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Kicking off the third lockdown. Weighing up the economic costs


Resumen Ejecutivo

The Activity
Fiscal accounts and the financial program

The monetary and exchange program
Debt Recalculating the 2020 scenario ... And 2021?

Since our previous monthly report “Micro behind Macro” many things have happened. Globally, the peak of cases overwhelming health systems in the developed world waned significantly over the first half of April, lockdowns are beginning to be eased and economies are taking flight faster than expected. On the other hand, infections are beginning to grow fast in the developing world, and this dynamic hinders the lifting of lockdowns in these countries, which lengthens the agony of the real economy.

The financial panic that had spiked in late March, when restrictions on the movement of people and the closure of borders began, practically faded. The unprecedented injection of liquidity by central banks and the creation of special vehicles to buy financial assets allowed the dynamics of the financial markets to be almost completely decoupled from the real economy. Stock markets virtually returned to the records reached in the pre-pandemic, commodities recovered part of the fall, the credit market begins to be open to emerging countries and their currencies cut part of their sudden devaluation. The Real returned from the peak of almost R$6 per dollar in April to R$4.7, and in the past month, Brazil, Chile, Colombia, Peru, Mexico and Paraguay placed once again debt on the international market.

Locally, Argentina faces an acceleration of infection cases in the City of Buenos Aires and greater Buenos Aires (AMBA), with an epicenter in poor neighborhoods after two lockdown periods and the government announced a third one. Activity indicators are beginning to show, as in the rest of the world, the virulence of the damage to the real economy. But the need to extend restrictions to limit infections generates a spike in economic costs that start to differ from what is observed in the rest of the world due to the extension of the lockdown, but essentially due to the lower efficient resilience of fiscal and monetary policies in a country with no credit and no currency.

The EMAE’s 11.5% fall in March includes the last 10 days of the month of the strictest lockdown (phase 1) and the first 20 days when the economy operated without any restrictions. Deconstructing this dynamic based on the Google Mobility Report and energy consumption information shows us that the economy might have fallen almost 40% i.a. in the past 10 days of March. Projecting this carry-forward on to the second quarter and considering the gradual opening that has already been taking place since then (phase 3 in AMBA and phase 4 in the rest of the country), we come to a second quarter falling by 17.6% on average yoy. (23% in April, 17% in May, and 12% in June). Even considering that the economy might go back to normal as from July, the average fall in the year will be around 9.5%, leaving a positive statistical carry-forward of around 3.3% for 2021. While the rebound begins to take place only as a consequence of the lifting of restrictions, the ability to start to grow will be additionally tied to the way in which the country manages to stabilize the demand for pesos against the huge monetary injection in the coming months and thus avoid an inflationary spike.

For the moment, inflation is contained behind an increase in precautionary demand for pesos and anchored in rates that do not rise, “non-existent” prices – as long as supply is limited – a contained wealth-distribution struggle and strict prices controls that prevent higher costs from being transferred. But the 1.5% of April, and the 1.3% of May shown in our survey do not seem to be sustainable over time once restrictions start to be eased with a rate of devaluation of the official dollar (crawling at 2.7% monthly) driving the exchange gap at around 65%. The attempts to stop the drainage of reserves by limiting companies’ access to MULC or those that paid off commercial debt or those with dollars abroad, worked in the short term and the Central Bank (BCRA) bought again USD580 M in the last six days. However, this is at the expense of importers starting to value stocks at the parallel dollar, generating a lack of prices in the economy in most imported goods and inputs that, if operations are not unlocked, may start to spill over prices and/or could lead to shortages if trade barriers should coexist with restrictions to price increases.

Employment is corrected at a much slower rate, but even with government compensatory programs aimed to pay wages and decompress social contributions, it is difficult to think that no additional harm to employment in traditional sectors will not take place, sectors which are not sufficiently compensated for the generation of jobs in platform economies which were the most benefited in these circumstances. Above all, if the exit from the lockdown occurs so slowly. Much more so if, at any point, restrictions are tightened again.

And this is when it comes into play the debt management, the administration of the enormous monetary injection of the coming months, and the ability to move forward a stabilization plan as soon as the restrictions end, point at which the three conditions we posed at the start of this administration come along again: fiscal consistency, debt settlement, and management of the wealth-distribution struggle.

1) The fiscal consistency sought by the government at the start of this administration when the Law of Solidarity and Productive Reactivation was passed in record time by Congress, collapsed with the pandemic. The primary deficit data for April ($228 B, 0.7% of GDP with expenses growing by 100% and revenues 14%) and the collection for May with an increase of only a nominal 12% (0.5% in terms of Treasury revenues) confirm the trend we have been outlining. Although the extension in time of the lockdown and the compensatory measures increase in the margin the fiscal imbalance towards 6% of GDP with a concentration of the deficit in June and July. The increase in pensions by 6.1% was a fiscal signal showing that even in the midst of the pandemic, the government “did not throw in the towel”, but it goes unnoticed in the face of the increased spending and the collapse of resources.

2) After the setback in the first offer with less than 15% acceptance, the debt negotiation continues with the three groups of bondholders that hold close to 40% of the US$66 BB being negotiated. For the moment, markets reacted very favorably to a new offer from Argentina of around US$48 (including a new bond for the coupon) and eventually a GDP Warrant that adds another US$5, and a position of the groups of the stricter bondholders of around US$58 plus the cash payment of the coupons (US$1.6 BB) and a GDP Warrant for the 2005/2010 swap bonds. In between, the IMF publishes a new document, at the request of the Government, setting forth the chance to expand the improvement to US$50 without disrupting “sustainability”. The negotiation extended to June 12, but a new formal proposal has yet to be filed at the SEC. Once the political decision to close a deal became known, each day that goes by in a world where liquidity returned, bondholders bargaining power increases, diluting the improvement in the government offer, and increasing again the risks of a swap with holdouts.

3) Temporarily, the wealth-distribution struggle withdrew to winter quarters with unions guarding employment and return-to-work protocols to limit infection. Even accepting temporary cuts in wages in the private sector which were unthinkable until a few months ago. For the moment, the destruction of the employment goes up to 10% of the distraction of the activity level, and it is basically associated with companies that begin to file for Chapter 11 and/or a bankruptcy cascade.

Settling the debt is a prerequisite to prevent a major economic meltdown, but it requires it to be embedded in a medium-term stabilization program, which is not in sight today.

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