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September 30, 2020


ARGENTINA: The Week at a Glance

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

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The Fragility of the Labor Market and Its Social Consequences

Unemployment data showed the fragility of Argentina’s social scheme very clearly. Unemployment climbed to 13.1% a lower figure than expected by the market. But this cannot be considered good news. Instead of looking at unemployment, we must consider the employment rate. And there we can find devastating figures: only 33.4% of the population worked in the second quarter of the year when only a year ago that figure was 42.6%.

Unemployment did not burst mainly for two reasons: Firstly, labor participation also slumped from 47.7% to 38.8%, not considering many of those who did not count as unemployed because they were not able to search for work. Secondly, the ban on layoffs in the formal sector of the economy kept the employment level artificially high. If we look at the proportion of public employment, we see that it jumped from 17.1% to 21.9% as a sign of how the formal and public sectors were spared.

According to the sample collected by INDEC in 31 urban centers, there are 2.5 million less fewer workers than a year ago. Extrapolating from the total population, approximately 4 million jobs have vanished in the last year.

This has hit the informal and most vulnerable sectors hard. For example, among those with a low education level (who have not completed secondary school or less) 1.8 million jobs were lost, almost half the total jobs. From an informal point of view, almost 3 million of the 4 million jobs that vanished belonged to workers without contributions towards retirement pensions or self-employed individuals.

Mobility restrictions are clearly the main culprit and, as the economy moves back to normal, some of the 4 million jobs will be recovered. The first to do so will be construction jobs and much later the same will happen with services such as restaurants, malls, hotels, entertainment, and culture. But the wounds shall remain. There are many companies, coincidentally labor intensive, that are in intensive care. The level of employment is sustained by a government program, which is increasingly restrictive, but it is clear that it is neither sustainable from a fiscal point of view nor can businesses endure much longer without generating revenues or with a low capacity utilization rate (restaurants with only tables outside). The immense number of “zombie” companies will generate a significant effect on the level of employment.

Some big cities such as Rosario, Cordoba, Santa Fe and Mar del Plata face a greater level of unemployment than the rest. The greater Buenos Aires in its hubs of poverty and informality are another concern due to its social effects, and insecurity. The income distribution data confirmed this extreme fragility, showing how the lockdown did not hit evenly. The Gini coefficient, which measures the degree of inequality, went from 0.434 to 0.451 while the income of the richest 10% was 25 times greater than that of the poorest 10% when two quarters ago it was 21 and 20 times in the second quarter of 2019.

Recovering employment in these low human capital and very informal sectors is very hard. A third of the unemployed had been so for at least 6 months during the year´s second quarter. Given the scarce opening of the lockdown in the third quarter, this data will probably not improve. In the post-pandemic period, it will be important to articulate workforce retraining policies. This is not only about solving the long-term problem but also about a faster change in production patterns of goods and services. The problem is that these measures require two things in which Argentina does not excel: management and fiscal muscle.


Low Inflow of Trade Dollars and Many Purchases of Dollars for Saving in August

– A wide FX spread and few net reserves to uphold the official exchange rate cause distortions for exporters as well as for importers: exports collections (FX market) were below the exports recorded by customs (ICA) for the seventh month in a row and the opposite happened with imports: in four of the last five months the balance paid is greater than the accrued one

– In y/y terms, export collections have been falling for the fifth month in a row (-17%); while import payments have accelerated (28%); thus, In August the net dollar inflow for goods was scarcely USD 366 million

– As for services, the balance was USD 229 million negative, the highest record so far this year; even though shutting down international tourism generated a correction of the deficit, payments to foreign suppliers fall under this item, and have accelerated at the margin

– The purchases of dollars totaled USD 768 million, with 4 million buyers in the month; it is relevant to note that as from mid-September, with the implementation of the XXL cepo, the sale of dollars stopped for over a week, as banks had to check the necessary conditions to be able to sell to their clients

– With this level of pressure in the FX market during August, with many dollar purchasers and a scarce net inflow of foreign trade currency, the CB intervened selling USD 1.2 billion reserves, the highest amount so far this year; thus, gross international reserves decreased USD 544 million, ending the month at a level of USD 42.8 billion

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During August, the settlement of dollars in the FX market due to sales of goods was again affected by the distortion generated by a high exchange rate spread, added to the shortage of reserves to defend the official exchange rate. In fact, during the month USD 1.2 billion reserves were sold for intervention, the greatest amount so far this year. The dynamic is distorted because exporters prefer to postpone their dollar sales as much as possible; and conversely, importers seek to bring forward cash payments. This fact is remarkable when comparing the FX market (cash basis) with the Argentine Commercial Trade report surveyed by INDEC (accrual basis). The currencies settled in exports (FX market) were below the exports made (ICA) for the seventh month in a row. The opposite happened with imports: in 4 out of the last 5 months the balance paid was higher than the one computed in customs.

