that the economic and social scenario was very different from the current one. If we take into account the ARS 33.6 billion interest payments to the private sector, the fiscal deficit amounted to ARS 189.1 billion, around ARS 111 billion more than in July last year. Thus, the primary deficit amounted to ARS 1.045 trillion year-to-date (4.0% of GDP), with revenues growing at 19.8%, far below the 71.2% growth rate of primary expenditure. The fiscal deficit was ARS 1.376 trillion, financed by temporary advances and the profits transfers from the CB, which amounted to ARS 1.472 trillion in the first seven months of the year

The Economy Recovered More Than Expected: 7.4% in June

– EMAE-INDEC improved 7.4% compared to May, but it is still 12.9% below its February level

– In y/y terms, the official indicator reduced its fall from 20.6% to 12.3%

– Financial intermediation and electricity, gas, and water sector were the only two sectors that achieved a positive y/y growth

So far this year, EMAE has fallen 12.9% compared to the same period in 2019; we expect it to fall 11.6% during the entire year

After hitting rock bottom in April, recording its steepest monthly and y/y falls in the historic series, economic activity started recovering in May and June faster than expected. However, it still did not manage to make up for all losses during the quarantine, and it is still 12.6% below its February record.

Picture 1

EMAE-INDEC scored a 7.4% rise in June compared to May’s record ─seasonally adjusted series─, which contributes to the 9.7% growth from the previous month. In y/y terms, the official indicator contracted 12.3%, though it strongly reduced its fall from a 20.6% level. The second quarter of the year ended with a 16.6% q/q drop and a 20.3% y/y fall.

Out of the fifteen sectors of activity grouped by the official indicator, financial intermediation (4.8%) and the electricity, water, and gas sector (3.6%) were the only ones that managed to grow in y/y terms. Surprisingly, “wholesale and retail trade and repairs” fell scarcely 0.3% in a month in which supermarket and shopping center sales fell 1.5% and 88.6% respectively according to INDEC, retail sales contracted 27.7% according to CAME’s series, new car sales fell 34.9% according to ADEFA, and only wholesale sales surveyed by INDEC achieved growth in y/y terms (5.7%).

The sectors “Other Community, Social, and Personal Services” (63.2%) and “Hotels and Restaurants” (62.7%) experienced the greatest y/y falls in June. However, due to its relative weight on the general indicator, the greatest negative contribution to EMAE’s y/y variation was made by “Transportation and Communications,” which fell 20.8%, affecting the general indicator by -1.66 pp. The “Manufacturing Industry” fell 7.8% with a -1.11 pp. effect, while “Construction” had a -1.16 pp. effect with a 41.9% fall. Paradoxically, one of the worst-performing sectors was again health, which dropped 17.3% in y/y terms, given that, except for medical care linked to the pandemic, health centers are not experiencing much activity.

During the first half of the year, economic activity has accumulated a 13.2% fall compared to the same period in 2019. We expect the economy to have definitely taken off from the low it hit in April, as July’s preliminary data point out that the economy continued its recovery, though at a slower pace. With a recovery during the second half of the year, we forecast 2020 will end with an average fall around 11.6%. This fall, if it finally ends up materializing, would be even greater than the one recorded during 2002 (-10.9%) or during previous crises, such as the hyperinflation in 1989 and 1990, when the debacles did not surpass one-digit figures.

Despite the Crisis, Supermarket Sales Increased 1.3% During Q2-2020

– In June, supermarket sales were 1.5% below their record from a year ago, while wholesale stores experienced a 5.1% rise in sales

Shopping centers are still in a critical state with an 88.6% y/y slump, although the rest of the country is reopening faster than Buenos Aires

– With a 10.6% monthly growth in July, retail sales continued their recovery, though they lost momentum compared to previous months

Supermarkets were immune to the pandemic’s economic effects. INDEC’s data for June completes the picture: during the economy’s worst quarter in the last two decades, supermarket sales in constant prices grew 1.3% compared to April-June 2019. Their 4.8% fall compared to the first quarter is mainly explained by the pre-quarantine hoarding effect in March. Specifically, in June, supermarkets sold 1.5% less than a year ago, failing to continue the positive trend recorded since the summer. Online sales keep growing, representing about 5% of sales during the month (last year, on average, only 1% of sales were made through virtual channels). Wholesale stores’ sales, which amount to a sixth of supermarket sales, remained steady and scored a 5.7% Y/y rise in June.

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Electronic devices and home appliances took the lead. In y/y terms, they were the item expanding the most (104% measured in current prices), way over inflation at 43.8% although this is a logical increase given their dollarized prices. The vast FX spread, which was at around 60% that month, encouraged people to purchase goods that have their prices tied to the official exchange rate, such as home appliances. On the other end, sales of prepared meals fell even when measured in current prices (-15.9%).

Shopping centers in the interior of the country had a small mercy with their reopening in Rosario and Córdoba, which followed the trend established by some other smaller towns that had reopened previously. Thus, in June the Buenos Aires Metropolitan Area’s sales volume was an eighth part of the rest of the country’s, while it has historically represented little under two thirds of the total. Anyhow, the sector’s situation is still very concerning: at a national level, its real sales have plummeted 88.6% compared to a year ago.

Retail trade grew 10.6% between June and July, but its recovery decelerated. During the beginning of the second quarter, retail sales continued to increase, although their monthly growth rate dropped compared to June (32.7%) and May (15.2%) in seasonally adjusted terms. The sector has some way to go before recovering its pre-pandemic levels and is still 27.7% below its July 2019 records, although the difference between Buenos Aires (-38%), which had a longer lockdown, and the rest of the country (-13.7%) is very clear, in the same fashion as with shopping centers. Once again, essential items such as “Food and Beverage” (-14.6%), “Pharmacies” (-14.8%), and “Hardware Stores” (-16.5%) were the ones with the best y/y performances.

The City of Buenos Aires pushed forward some reopenings toward the end of August, adding several sectors to the list of permitted activities and allowing activity in key areas such as Once or Flores. The greatest infection hotspots have moved over to the Greater Buenos Aires, so a slower reopening is expected, but it will eventually mimic its porteño counterpart. In addition to restricted movement and prevention protocols, private consumption has a new challenge: the decline of real wages. According to SIPA, in May private wages were 4% below their level one year ago, and the harsh economic scenario will affect wage negotiations with unions during the second half of the year.

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