Argentina Update

Our view on local macroeconomics, explained in ten charts

May 8th, 2020

Strategy & Economics

Joaquin Pastor
jpastor@maxvalores.com | +54 9 11 5865-1079

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of Max Valores is strictly prohibited
May 8th, 2020

The strict lock-down measures taken have generated an 80% reduction in mobility vs. baseline (30 p.p. less mobility
1 than in Uruguay or Brazil), and have increased President Fernández popularity significantly, according to some polls
At the same time, the economy is suffering a severe impact, as shown by leading indicators, and we expect a sharp
2 contraction in activity -even reaching two digits- this year
This trend, combined with difficulties in the identification of vulnerable groups of population, will inevitably push upwards
3
Argentina
poverty, which was already at high levels as of end-2019 (35%), thus possibly bringing in tensions (and/or social unrest)
Fiscal numbers are starting to signal the effect of the crisis with revenues growing 36% and expenditures 58% as of
4 March
Update 5
But they still aren’t showing full impact: the trend will deepen in coming months with the implementation of the fiscal
package, with a government-estimated size of assistance to the Private Sector of ~8% of the GDP
Our view on local The government, short of alternatives, is financing its deficit with BCRA’s transfers, which evidences in record
macroeconomics, 6 transfers in terms of GDP and Monetary Base

explained in ten 7
The monetary base is growing at a pace of 64% yoy; all components grow at high rates, but the fastest are currency in
banks and bank reserves, growing at 74% and 67%, respectively
charts Recent experience shows that when money reaches the public, the gap between official and parallel FX broadens;
8 this is exactly what happened between 2011 and 2015
This time would be no different; since early March, BCS surged 36% while Official FX only depreciated 7%, and the
9 government reacted with new regulations
There are no imminent inflationary pressures, as long as official FX is controlled; furthermore, we could see some
10 prices falling in next weeks

BONUS: What’s coming next? Some food for thought

Assuming the increase in fiscal deficit is transitory, the problem will be the day after the pandemic; there are two possibilities
ahead and neither of them is desirable for the government: increase sterilization or let the inflation accelerate

2
 May 8th, 2020

1 Strict measures have reduced mobility 80% and increased

President Fernández popularity1

Measures taken have reduced mobility 80% vs. …simultaneously increasing

baseline (-30 p.p. vs. Brazil or Uruguay)… Fernández popularity
Mobility in retail and recreation, percent change from baseline2 Image of President Alberto Fernández

20 1st case in Lock-down until Lock-down ext. to

Argentina Mar-31 May-10
Lock-down ext. to
0 Apr-12 2,2% 3,2% 2,2% 1,4% 1,5%
Lock-down ext. to 4,8% 7,4%
Apr-26 Don't know 28,5% 27,2% 27,4%
-20
Brazil
-40 Negative
Uruguay 93,8% 91,1%
-60 69,3% 69,6% 70,4%
Chile
Colombia Positive
-80
Peru
Argentina Dec-2019 Jan Feb Mar April
-100
(2nd week)
4-Mar

8-Mar
2-Mar

6-Mar

11-Apr
13-Apr
15-Apr
17-Apr
19-Apr
21-Apr
23-Apr
12-Mar

16-Mar

20-Mar

24-Mar

28-Mar
10-Mar

14-Mar

18-Mar

22-Mar

26-Mar

30-Mar
17-Feb
19-Feb
21-Feb
23-Feb
25-Feb
27-Feb
29-Feb

9-Apr
1-Apr
3-Apr
5-Apr
7-Apr

1. At least according to pollsters close to the ruling party

2. The baseline is defined by Google as the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020

Source: Max, based on Google Maps’ Community Mobility Reports and reports by Analogías Consultora 3
 May 8th, 2020

2 The economy is suffering a severe impact, and we expect a hard

contraction in economic activity (even reaching two digits)

Leading economic indicators GDP Scenarios for 2020

Percent change yoy ARS millions, at 2004’s constant prices
Industry's Car Sales Cement Sales Pre-COVID projection
No. of units Tons
37.708 940.167 Scenario COVID-19 no. 1
Scenario COVID-19 no. 2
700.000
-50% 18.992 -47% 502.541
600.000

500.000
Mar '19 Mar '20 Mar '19 Mar '20
Soybean crushing VAT Collection
Tons Constant ARS of Apr '19 % yoy
2.913.048 2,4%
117.200 -1,4%
85.444 -1,7% -9,4%
-2,6%
-6% -27% -13,1%
2.740.944

III-17

III-18

III-19

III-20
I-17

I-18

I-19

I-20
IV-18

IV-19

IV-20
IV-17
II-17

II-18

II-20
II-19
Mar '19 Mar '20 Apr '19 Apr '20 2017 2018 2019 2020

Source: Max, based on ADEFA, AFCP, Ministry of Agriculture, AFIP and Indec 4
 May 8th, 2020

