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The five key variables of the post-quarantine economy


Dal Poggetto, Kiguel, Delgado, Pérez Duhalde and Gueretza analyze what will happen to the dollar, inflation, debt, GDP and employment.

Damien Kantor

04/25/2020 - 13:08

  • Clarí
  • Economy

Calculation, correction, calculation and again correction. It is the new routine that imposed the coronavirus crisis on specialized consultants, since the change in a trend affects and modifies all previous analyzes . Even so, with the precariousness of such a volatile scenario, five economists accepted the challenge of the Economic one to analyze the possible derivations and exits of the obligatory quarantine.

On this fragile puzzle of moving parts, some concepts stood out, which graph the complexity of the context. " We are facing the most violent and dramatic recession in modern history ," summarizes Ricardo Delgado. Bárbara Gueretza Echagüe interpreted that the current crisis " is different from the typical Argentine crisis " and Marina Dal Poggetto exclaimed, by way of introduction, that "the coronavirus broke all the projections that were considered until now". Miguel Kiguel, for his part, remarked that the crisis produced a " slowdown in economic activity rarely seen , mainly because it is strong and sudden"

The problem of isolation, the extent and depth of which is still unknown, hits the economy squarely, with particular harshness in crucial sectors, such as industry, construction and commerce . Delgado (Analytica), Gueretza (Estudio Arriazu), Dal Poggetto (Eco Go), Kiguel (Econview) and Soledad Pérez Duhalde (Abeceb) concentrated their attention on 5 key variables. Dollar, inflation, debt restructuring, GDP and employment came under the scrutiny of experts, in a virtual round table, in accordance with these times of social distancing. These were the main conclusions.

Debt restructuring

Miguel Kiguel: "The bondholders have until May 8 to decide whether to accept or reject the offer to exchange the debt."

Dal Poggetto: Although the impact on global markets and on the prices of Argentine debt opened a door to negotiation, the proposal presented last week is far from having been previously negotiated with creditors and unless the government is willing to improve it. , it is unlikely that an agreement will be reached within the 20 days proposed for the closing of the negotiation. If this occurs, it is expected that the default will be triggered on May 22, when 30 days have elapsed since the maturity of the global bonds, which were already warned they would not be paid, and finally progress is made in an exchange of the bonds with debt with foreign law.

Pérez Duhalde: The Government offered an exchange of old bonds for a menu of 10 new bonds (5 in dollars and 5 in euros) that strongly reduces interest coupons, grants 3 years of grace for their payment and contemplates reduced capital withdrawals. It is an aggressive offer, with discounts much higher than those usually applied in preventive swaps (20%). And more compatible with post default restructuring. The default can be avoided by improving the supply a little and considering that after the coronavirus it goes towards a new normality in the world of very low rates and debt risks in many emerging markets that may favor acceptance.

Delgado: The negotiation phase began after the Argentine offer and the foreseeable first rejection by creditors. We believe there is scope to offer something more. It is possible that an agreement will not be reached in such short terms, but at least there is the Argentine political signal to try to negotiate even in a state of emergency. There is no type of fiscal guarantee, as is to be expected in this context of increasing deficit, that can be offered, nor is there a consistent program forward. This same offer might have had a greater acceptance by the markets towards the end of the year, with greater predictability on central indicators of the Argentine economy. It is also not clear how the IMF will collect its debt, a margin of maneuver that the government leaves to negotiate but that can play against it if it is misinterpreted by private bondholders. The Fund should speak, for more information. The Argentine offer leaves a large surplus of dollars in the exchange market, it is unknown how it will be distributed. Far from the pretensions of investment funds and taking into account that the cost of a default is too high to finance the post-pandemic recovery, a scenario could occur with a partial agreement, without the required majorities, with stressed markets and payments on account to the IMF for several years.

Kiguel: The government launched the offer for debt restructuring that includes a relatively modest capital drawdown, a significant reduction in the interest coupon and for almost all bonds an extension of the term for the payment of principal. With this offer, the prices of the new bonds can range between 30 and 40 dollars for every 100 dollars of the original bonds, that is, a reduction that is around 60-70%, which is higher than the 2005 exchange rate. until May 8 to decide whether to accept or reject the offer, and in this second case the country would default. The first polls indicate that the bondholders will not accept this offer, unless the government can improve it, which could be done without compromising the sustainability of the debt. It would be desirable to make every effort to avoid a default, because it would help Argentine companies obtain loans to finance investments, that there is less pressure on the dollar, that recovery from the coronavirus crisis is faster.

