March 20th, 2019


Weekly report Nº 24: Lockdown

[Activity] The government has finally decreed the Lockdown on non-essential activities, and the economic activity in now navigating into uncharted waters. Thinking of a mild contraction (-2.5% 2020) seems now overly optimistic. We have no clear-cut references for a negative supply-side shock like this one but, at this point, a scenario like 2009 with as much as double that rate or more (5%/6%) does not look unrealistic, although during that years the economy was affected by a severe drought, partially offset by a strong fiscal stimulus. On the international front, analysts are already expecting a global contraction as strong as the one during the financial crisis in 2009 (-1.6%) or worse. 

[Fiscal] the government announced on Tuesday fiscal measures to support economic activity. Government measures aimed at mitigating the Covid shock total ARS 618bn, or 2% of GDP. 

The primary deficit will increase way beyond our (revised) projection of -2.0% of GDP and, again, doubling this figure now doesn't look unrealistic. The 0.9% fiscal cost of the stimulus, plus possible additional measures to alleviate the economic downturn to come (we consider this to be the first of several waves of the fiscal stimulus) will be complemented by a contraction of tax revenues.

How much can the tax collection fall?  We have estimated a Vector Auto-Regressive Model (VAR) of tax collection and economics activity. Cumulative activity to tax elasticity lies in the range 1.6-1.9 for activity related taxes and 1.2-1.3 for social security taxes,  thus ranging the total elasticity between 1.4 and 1.5, consistent with a real contraction of 7%/8% YoY in tax collection or more.


[Markets and Debt] The government launched a big debt swap, in order to relieve its ARS maturities and make some room for the fiscal response to the Covid shock. The swap implied a considerable face value haircut, although, at market prices, the haircut is lower. Results were positive, exchanging about 52% of all the possible debt.

[Monetary] Non-performing credit to the private sector where on 20 years high even before the coronavirus shock. Transfers to the public sector from BCRA accumulate ARS 419mm or 1.3% of GDP since the implementation of capital controls.

Private M2 has increased by 1.0% of GDP in line with dynamics after 2011-2012 capital controls, however, credit to the private sector has not increased in this opportunity, probably explained by the recession and the high non-performing loans. On the other hand, we are now seeing a growth in remunerated liabilities of the Central Bank not seen in 2012.


[Prices] Current week inflation was 0.3% WoW (vs. 0.6% WoW previous week). Internal fuel prices are relatively high and gasoline prices are 118% over the import parity price.




[Activity] The government has finally decreed the Lockdown on non-essential activities, and the economic activity in now navigating into uncharted waters. Thinking of a mild contraction (-2.5% 2020) seems now overly optimistic. We have no clear-cut references for a negative supply-side shock like this one but, at this point, a scenario like 2009 with as much as double that rate or more (5%/6%) does not look unrealistic, although during that years the economy was affected by a severe drought, partially offset by a strong fiscal stimulus. On the international front, analysts are already expecting a global contraction as strong as the one during the financial crisis in 2009 (-1.6%) or worse. 
 
Global and local growth
% Yoy
[Fiscal] Countries are adopting drastic social-distancing measures and implementing supportive policies (ranging from 2% to 18% of GDP), at the expense of increasing fiscal deficits and public debt levels, policy rates have hit the zero-lower bound and central banks have restarted aggressive QE programs. 
 
Locally, the government announced on Tuesday fiscal measures to support economic activity. Government measures aimed at mitigating the Covid shock total ARS 618bn, or 2% of GDP. Our cost estimates for most relevant initiatives in the following table. It should be noted that the fiscal cost of the package is ARS 268bn (0.9% of GDP), as credit lines will be implemented by the Central Bank and the BNA. 

Summary of fiscal measures 
ARS bn and % of GDP
Note: Other measures involve the expansion of the Repro Program, an increase of unemployment benefits, debt deferrals with ANSES for social beneficiaries and accelerated payment of export refunds. These measures are more difficult to cost lacking detailed information, though we assume a conservative ARS 90bn (0.3% of GDP). 
 

While relevant in economic terms (2% of GDP), we believe that the policy mix may be missing the target, as pumping demand when the problem lies mostly with aggregate supply might reap few benefits but relevant downsides. Most policies aim to support demand, through a mix of higher fiscal expenditures and targeted (subsidized) credit. However, the initial impact of the lockdown will be supply-sided, as the effects stress firms' financial situation.  

The primary deficit will increase way beyond our (revised) projection of -2.0% of GDP and, again, doubling this figure now doesn't look unrealistic. The 0.9% fiscal cost of the stimulus, plus possible additional measures to alleviate the economic downturn to come (we consider this to be the first of several waves of the fiscal stimulus) will be complemented by a contraction of tax revenues.

