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Good Closure for the Debt: Now Comes the IMF
Argentina successfully closed a very important chapter in its prolific economic history. It is solving its ninth default, practically with no skeletons in the closet after achieving a 93% acceptance rate, which means over 99% of the bonds will be restructured once the collective action clauses are triggered. Some bondholders did not participate in the debt restructuring, but the number is small (they hold approximately USD 600 million from the 2010 Par Bonds), so we could say that the cost is almost exclusively reputational for being such a frequent defaulter. The proposal for debt restructuring under local law that ends on September 1st should not have any problems either, and we expect a high acceptance rate.
Argentina has obtained a substantial debt relief for at least 5 years. Until 2025 only about 5.6 billion dollars will mature, around 1.5% of GDP. The only shoe that could fit too tight would be the local currency debt, but those problems would be easier to solve if it came to that. There are monetary and regulatory tools at hand (not all with the same effect) that would help with some bottlenecks.
Now the real challenge is to build a consistent plan based on 3 pillars: 1) To eliminate fiscal deficit over a 3 year period; 2) To significantly reduce inflation over a somewhat longer period and 3) To pull Argentina out of a stagnation state that goes beyond the effects of the pandemic. July’s GDP is similar to that of January 2007, and before the Covid outbreak we were at the same spot than 10 years ago. Being relatively optimistic, we believe that we will return to our pre-pandemic GDP in 2023.
The upcoming negotiation of a program with the IMF is an opportunity to start addressing these issues. This is a young government with almost 3.5 years ahead of it, so the long-term incentives, at least in theory, could be there. Short-term political needs are the most tangible risk, along with some ideological components of some members of the governing coalition.
The letter that was sent to the Managing Director of the IMF, signed by the Minister of Economy and the President of the Central Bank, was an auspicious kick-off. Authorities recognized some achievements of the previous administration and its last point shows their willingness to take any additional actions required in search of consistency. This letter is one of the most moderate pieces that have been released by this government.
From a fiscal point of view, here is a greater willingness to make numbers add up, and this would clearly help the monetary front by reducing the need for assistance. However, the tax increases that were leaked by the press would indicate that, even if the fiscal gap was to be closed, it would be done in a sub-optimal way, without reconfiguring public spending. The 2021 budget that will be presented in 2 weeks will provide more concrete clues.
– The CB, along with ANSES, has actively intervened in the last weeks to contain the FX spread and it is estimated that the fire power of both entities combined amounts to a nominal USD 24 billion after the debt restructuring
– The blue chip swap experienced a lot of volatility in August and hit 137 pesos; it finally closed the month at around 126 pesos (69% spread with the official rate).
– July’s FX market data was released, highlighting the acceleration in the payment of imports and a greater purchase of dollars (3.9 million people)
– Despite the relative stability of gross reserves around USD 43 billion, net reserves remain under pressure
The CB, along with ANSES, has actively intervened in the last weeks to contain the exchange rate spread. Both entities sold bonds to reduce the blue chip swap’s implicit price and avoid disruptions in a market that was illiquid due at the start of the bond restructuring under local law. The BCS experienced a lot of volatility during August and hit 137 pesos, finally closing at around 126 pesos. The main bond used for the operation, Bonar 24, is one of the bonds that are eligible for restructuring. It is expected that from now on the most liquid bond will be the future Bonar 2030 to be issued in the local law restructuring. Both entities have hinted that they will continue to intervene in the FX spread. To this end, they have a considerable amount of bonds that will allow them to reduce the spread in an event of high stress. It is estimated that the fire power between both entities will amount to a nominal USD 24 billion after the debt restructuring
Apart from the technical factor, behind the spread lays the enormous monetary imbalance and pressure on the FX market (spot and futures) with the CB intervening actively. USD 962 million were sacrificed on spot intervention and the open interest on dollar futures exceeded USD 5.4 billion. Thus, in August the official exchange rate (Com. “A” 3500) moved 2.6% to close at 74.18 pesos, the same depreciation rate as last month. For the same period, the BCS moved 1.1%, the MEP fell 0.3% and the parallel dollar fell 0.7%, reaching 126.3, 121.9 and 135 pesos offer rate (spreads of 64, 69 and 80% respectively). In this context, the movement of the official exchange rate was above what the private Badlar yield (2.4%) and would be below the inflation expectations for August, around 3.0%.