3 This trend, in a context of labor market fragmentation and high

informality, will push poverty upwards

Labor market fragmentation and informality …thus boosting poverty (which

complicate identifying/supporting the affected… is already +10p.p. vs. 2017)
Labor market indicators, Q4-2019, ‘000 individuals1 Poverty rate, % of individuals
lation1
popu-
Total

28.469 100%
35,4% 35,5%
32,0%
Non- 30,3%
i 3.353 12% 28,6% 27,3%
salaried 25,7%
Employed

Formal
Labor force

a ii 5.700 20%
employee
1
Informal
iii 3.187 11%
employee
Unem-
ployed

b 1.196 4%
Inac-
tive

2 15.033 53%

1. Includes total population of 31 urban agglomerations

Source: Max, based on Indec 5

 May 8th, 2020

4 Fiscal numbers are starting to show the effect of the crisis, with
revenues growing 36% and expenditures 58% as of March…
Non-Financial Public Sector Overall Balance, March YTD (ARS Mn)

Growth 39% 16% 36% 52% 98% 64% -18% 58% -1608% 35% 183%

ARS Mn 975 405 1.088 551 200 452 41 1.244 -156 169 -325
1.200
1.000
800
600
400
200
0
-200
-400

Total Expenditures
Tax & Social

Other current

Overall Result
Subsidies
Other

Total Revenues

Primary Result
Capital spending
Pensions

Interests
Security

Source: Max, based on Ministry of Economy spending 6

 May 8th, 2020

5 …but they still aren’t showing full impact; the trend will deepen
in coming months, with assistance of ~8% of GDP
Package of sanitary emergency measures and income policies, ARS Millions and % of GDP

Estimated April, May and

April 2020
June, 2020
Fiscal Cost, Fiscal Cost,
% of GDP % of GDP
ARS MM ARS MM
(1) Fiscal package of Emergency Policies 351.444 1,2% 1.054.332 3,5%

(2) Financial Facilities Program 640.014 2,1% 640.014 2,1%

(3)=(1)+(2) Estimated Global Package 991.458 3,3% 1.694.346 5,6%

(4) Income transfers 211.785 0,7% 635.356 2,1%

(5)=(3)+(4) Total Assistency to Private Sector 1.203.243 4,0% 2.329.702 7,7%

Source: Ministry of Economy 7

 May 8th, 2020

6 The government, short of alternatives, is financing the deficit

with BCRA’s transfers
BCRA's transfers to the Treasury, ARS billions

% of
- 0,3% - - 0,4% - - 0,2% 1,0% -0,0% 0,4% 0,7% 1,0%
GDP 1
% of
Monetary - 3,5% - - 5,8% - - 2,8% 13,3% -0,0% 4,9% 9,4% 14,2%
Base 2

ARS bn
350
310
290
300

250
205
200

150 127 Profits distribution

107
100 77 Transitory loans
60
50
- - - - -
-

Nov-19

Dec-19
May-19

Jan-20
Jul-19

Oct-19
Sep-19
Jun-19

Feb-20

Mar-20
Apr-19

Apr-20
Aug-19

1. Assuming an average GDP of ARS 30 trillions

2. Using as a reference the average monetary base as of April 2020

Source: Max, based on BCRA 8

 May 8th, 2020

7 The monetary base is growing at a record pace,

but (so far) mostly explained by bank reserves
Monetary base, monthly average yoy variation and ARS trillions
100%

Monetary base is
80%
Currency in banks. 74% growing at 64% yoy
Bank Reserves. 67%
60% Monetary Base. 64%
Currency in circulation. 61%
All components grow
at high rates, but the
40%
fastest are
20%
currency in banks
and bank reserves,
0% growing at 74% and
67%, respectively
-20%
2,5 Currency in
2,0 Bank Reserves
circulation is the
1,5 slowest, growing
1,0
Currency in banks 61% yoy (although
0,5 Currency in circulation
this is above
0,0 inflation, currently
at ~48% yoy)
Oct-19

Mar-20
Feb-20
Dec-19
Jun-19
Apr-19

Apr-20
Sep-19
Aug-19

Jan-20
Nov-19
Jul-19
May-19

Source: Max, based on BCRA 9

 May 8th, 2020

8 When money reaches the public, the gap

between official and parallel FX broadens
FX gap and currency in circulation, during period 2010-2016

