Strong warning from the bank that advises the Government to renegotiate the debt on the recession, inflation and exchange controls

The bank that advises the government to renegotiate the debt warned that the Argentine economy will suffer a 7% drop this year, that inflation will rise to 4% monthly when the economy reopens and questioned the expansionary monetary policy.

The Bank of America (Bofa), one of the two entities designated to collaborate with the Ministry of Economy on debt, released a report called “Quick quarantine, slow reopening.”

There it was indicated that “Limited market access and lack of confidence in the peso limit the potential size and effectiveness of the fiscal stimulus” in the face of the coronavirus shock.

Bofa analysts considered that “the authorities reacted decisively and implemented a national quarantine since March 19, except for some essential activities, which are among the strictest in Latin America. “

“This decision was initially effective in flattening the case curve, showing a low mortality rate until now.. In any case, there have been recent cases in poor and densely populated areas of the metropolitan area that may delay the reopening, ”he clarified.

The analysts indicated the differences in the health panorama with the interior and affirmed that the companies reopened slowly, in a context of restrictions on transport and supply in general.

“Argentina shows some strengths in the fight against Covid, including a high level of hospital beds per capita, a strong official reaction and low density,” he said.

Immediately, he clarified that “some of the weaknesses are the relatively low level of penetration of the tests, difficulties to implement the quarantine in poor neighborhoods, high level of poverty and limits to finance the fiscal stimulus ”.

In this sense, he predicted that the recession will be 7% (although other banks and consultancies believe that it could be greater) and thus accumulate a recession of 11% in three years. Long ago, the Bofa estimated a fall of 5% in the GDP.

“The reopening of the economy has been much slower than we anticipated, with a significant effect in terms of economic consequences,” he said.

“We estimate that one third of the recession is due to global factors (such as the global recession and the fall in the price of raw materials and two thirds at the close due to quarantine“They detailed.

In particular, they stated that the second quarter will show an 11 percent drop.

Regarding the fiscal package, which for now reaches 2.5% of GDP, it details the measures adopted to subsidize the most affected sectors, through direct transfers, partial payment of wages in private companies, credit guarantees, increased bank credit and some tax relief.

Following these measures, the bank raised its fiscal deficit projection in three months from 0.4 to 4 percent due to “spending stimulus measures, a deeper recession and a faster decline in tax revenue than GDP.”

“The fiscal stimulus package is not as large in relative terms with other countries, but given limited access to credit, this creates a risk of monetization and pressure on reserves and the exchange rate.”

If transfers to the private sector were to be repeated for another month, the deficit will rise to 4.6% of GDP and there may be a deeper recession.

For next year, an improvement in the deficit is expected to drop to 1% assuming a recovery of 6% in GDP (which appears much more optimistic than other projections), the end of the peak of the pandemic (and therefore the transitory fiscal stimulus) and a recovery in export earnings.

However, he warned that there are “Upward risks to the deficit due to higher spending in an electoral year”, with the midterm elections.

On the monetary level, they clarified that the Government maintained a wrong expansionary policy, through a continuous drop in rates, while increasing Central Bank financing to the Treasury. “The excess of pesos implies significant pressure on the exchange rate and the Central Bank must sterilize a large part of that monetization through the Repos,” he assured.

In this sense, he highlighted that the depreciation of the official exchange rate was slower than in other countries, which generated a loss of competitiveness with the real exchange rate close to its minimum since July 2019, before the primary elections of the year. past.

Instead, the parallel exchange rate increased more than 50% since February, which generated a gap of more than 80% with the official one. And he stressed that, to contain the exchange pressure, a series of controls were applied to which others could be added on imports in the coming months.

“Net international reserves reach USD 9,000 million amid a drop in the supply of dollars for lower exports,” he said.

“We expect a surplus of $ 8 billion in the current account this year and $ 4 billion next year due to the payment of less interest, but additional capital controls with more trade distortions due to a high exchange rate gap, increase downside risks” , clarified.

For this reason, analysts indicated that “The authorities will eventually accelerate the adjustment of the official exchange rate to reduce the exchange gap when the economy reopens.”

“We believe that the government does not want to give all the bad news together at the same time and for this reason they keep the official exchange rate under control during the closure of the economy to avoid a rise in inflation“They warned.

Furthermore, the report warns that dollar deposits fell 6% since February amid financial uncertainty.

“We cannot rule out that the increasing financial repression that followed the monetary expansion and the depreciation of the blue chip is exacerbating concerns about the convertibility of deposits,” he warned.

Anyway, he clarified that there is still a lot of liquidity, since deposits in the BCRA cover almost 2/3 of deposits, which should rule out “a run on deposits”.

“The financing of part of the package with transfers from the Central Bank can lead to an increase in inflation when the economy reopens, which will increase the inflation tax and financial repression, reducing the purchasing power of other agents,” he assured.

The combination of fear of “higher inflation and monetization may itself reduce consumer confidence and spending,” he said.

“We expect inflation to accelerate to 4% per month when the economy reopens, after 1.5% in April,” he said. The bank estimates an inflation of 45% for this year.

On the other hand, after the 6% discretionary increase announced for next month’s retirements, the bank said it missed an opportunity.

“The president recently said they hoped to have a new formula for pension payments by the end of the year. It should be recalled that the Government had promised to send the pension formula bill to Congress in June, ”they detailed.

“We believe that this would be a missed opportunity to provide advanced guidance on fiscal consolidation, key to reducing expectations of printing money (and building a stabilization plan), “concluded, emphatically, the government’s advisory bank.