The FX market data for July was released. The decline in the current account was remarkable, as it recorded a USD 555 million surplus, a third of what was recorded in the previous month. This bad performance was explained exclusively by higher import payments. The exchange rate spread induces early payments due to greater expectations of future depreciation. Thus, they totaled around USD 3.5 billion (an 18% annual increase). Exports increased marginally, reaching USD 4.5 billion (9% annual fall, the fourth consecutive reduction, but improving slightly). The balance for goods totaled USD 6.6 billion until July, half of what was recorded a year ago, and the Central Bank was unable to accumulate reserves. Conversely, it lost USD 463 million selling in the FX market during the same period.
As for the services account, the deficit increased slightly during the month to USD 134 million, although it is still affected by the interruption in tourism as a result of the Covid-19 outbreak. This account had generated a USD 3.7 billion outflow in the first 7 months of last year, a drainage that was significantly reduced to USD 414 million at present. As for interest payments, they generated a USD 390 million outflow of funds. Although Argentina defaulted in April, when sovereign debt payments under local and foreign law were interrupted, payments to international organizations were not interrupted. So far this year, interest has totaled USD 4.5 billion (net).
The financial account showed a USD 1.1 billion outflow, explained by financial loans (USD 678 million) and private foreign assets purchases (USD 452 million). In July, 3.9 million people purchased USD 753 million dollars, a figure that may have risen to a floor of 4.5 million individuals in August, taking into account that the sale of CB reserves accelerated to almost USD 962 million until the 25th.
In this context, the variation in gross reserves from transactions resulted in a USD 581 million reduction, although accounting reserves increased USD 145 million, finishing July at USD 43.3 billion. Although gross reserves remained relatively stable, the truth is that they have been experiencing a lot of pressure in net terms. If we deduct CB liabilities, gold, and other items, they were under USD 6 billion last July, and nowadays they stand below USD 4 billion.
July’s Trade Balance: Another Surplus for the Wrong Reasons
– Exports totaled USD 4.9 billion and fell both m/m (-0.8% s.a.) as well as y/y (-16.3%)
– Imports totaled USD 3.4 billion and continued to plummet: -1.2% m/m and -30.1% y/y
– So far this year, the trade surplus has amounted to USD 9.6 billion with exports falling 11.9% and imports collapsing 24.4%
The trade balance scored a USD 1.5 billion surplus in July, its twenty-third in a row. Far from being attributed to a greater trade opening, this positive record was again the result of a collapse in imports that managed to offset the crash in exports. The weakness of economic activity and greater obstacles to get access to permits and to the FX market are halting imports, while higher expectations of devaluation and correction of the exchange rate received by exporters, which is currently around ARS 46 per dollar for the soybean sector and ARS 65 for the industrial sector, are delaying the dispatch of exports.
For the second month in a row, both exports and imports contracted in monthly (seasonally adjusted) and year-on-year terms. Exports reached USD 4.9 billion and fell 0.8% compared to one month ago, while imports totaled USD 3.4 billion and fell 1.2% compared to June. In y/y terms, exports contracted 16.3% as a result of a 10.7% drop in volumes and 6.3% in international prices. Imports, on the other hand, were 30.1% below their levels of a year ago, as a result of a 24.2% drop in imported volumes and with prices falling 7.8%.
Exports recorded year-on-year declines in all areas. The biggest drop was recorded in industrial manufactures, which totaled 32.3%. It was followed by fuel and energy, primary products, and agricultural manufactures, which registered y/y falls of 20.3%, 10.0% and 9.0%, respectively. Fuel and energy exports were the only ones that grew in volume but were affected by the sharp fall in international prices that affected all products that make up the category.
In particular, USD 510 million fewer industrial manufactures were exported, and this was also the item that most affected the fall of exports, mainly due to the drop in sales of vehicles for the transportation of goods and people, especially to Brazil. Exports of manufactured goods of agricultural origin fell USD 199 million, with increases in exports of soybean oil, mostly to China, and sunflower oil, while exports of flour and pellets from the extraction of soybean oil, among others, fell. Exports of primary products, on the other hand, dropped USD 170 million, due to lower sales of soybeans excluded for planting, corn grains, and lemons, among others. Net exports of the main soybean products and by-products recorded a USD 1.3 billion surplus, which meant a USD 263 million drop compared to the same month in 2019, mainly due to a USD 185 million drop in exports, with volume falling 13.3% and a price increasing 2.8%.