Gueretza: Argentina does not have a problem of excess debt, but we are close to an unnecessary default. In terms of GDP (excluding the BCRA and ANSES) it is below 60% of GDP. The problem is the concentration of maturities and that is a clear symptom of the lack of confidence in our country. Today is a great time to show that Argentina adopts State policies, and that fiscal austerity is one of them. Avoiding default should be at the top of economic priorities, along with social assistance and the protection of companies. For the first time in many years, Argentina is facing a shock that really paralyzes the economy and justifies an increase in the fiscal deficit. Avoiding default would help us to walk the path towards fiscal normalization with less inflation.

Economic activity

Marina Dal Poggetto: "Every day in quarantine, the economy operates 40% below its previous level."

Gueretza: The genetics of the 2020 crisis is different from the typical Argentine crisis. Today we are experiencing an economic implosion due to the interruption of all activities. Each month of quarantine generates a drop in GDP of between 2 and 3%. The assistance of all the governments in the world, including the Argentine one, is necessary to avoid that in addition to less activity there is a break in the chain of payments. But having acted irresponsibly for many years today we have a limit on our capacity to act. We do not have a strong currency or savings, and we are close to an unnecessary default. Broadcasting is the only tool we have, and we must manage it carefully because if not, crises are intertwined.

Pérez Duhalde: Considering the absolute priority that the Government gave to health over the economy, today our projections point to a drop in GDP of around 6%. It should be noted that in our alternative scenario (more negative), the drop in GDP would be around 8.5%. On the supply side, a generalized drop is expected in the sectors, with a better relative performance for some segments focused on the emergency, such as the health industry, basic goods and communications. The hardest hit, which would show double-digit falls are those associated with tourism and transport (-17% in the year), hotels and restaurants (-16%), social and personal services (-14%), and construction (-11%). ). Trade and industry at the aggregate level would show falls of around 8% per year in our base scenario, although with considerable heterogeneity within it. Another sector to closely monitor is textiles, which is intensive employment.

Dal Poggetto: The coronavirus broke all the projections that have been considered until now. Every day in quarantine, the economy operates 40% below its previous level, so even if the restrictions were lifted tomorrow, the fall in GDP would be 3 pp greater than what we had been managing in our previous scenarios. If the default is triggered and the quarantine is extended, the economy could fall 7% on average in 2020, consistent with a cumulative drop of 13% since it began to fall in the first quarter of 2018.

Delgado: We are facing the most violent and dramatic recession in modern history. The drop in activity expected in the second quarter is the deepest: we calculate a 16% drop compared to the first. How long this strong recession will last depends essentially on two factors. First, and basic, how the pandemic evolves. We are entering an era where social distancing, what some are beginning to call the “low contact economy”, is going to be the rule of economic relations. And it seems difficult today to forecast when all activities will operate without restrictions. Second, the debt settlement format will condition the letter of the post-pandemic recovery: whether it is a fast "V", a complex "U", a very difficult "L" or even a rare "W". A good exit from the swap can manage foreign exchange in the credit market, allowing to expand the production frontier. To produce you have to import and pay with dollars. A bad negotiation, or an open default, can generate serious problems in the exchange, not only financial (which is interrupted today), but real. To grow again, financing is needed to import and export, which in the event of a default event will be very difficult to obtain. With these precautions, we estimate that GDP will fall 8% this year.

Kiguel: The current crisis is leading to a slowdown in economic activity rarely seen, mainly because it is strong and sudden. In this sense, Argentina is no different from other countries such as developed ones, where GDP is expected to fall 6.3%, or Brazil where it may fall 5.3% or more. In Argentina the product may fall 6.5%, somewhat more than in Brazil because in our country a contraction was already expected before the coronavirus crisis. This fall will be highly concentrated in the second quarter, which is the time when the effects of quarantine and the global recession are expected to be stronger. Prospects are for a recovery in the third quarter, although the strength of it will depend in part on the speed with which it is released from quarantine and on whether the country successfully solved the debt problem.

Employment in the main sectors

Soledad Pérez Duhalde: "We estimate unemployment of 13% in 2020 (compared to 9.8% in 2019) and a fall of 6% in real wages."

Kiguel: Employment is suffering the effects of quarantine and the coronavirus crisis. The sectors most affected are services in sectors such as hotels and restaurants, retail, construction and much of the industry. To the extent that activity does not recover, employment will remain depressed. Going forward, the recovery in employment will accompany the revival of the economy. A key factor for employment growth is that the Government manages to keep companies' financial situation healthy so that they can quickly return to production as quarantine is lifted, something that is undoubtedly costly from a fiscal and credit point of view. , but essential to avoid entering a prolonged recession.

Dal Poggetto: The dismissal ban immediately limits the loss of formal employment in the face of the violent supply shock caused by the pandemic. This, together with the little space that the government gave to the negotiation to reduce labor costs in sectors directly affected by social isolation measures, and the delay in the devices to compensate for losses, is generating pressure on companies that is difficult to absorb. Above all, if the restrictions are extended and the exit scenario ends complicated by a destabilization of the economy in the face of the flash of pesos that must be issued in the coming months to finance the jump in the fiscal gap generated to offset the economic costs. In the informal sector, the increase in unemployment should be substantially greater.