The implementation of currency

FX Gap (BCS vs. Official, %)
controls at the end of 2011
Currency in circulation (deflacted, right axis) triggered a surge in the gap
80% 130
between official and blue-chip
swap (BCS) rates
70%
Exchange rate 120 Monetary financing of the fiscal
60% liberalization deficit reflects in the growth of
110 real cash balances in circulation
50%
When the public tries to get rid of
40% 100 excess cash balances, that
Average=40% behavior puts pressure on the
30% 90 local price of US dollars: the BCS
20% Foreign exchange increases along with other parallel
market intervention Court ruling in favor 80 exchange rates
10% of holdouts and
“technical default” The average gap between the BCS
70
0% and the Official exchange rate for
the period 2011-2015 was 40%,
-10% 60 accentuated in times of controls
Oct-11

Oct-12

Oct-13
Oct-10

Oct-14

Oct-15
Jul-10

Jul-11

Jul-14

Jul-15
Jul-12

Jul-13
Apr-12

Apr-13
Apr-10

Apr-11

Apr-14

Apr-15
Jan-10

Jan-11

Jan-14

Jan-15

Jan-16
Jan-12

Jan-13

tightening and specific news that

affected expectations such as the
ruling in favor of holdouts in 2014

Source: Max, based on Bloomberg, BCRA and Indec 10

 May 8th, 2020

9 This time would be no different; BCS surged and the

government reacted with new regulations

FX gap and currency in circulation Currency in circulation expanded 20% in real terms since
December and it was a matter of time for this to impact BCS
FX Gap (BCS vs. Official, %) With companies’ liquidity necessities in the first months keeping
Currency in circulation, deflacted (right axis) FX “calmed”, the final trigger was the apparition of COVID-19
90% 105 cases in Argentina: BCS surged 36% since the beginning of
March, vs. only 7% of the official FX, with the gap reaching
80%
100 +70%
70%
60% 95 To mitigate this trend, the government reacted with regulations:
50% 90 • Argentina’s securities regulator (CNV) introduced a
40% requirement for local mutual funds to allocate at least
30% 85 75% of their assets to ARS-denominated financial
20% instruments, with an estimated impact of USD 1bn,
80
representing 15x the daily volume of BCS market
10%
75 • The Central Bank issued a resolution determining that
0%
-10% 70 companies and individuals that accede to the official FX
will have to confirm they have not engaged in transactions
1-jun-19

1-ene-20
1-ene-19

1-may-19

1-dic-19
1-nov-19

1-feb-20
1-feb-19

1-ago-19
1-abr-19

1-abr-20
1-jul-19

1-mar-20
1-mar-19

1-sep-19

1-oct-19

involving the purchase and sale of financial instruments

liquidated in foreign currency during the previous 30
days, as well as commit to not doing so for the subsequent
30 days, and vice versa

Source: Max, based on Bloomberg, BCRA, Indec and 1816 Estrategia y Economía 11
 May 8th, 2020

10 There are no imminent inflationary pressures, as long as official

FX is controlled; furthermore, we could see some prices falling

In the short term, with FX under …specially with +36% of household

control, inflation will remain low… expenditures restricted by quarantine
Framework for analyzing inflationary pressures Household expenditure structure
Country total2 for years 2017-18, in %
Housing &
Utilities
Drivers of Variables to Food and non- 14,5%
Inflation measure Inflation alcoholic beverages
22,7%
International prices
Transportation
Exchange rates Export/Exportable goods’ prices 14,3%
Export ad valorem taxes

Tariffs on imports Import/Importable goods’ prices

Other goods Recreation &
and services Culture
Mark-up on costs 6,2% 8,6%
Non-tradable goods’ prices Education
Price of public services 3,1% Clothes and footwear
Communications 6,8%
Wages 5,2%
Home maintenance & equipment Restaurants & hotels
Healthcare 6,6%
5,4%
6,4%
1. Even though this could not be true if individuals purchased the goods using digital channels, at the moment of this survey less than 10% of total expenditures took place through them, making this a distant
possibility
2. Includes Towns with 2,000 and more inhabitants

Source: Max, based on INDEC (2019) National Survey of Household Expenditures 2017-2018 12
May 8th, 2020

Assuming the increase in fiscal deficit is transitory, the problem

is the day after the pandemic: there are two possibilities

Two possible outcomes1 of increased money supply after COVID-19 crisis

Increased sterilization Inflation Acceleration

e.g., with Leliqs

Crowding-out of the private sector as the Transition to a high inflation regime,

government finances through the financial with shortening of contracts and
system, with upward pressure on recurrence to indexation as a mechanism
interest rates’ gap and negative effect to lower transaction costs, implying
on expectations2 increased risks of spiralization

Most probable scenario involves a

combination of these two possibilities

1. Assuming that attaining a primary surplus is off the table

2. In this context, quasi-fiscal déficit will become again a big source of concern

Source: Max 13
Strategy & Economics
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