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In August, collections for exports were USD 4.0 billion, below the two previous months. In year-on-year terms, the settled balance was 17.4% less than a year ago. A strong USD 6 billion fall in exports financing can be highlighted. This decrease can be explained by the reduction in dollar deposits since the 2019 primary elections (USD 14.4 billion) and to maintain high liquidity standards, banks had to cancel loans (USD 10 billion). At a sector level in August, the “Oilseeds and Cereals” sector sold around USD 1.9 billion, and despite the fact that the gross harvest season ended in June and therefore August is a month with low seasonality, the settled balance was scarce and was 27% below the same month last year. As for imports payments, they amounted to USD 3.7 billion, and in line with what we commented on the trend to advance payments, 28% over one year ago.

This way, the balance in dollars for goods in the FX market fell USD 366 million, pressuring for greater import payments, and there were fewer dollar settlements due to exports.

On the services side, the balance was USD 229 negative, the highest record so far this year. The deficit for the account “Travel, fares and other payments” reached minimum levels, in line with the closing of international tourism. However, remote purchases from foreign suppliers are also included in this item. As for interest, the payment of USD 306 million to the IMF was highlighted.

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As for the financial account, the outflow of dollars due to dollar purchases totaled USD 571 million net, the highest record so far this year. Purchases of dollars for savings totaled USD 768 million, with 4 million buyers in the month. It is relevant to note that as from mid-September with the implementation of the XXL Cepo, the sales of dollars were on hold for over a week, as banks had to check the necessary conditions in order to sell to their clients.

This way, the CB’s gross international reserves decreased USD 544 million, ending the month at a level of USD 42.8 billion. Without considering de valuation adjustments, the fall was greater (USD 907 million)

After Half a Year of Lockdown, the Spread Between Expenditure and Revenue growth is 30 Points

– In August, National Government’s total revenues grew 24.9% compared to the same month in 2019; primary expenditures grew 56.9%

– Social spending hiked 87.6% y/y, and included a little over ARS 71 billion towards Emergency Family income programs (IFE) and Emergency Assistance to Work and Production (ATP)

– Primary deficit grew to ARS 89.5 billion in the month (0.3% of GDP), after recording an ARS 13.7 billion surplus in August 2019; the fiscal shortfall was ARS 145.5 billion, around ARS 130 billion higher than a year ago

– Cumulative year-to-date, the primary deficit reached ARS 1.134 trillion -4.3% of GDP- while the fiscal deficit amounted to ARS 1.522 trillion

After six months of lockdown, the expenditures to sustain production and employment in the midst of the pandemic continued to maintain the dynamics of primary spending, which accumulated half a year growing at over 56% y/y. The spread between expenditures and revenues growth continues to narrow since the peak of May when it reached 94.4 percentage points, but extraordinary disbursements in social benefits set a high floor on expenditures.

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The difference between the year-on-year growth rate of primary spending and revenues decreased by more than 10 percentage points, from 43.2 in July to 32.1, but it remains high. Most of this reduction was due to the acceleration in the revenues growth rate, from 16.1% to 24.9%, while primary spending grew 56.9% compared to a year ago, slightly below 59.2% the previous month.

Among the total revenues of the non-financial public sector, tax revenues grew 30.1%, about 5 percentage points above the previous month’s record. Revenues from income tax (37.1%) and personal assets (678.6%) were the key drivers, favored by changes in the change in the due date of these taxes. Also, the additional revenues involving the P.A.I.S. tax, mainly on purchases of dollars for hoarding. Revenues from VAT remained depressed and grew only 11.7% y/y, reflecting the weakness of private consumption.

Revenues not linked to tax collection were again the weakest: rents on assets fell 27.2%, capital inflows contracted 24.8%, and “other current inflows” scarcely grew 6.5% in nominal terms compared to a year ago. Among other factors they were affected by the waiver in installment collections in loans granted by ANSES to the private sector and the lower available ANSES resources for financing the Historical Reparation program.

Primary spending declined for the third month in a row, but still remains around 5 points above the pre-lockdown growth rate. Among the various spending items, social benefits stood out once again and grew 87.6% year-on-year. Transfers to the private sector through IFE and ATP amounted to just over ARS 71 billion, while the Alimentar program and allocations in the area of Employment Support together accounted for almost ARS 8.65 billion. Indeed, “other social programs” sub-item leaped 713.6% y/y, and retirement and contributory pensions added up to a year-on-year increase of 43.2%, after the last increase of 6.12% granted in June.