Among imports, all economic uses also recorded negative y/y variations. Imports of fuels and lubricants (-54.8%), automobiles (-51.6%), and parts and accessories for capital goods (-50.9%) registered the highest relative declines. They were followed by capital goods (-24.0%), intermediate goods (-15.9%), and consumer goods (-16.7%).
The USD 1.5 billion trade surplus recorded in July was USD 526 million higher than the one recorded during the same month in 2019. This positive variation of the trade surplus as a result of greater falls in imports compared to the fall in exports has been happening since January 2020. If the prices recorded during the same month of the previous year had prevailed in July, the trade balance would have shown an even greater surplus: USD 1.5 billion.
In this scenario, the trade exchange (exports plus imports) decreased 22.6% compared to the same period one year ago. China, Brazil, and the United States were once again the country’s main trade partners. In particular, exports to Brazil totaled USD 557 million and imports USD 692 million, recording a USD 134 million bilateral trade deficit.
So far this year, the trade surplus has totaled USD 9.6 billion, USD 3 billion over the balance for the same period in 2019. This result occurred in a context where exports fell 11.9% and imports plummeted 24.4%.
– UTDT’s indicator stood 1.3% under its record one year ago and accumulated a 2.4% decline during the first eight months of 2020
– Confidence in the government fell 6% in August and 27.7% since April; sub-indexes regarding spending efficiency and concerns about the general interest fell over 30% in 4 months
The announcement on August 4th dispelled fears of a prolonged default and was probably one of the factors that reflected positively on consumer confidence, which climbed 8.2% between July and August. A certain relaxation of the lockdown was another probable key factor. Thus, the indicator reversed the negative records of the autumn months and returned to its March levels. The survey, conducted by the Di Tella University between August 3 and 13, failed to capture the volatility of the “free” variants of the dollar during the second half of the month. In order to find such a pronounced monthly increase in confidence, one must go back to July 2019, when the indicator improved by 8.9% in a climate of exchange stability and electoral forecasts favorable to the former government. In any case, confidence remains 1.3% below that of last year’s August.
The settlement with creditors improved immediate expectations, but there are still doubts about the future. The macroeconomic sub-index grew 3.7% in the month, with optimism focused on short-term expectations (19.1%), while long-term expectations worsened between July and August by 4.0%. In spite of the relief for public accounts brought by the debt restructuring, the government will face complex economic challenges in the post-pandemic period: the perception of the macroeconomic situation is today 14.9% worse than in August 2019, in the midst of the exchange rate crisis.
Apart from the financial aspect, respondents confided a relief in their personal situation after three hard months: the sub-index had deteriorated by almost 20% between April and July, but it recovered 7.9% in August. The implementation of the economic reopening weighed more heavily on expectations than the still low levels of activity. Surprisingly, respondents do not consider their situation has worsened much compared to a year ago (-0.8%).
Consumption of durable goods and real estate, especially home appliances, partly explains this recovery. The tendency to purchase increased another 18.9% in August, and after hitting rock bottom in April it did not stop rising due to the wider FX spread, which encourages consumers to purchase in advance goods with prices tied to the official exchange rate. A possible red flag is that the sub-index of consumption of home appliances is 31.9% higher than in August 2019, and it is close to the records from the second half of 2017, when the economic context was much more favorable.
The confidence in the government parted ways with consumer confidence, beyond the fact that both indicators are produced by the UTDT with surveys from Poliarquía. In August, the fourth consecutive drop occurred, accumulating 27.7% since the beginning of the lockdown. The five sub-indices fell in August. In the last four months, the ones that fell the most were efficiency in spending, concern for the general interest and general evolution, with over 30 points of decline. Compared to a year ago, the index is 8% higher with 4 of the sub-indexes in a better situation. The UTDT attributes the drop in confidence to the prolonged lockdown, economic problems, and some decisions that raised controversy, such as the case of judicial reform.
With the strong rise in August, consumer confidence cut its cumulative decline for the year. The UTDT indicator has dropped 2.4% in the first eight months of 2020. It seems a minor decline given the magnitude of the crisis, although by this time last year confidence had accumulated a 16.3% advance, contrary to most economic indicators. Looking ahead to the last stretch of 2020, the evolution of the epidemiological situation will be key for its impact on the implementation of new activities.