Contrary to what the turbulent Argentine history of summer crises could foretell, the summer is ending more calmly than expected. The exchange rate spreads fell, the dollar did not jump sharply and activity is on course for a recovery of around 7% in 2021. It is a better outlook than expected a couple of months ago. Clearly in the short term, the glass is half full.
There are two international factors that aided in this process. The first is that the price of soybeans above USD 500 improves the availability of dollars, precisely the weakest side of the Argentine economy. Reserves remain scarce, but in perspective they are less scarce than before. Secondly, the distribution of SDRs (the IMF’s currency) that will be proposed in April and we believe can be disbursed in August represents an extraordinary gift of around $ 3.3 billion. In perspective, this not only improves the government's external position to, for example, face the payment of 1.8 billion with the IMF itself in September, but it will improve the fiscal deficit by around 0.8% of GDP, at least in the books.
We do not expect high volatility situations in the autumn and winter months. If there were shocks in the system, we believe that they would probably be for political, health or security reasons, rather than economic ones. We see the “muddle through” scenario as the most likely.
But outside the very short term, it is not clear that the glass is half full. Inflation is a problem on which the government does not seem to have a clear action plan. February could bring some relief from previous months, but it would be marginal. The same is true for March, that is, very high records continue.
Trying to contain it with exchange rate appreciation is only a temporary solution. In a country where the deficit is financed through monetary issuance in low credibility scenario, it does not seem like a recipe that can last long. In fact, the market believed Martín Guzmán somewhat, but not fully. The annualized implicit devaluation fell to 40%, but not 25%. The BCRA's devaluation pattern also adjusted somewhat downward, but not close to what the minister proposed. To end the year at 102 ARS/USD as Guzmán wants, the nominal devaluation should be 1.27% per month by the end of the year. Soy does some miracles, but it won’t do all the work. Reaching that number would imply stepping on imports at a level that the economy cannot tolerate. If international tourism returns in the second semester and the dollars escape through Ezeiza airport, things will get even tougher.
The most worrying point is the lack of investment. Not only that country risk has already passed 1,500 points, showing that not even the drop in the FX spread generates a buying appetite for bonds, but that it will be very difficult for real investment to grow beyond a natural recovery above the 2020 floor. There is little chance of multinationals repatriating profits or paying their debts in a timely manner. This week a new brick in the wall was added with the story of union extortion of a logistics company, in the face of inaction by officials and judges.
In this context, we believe that while there will be neither economic crisis nor gigantic volatility, growth will be meager. The economy grows 7% because there is a drag of 6%. And our number for 2022 is 1.5%, because the adjustments will sooner or later hit the economy. The fiscal surplus for January was good news, but in general all Januaries have their accounts in order. The game is played from March onwards and our scenario is that after the SDRs dropped from the sky, the collection of the wealth tax and more withholdings, public spending will increase. The bonus to compensate pensioners for inflation is only the first chapter.
Econviews Weekly March 1st 2021