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In a scenario where gas, electricity and water rates remain frozen, and neither has transportation increased in recent months, economic subsidies grew 23.7% in August. In particular, transport subsidies climbed 48.3% with greater assistance for both public companies and the Financial Fund of the Infrastructure and Transportation System, within the framework of the compensatory regime for automobile transportation rates. On the other hand, energy subsidies scarcely grew 7.3% compared to August 2019, as a result of lower payments made to CAMMESA and assistance for around ARS 10.2 billion for the Plan GAS program.

Aimed at offsetting the lower revenues of provincial taxes and automatic tax-sharing transfers, current transfers to provinces grew 80.4% year-on-year. Transfers to universities grew 50.5% compared to a year ago, while operating expenses rose 17.4%, with salaries growing by 20.2%. As for capital expenditure, it contracted 14.4% year-on-year, in spite of including expenditures made by the Ministry of Public Works for the construction of hospitals (ARS $4 billion) and capital contributions made to FONPLATA for almost ARS 1.9 billion.

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In this scenario, August recorded a primary deficit of ARS 89.5 billion, equivalent to 0.3% of GDP. This result means a strong weakening when compared to the ARS 13.7 billion surplus in August 2019, although it must be considered that the economic and social scenario was very different to the current one. If we take interest payments to the private sector for ARS 56,0 billion into account, the fiscal deficit amounted to ARS 145.6 billion, around ARS 130 billion more than in the same month last year. Thus, the primary deficit amounted to ARS 1.134 trillion cumulative year-to-date (4.3% of GDP), with revenues growing 20.5%, way below the 69.3% primary expense growth rhythm. The Fiscal red accumulates ARS 1.522 trillion, financed by temporary advances and profits transfers from the CB that amounted to ARS 1.512 trillion in the first eight months of the year.

The Third Quarter Began with the Economy Growing 1.1% in July

– EMAE-INDEC grew 1.1% compared to June, although it is still 11.6% below its level in February

– In y/y terms, the official indicator slightly increased its fall from 11.7% to 13.2%

– Financial intermediation (2.9%) and electricity, gas, and water (4.4%) were the only two sectors with positive y/y growths

– So far this year, EMAE has accumulated a 12.6% fall compared to the same period in 2019; we expect it to fall around 11.6% in the entire year

– Last week, INDEC released its national accounts estimates corresponding to the second quarter, which displayed a 16.2% quarterly fall

The economy has left behind April’s low and accumulated its third consecutive rebound in July. But, despite the fastest recovery than expected, activity did not manage to make up for all the lost time during the strict quarantine and is still 11.6% below its record in February.

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EMAE surveyed by INDEC scored a 1.1% rise in July compared to its record in June ─seasonally adjusted series─, which continues the recoveries in June (7.5%) and May (9.5%). In y/y terms, the official indicator contracted 13.2%, slightly increasing its fall from 11.7%.

Out of the fifteen activity sectors gathered by the official indicator, financial intermediation (2.9%) and the sector that produces electricity, water, and gas (4.4%) were the only ones that managed to grow in y/y terms. Although they have already started to recover, industry and construction were 8.1% and 30.1% below their records one year ago. Among the services sector, “wholesale and retail trade and repairs” fell 5.8%, while June’s record (which surprisingly recorded a scarcely 0.3% fall) was revised and lowered to -1.4%.

“Fishing” (-67.1%), “Other Activities Related to Community, Social, and Personal Services” (-60.3%) and “Hotels and Restaurants” (-65.4%) were the sectors with the greatest y/y falls in July, although the greatest negative contributions toward the y/y variation of EMAE, given its relative weight, were made by “Taxes Net of Subsidies” (-2.39 pp.) and “Transportation and Communication,” which fell 23.3% with a -1.92 pp. effect on the general indicator.

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During the first seven months of the year, economic activity accumulated a 12.6% fall compared to the same period in 2019. We expect the economy to have definitely taken off from April’s floor, although the recovery will now be way slower than May and June’s records.

Last week, INDEC revealed its estimations on National Accounts corresponding to the second quarter of the year, which resulted in a 16.2% fall compared to the first quarter of the year and a 19.1% drop in y/y terms. Previously, EMAE had anticipated a 16.6% decline and a 20.3% y/y reduction.

Particularly, private consumption fell 18.9% compared to the previous quarter and 22.3% in y/y terms, while investment plummeted 27.3% and 38.4% respectively. As for foreign trade, exports fell 7.9% compared to the first quarter and 11.7% in y/y terms, while imports slumped 19.1% and 30.1%.