How much can the tax collection fall?  We have estimated a Vector Auto-Regressive Model (VAR) of tax collection and economics activity. Cumulative activity to tax elasticity lies in the range 1.6-1.9 for activity related taxes and 1.2-1.3 for social security taxes,  thus ranging the total elasticity between 1.4 and 1.5, consistent with a real contraction of 7%/8% YoY in tax collection or more. 

 
Cumulative response Activity -> activity related revenues



 
 
[Debt]

The government launched a big debt swap, in order to relief its ARS maturities and make some room for the fiscal response to the Covid shock. The debt to be exchanged totaled ARS 596bn, including several bills (some issued under this administration) and the Botapo (TJ20). The Treasury offered four different options for the exchange: all CER indexed bonds plus a margin (1%, 1.2%, 1.4% and 1.5%) with different maturities (08/05/21, 03/18/2022, 03/25/2023 and 03/25/2024, respectively).

The exchange implies a considerable face value haircut, although, at market prices, the haircut is lower. For instance, we compared the face value and market price variations of the instruments included with the TX21. 
 
New instrument against TX21

 
The exchange results were positive. The government was able to exchange 52% of the total eligible debt: 69% of LECAPs, 49% of LEBADs, 82% of the discount Bill and 17% of the Botapo. As a result, the Treasury issued a nominal original value of ARS 315bn: 38% of Boncer 21, 21% of Boncer 22, 20% of Boncer 23 and 20% of Boncer 24. Market information states that approximately ARS 90bn of the exchange corresponded to public sector holdings of eligible debt, implying that the exchange with the private sector was of 43.5% of eligible debt.
 
[Monetary]
 
Non-performing in credit to the private sector increased before the coronavirus shock. In January, non-performing private credit over total financing increase to 6% from 5.6% the previous month or 3.5% the previous year. By sectors, the increase is mainly explained by companies with a register of 7.8% from 7.1% or 3.1%, respectively. The register is the highest at least since January 2007 which means that is higher than the 2008/09 financial crisis. It Is expected to significantly increase in the following months by the coronavirus shock. Additional financial aid measures will be necessary.
 
Private sector non-performing credit / total financing
Since the implementation of capital controls, Transfers to the public sector from BCRA accumulates ARS 419mm or 1.3% of GDP. 
 
Private M2 has increased 1% of GDP since the implementation of capital controls,  similar to the trend after 2012 capital controls episode. In just five months, Private M2 has increased by 1.0% of GDP. The trend is similar to the expansion of the aggregates in 2012 (1.1% in the same period). During that episode, Private M2 reached 2.3% of GDP, before starting to decrease by an increase in inflation and Central bank's FX sales. To that extent, there may still be some room for monetary expansion but with high risks, and a default event will likely decrease demand for local assets.
 
Evolution of Private M2 in different capital controls 
t = 0 = implementation month of a hard capital control
 
A remarkable difference with previous capital control is that credit to the private sector has not yet increased, probably explained by the recession and the level of non-performing loans. On the other hand, in the current episode, Central's Banks remunerated liabilities are growing. Leliq stocks stood at 4.9% of GDP in February vs 4% before the capital controls. Meanwhile, private credit as a share of GDP stood at 6.4% vs 6.5%, respectively.
 
Remunerated liabilities as a share of GDP
 
 
[Prices]
 
Current week inflation was 0.3% WoW (vs. 0.6% WoW previous week). Meanwhile, core inflation stood stable at 0.4% WoW. As of March 20th, the general monthly inflation is 2.3% MoM and core inflation is 2.0% MoM.
 

 
Internal fuel prices are relatively high. We estimate that gasoline prices are 118% over the import parity price, as a result of the sharp drop in the price of Brent oil (USD 65.5 per barrel in January vs current USD 23.3 per barrel). So far, the government has not announced any changes to fuel prices or the FTX (Fuels Transfer Tax). Though there is margin to reduce internal fuel prices, doing so would hurt the already weak finances of YPF.
 
Brent International prices vs. Lag

 
[Markets]

The bear market continues eroding assets value worldwide: S&P500 ETF dropped -2% WoW and -27% MoM,  completely eroding the cumulative increase since Donald Trump took office. Meanwhile, Argentina's sovereign spread increased up to 4116bps this Thursday, 992bps more than a week ago (and the same level as in end-2001). Though at a different level, this is in line with Latam's risk premium dynamics, which increased to 695bps.
 
EMBI Spread: Argentina vs. Latam
Financial stress is also reflected on the forex market. Though the official FX rate increased to ARS 63.5 (1.2% WoW), the Blue Chip Swap moved downwards to ARS 89.1 (-1.4% WoW). Thus, the premium was of 40.3%. To note, last Monday registered the widest BCS premium since the imposition of capital controls (47%).
 
Blue Swap Chip Premium

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