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With economic activity recovering during the second half of the year, we foresee 2020 to close with an average fall around 11.6%. This fall would be even greater than the one recorded in 2002 (-10.9%) and in previous crises, such as the hyperinflation in 1989 and 1990, when one-digit falls were recorded.

Glass Half-Full: Monthly Rises in Exports and Imports Helped August’s Trade Surplus

– August’s trade surplus reached USD 1.4 billion, with strong y/y drops in both exports and imports

– Exports amounted to USD 4.9 billion and, although they fell 11.3% compared to one year ago, they grew 4.8% m/m seasonally adjusted

– Imports amounted to USD 3.5 billion and slumped 20.4% in y/y terms, although they grew 7.0% m/m seasonally adjusted

– Year to date, the trade surplus has risen to USD 10.9 billion, with exports falling 11.8% and imports collapsing 23.8%

The trade surplus scored a USD 1.4 billion rise in August, its twenty-fourth one in a row. Although commercial trade is still low due to the slump in both exports and imports, the good news brought by last month’s data is that both series have grown in seasonally adjusted, m/m terms. The weakness of economic activity and the greater obstacles to gain access to import permits are putting a brake on imports, although the greater opening of the economy and the possibility of obtaining dollars at the official rate, which is way below the financial dollar, provide importers with an extra incentive. Also, the recent rise in the price of agricultural commodities, especially in the price of soybean, is encouraging exporters to make shipments in advance, even though they get an ARS 50-65 exchange rate once export taxes are applied.

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Exports amounted to USD 4.9 billion and grew 4.8% compared to their record from a month ago, while imports totaled USD 3.5 billion and grew 7.0% compared to July’s record. In y/y terms, exports contracted 11.3% as a result of an 8.1% fall in volumes and a 3.5% one in international prices. As for imports, they stood 20.4% below their records from one year ago, consequence of an 18.3% slump in imported volumes and with prices dropping 2.7%.

Among exports, those of primary products (10.2%) were the only ones recording a y/y rise. The most significant fall was the one in fuel and energy, which escalated to 30.6%. Behind followed industrial manufactures and agricultural manufactures, recording 26% and 12.3% y/y declines, respectively.

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Particularly, industrial manufacture exports dropped USD 437 million, also being the item that most affected the fall of exports, mainly due to the lower sales of vehicles for transportation of goods and people, especially those with Brazil as their destination. Agricultural manufacture exports fell USD 258 million, mainly due to lower sales of fats, oils, and beef, while dairy product exports, among others, rose. As for primary product exports, they increased USD 154 million, accounted for by greater grains sales (corn grains were the main export of the month) and, to a lesser extent, by seeds and oilseeds sales. Net exports of the main products and byproducts of soybean recorded a USD 1.1 billion surplus, meaning a USD 219 drop compared to the same month one year ago, product of a USD 122 fall in exports and a USD 97 rise in imports.

Among imports, all economic sectors surveyed by INDEC recorded negative y/y variations. Fuel and lubricant imports (-48.1%) and imports of spare parts and accessories for capital goods (-37.8%) recorded the greatest relative falls.

They were followed by imports of automobiles (-24.5), capital goods (-23.0%), consumption goods (-10%), and intermediate goods (-5.1%)

The USD 1.4 billion trade surplus recorded in August was USD 268 million higher than that from August 2019. This behavior, a positive variation of the trade surplus as a result of higher falls in imports than in exports, has been recorded since January 2020. In this scenario, commercial trade (exports plus imports) has dropped 15.3% compared to the same period last year. Brazil, China, and the US were again Argentina’s main trade partners. Particularly, exports to Brazil amounted to USD 646 million, and imports USD 777 million, recording a USD 131 million bilateral trade deficit.

So far this year, the accumulated trade surplus has risen to USD 11 billion, USD 1.5 billion over the balance recorded during the same period in 2019. This record took place in a context in which exports fell 11.8% and imports slumped 23.8%.

Supermarket Sales Grew Again in July

– In July, supermarket sales measured in constant prices grew 1% compared to the same month in 2019, while wholesale store sales rose 5.8%

– The Coronavirus accelerated consumer-behavior changes, such as online shopping in supermarkets or using less cash

– Shopping centers experienced yet another tough month and their sales collapsed 83.3% in y/y terms

After June’s setback, supermarket sales scored another positive record in July. According to INDEC, their sales measured in current prices increased 47.5% compared to one year ago, implying a 1% y/y rise measured in constant prices. Thus far, except in June and January, supermarket sales have increased in all their 2020 records. Wholesale stores have performed even better: they have been accumulating favorable y/y results since last October and in July 2020 their sales in current prices grew 50.5%, which meant a 5.8% rise in constant prices. Anyhow, their sales volume is scarcely a sixth of that of supermarkets.

The pandemic keeps promoting changes in consumer behavior: online sales, which averaged less than 2% out of the total amount in 2019, jumped to 4.5% during the second quarter of 2020, and represented 6% of July’s sales. There is also a certain fall in the use of cash to pay for purchases: cash use dropped from 34% in 2019 to 30.5% since the lockdown began.

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Shopping centers were not as lucky and experienced another month of decline: their sales in current prices sank 73% compared to one year ago, an 83.3% real fall. In July, the disparity between the situation in Buenos Aires and the rest of the country grew again; sales in shopping centers in the Metropolitan Area represented less than 10% of the total, when they have been historically closer to two-thirds. Nonetheless, the rise in COVID-19 cases in the interior of the country in August and September led to new lockdowns in several regions, which could reduce that difference in the coming months.

Private consumption outlooks for the second half of the year are mixed. It seems quite hard for shopping centers to fully recover until the pandemic is behind us. Although they have been growing in y/y terms, the recovery of supermarket sales has decelerated over the last months and a potential acceleration in inflation would not be beneficial. According to SIPA’s figures until June, real wages lost 3.0% this last year. It will be hard for consumption to take off without a recovery in consumers’ income.

Consumer Confidence Was Decreasing Even Before the Super Cepo

– After growing 8.2% in August after restructuring the debt, consumer confidence fell 2.4% in a month that was marked by political conflict and the reserves drainage

– Compared to September 2019, UTDTs indicator worsened 4.2% and accumulated a 4.8% drop during the first nine months of the year

  • Confidence in the Government experienced yet another hard month, dropping 4.7%; after April’s historical peak, confidence has had a downwards trend

FX inconsistencies and political conflict had been eroding consumer confidence even before the CB’s announcement. This is portrayed in the Universidad Di Tella’s survey which was made between September 1st and 14th. The first fortnight of the month brought a marked decline in talks between the ruling party and the opposition, which led to a transferal of resources from the City to the Province of Buenos Aires. In addition, although the survey closed before September 15, the CB’s loss of reserves during previous weeks was near USD 100 million daily, which triggered rumors about potential exchange measures, increasing the general uncertainty.

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Thus, consumer confidence measured by UTDT fell 2.4% in September. The agreement with creditors had propelled an 8.2% rise the previous month, but it could not keep the momentum going. The indicator recorded a 4.2% decline compared to September 2019, although it is still far away from the lows in late 2018.

September was another month in which pessimistic views on the macroeconomy prevailed. In a year marked by the pandemic and the debt restructuring, the sub index referring to the country’s situation only grew in April and August, falling the rest of the months. In September, there was a 2.8% decrease, and the indicator stood 20.2% below one year ago. This month, there were no divergences between short- (-2.9%) and long-term (-2.7%) expectation, which worsened similarly.

Very few sectors have closed collective wage negotiations and surveyed individuals report that their personal situation has worsened. The fall in said sub index was 1.0% between August and September; the economic reopening partly compensates for the decline of wages in view of an accelerating inflation. Remarkably, the perception of personal economy is 1.7% worse than in September 2019, partly due to the good comparison basis left by the summer’s wage increases.

Low confidence prevails among high-income individuals surveyed: while they perceived their personal situation sank 8.3% during the month, the sectors with lower income recorded a 7.2% recovery. Something similar happens with macroeconomic outlooks: high-income individuals saw signs of decline (-5.9%), but this was not the case for low-income individuals (2.2%).

The Government experienced another negative month for its image: after April’s historical peak, confidence in the Government, also surveyed by UTDT, accumulated several months with falls, and decreased 4.7% between August and September. The sub-indexes that assess the Government’s general performance (-14.6%) and problem-solving skills (-6.8%) were the most affected ones, while the perception of public servants’ honesty (2.7%) rebounded. Alberto Fernández’s honeymoon seems to have come to an end, but the Government’s image is still 19% over the record from September 2019, right after the former administration lost the primaries.

During the first nine months of the year, consumer confidence accumulated a 4.8% fall. Having closed a deal with creditors and assuming the negotiations with the IMF will extend until the first half of 2021, the indicator’s evolution in the last quarter of 2020 will depend mostly on FX volatility and on how much activity reopens considering the still-high number of COVID-19 cases.

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