Delgado: A serious and consistent policy of social isolation such as that carried out by the Government has to protect jobs as the main economic objective. Bankrupt company destroys capital and employment, reducing power to subsequent recovery. It takes an average year for an unemployed person to reintegrate. Today an SME can survive only 3 weeks without billing, living on its own resources, before dismissing and going bankrupt. Focusing on active policies in the service sectors (tourism, gastronomy, commerce in general) and SMEs in the industrial and construction sectors, is going in the right direction. For example, commerce employs 3.6 million workers and is affected in 90% of its activity. In the industry, which operates at 25% activity, 2.5 million people work. In March, 65% of the job was at risk. They are about 12 million workers. Of this total, 5.5 million are at high risk, as they are informal, monotributistas, vulnerable sectors, which the Government serves through direct subsidies.

Gueretza : The damage in employment is circular and deepens with each turn. First, the direct impact of the interruption of the economy, which especially affects commerce, hotels, restaurants, entertainment, and transportation, among others, which create almost 4 million formal jobs. But then there are second-round hits, which are spread widely. Because people have changed their consumption pattern: they have replaced all superfluous spending with essential consumption, in a country that is already poor. Not only specific sectors are harmed, but all informal workers and the more than 2 million entrepreneurs who possibly saw their income cut sharply.

Pérez Duhalde: Although the authorities seek to control dismissals in the formal sector, the incorporations will be minimal, so we estimate an unemployment of 13% in 2020 (compared to 9.8% in 2019), with 300,000 more unemployed on average in the year and a 6% drop in real wages. Large urban centers (with the exception of CABA) are the most affected, given the high informality and the low proportion of public employment. The provinces of Patagonia generally show a good proportion of registered employment thanks to the direct and indirect weight of the oil sector. In the north of the country, on the other hand, the informality rate of the private sector is quite high, but it is compensated by the strong weight of public employment.


Ricardo Delgado: "We do not see an explosive inflationary dynamic. There are no objective conditions for a hyper".

Pérez Duhalde: At the moment, we do not substantially change our forecast around 38/42%. The depression of the level of activity, the lower wage pressures and the freezes of some prices such as tariffs and rents would help to keep inflationary pressures contained in the short term, offsetting the pressures derived from the greater monetary laxity and some slippage of the official exchange rate. But considering the process of strong expansion of the fiscal deficit and monetary issue, the forecast risk for both inflation and the exchange gap is upward. The possibility of an inflationary flash from the excess supply of pesos cannot be ruled out either, especially if after the worst of the pandemic the authorities do not face a prudential process of monetary normalization.

Gueretza: Inflation in the short term may decrease due to the drop in oil, economic activity, the easing of joint negotiations, the drop in international prices and the stability of the official exchange rate. Although there may be changes in relative prices that include higher increases in food. The inflation problem can be accelerated if a correct fiscal plan of exit from the quarantine is not executed. The inheritance is playing in favor of this Government: the crisis of the years 2018 and 2019 left the stock of pesos at historically low levels, only comparable with those of 2002/2003. This means that there is room to emit. But that space is running out if the fiscal imbalance financed with emission is maintained. And there inflationary pressures reappear. The risk of hyperinflation is still low, there are external surpluses and reserves, but the foreign exchange market must be monitored because the vertiginous events change the scenarios rapidly.

Kiguel: Argentina comes from many years of inflation, and it was expected that this year there would be a significant drop. The coronavirus crisis opens new questions due to an unprecedented scenario, in which on the one hand the Central Bank is significantly increasing the amount of money (which can be doubled in the year) to finance the fiscal deficit and some loans to companies. But on the other hand, we are seeing a sharp drop in the purchasing power of a large part of the population and therefore in demand. This combination has led to all kinds of forecasts, some emphasizing monetary issuance and predicting hyperinflation and others, with a focus on recession and the retraction of consumption and speaking of very low inflation. Most likely, we will have an intermediate scenario, in which the monetary issue will put pressure on prices, but they will not skyrocket due to the strong recession and the fall in the price of oil. This implies inflation similar to that of 2019, but with the risk that it is somewhat higher, especially if there are pressures on the exchange rate.

Delgado: We do not see an explosive inflationary dynamic. There are no objective conditions for a hyper. Obviously, a primary deficit that will be around 5 points of the product, must be financed with the only alternative that we have at hand, which is the monetary issue. If the issue is perceived as transitory and the Government, as outlined by Minister Guzmán, is willing to absorb it once the worst of the crisis is over, it will not have a significant impact on prices. There are other forces that are operating in the opposite direction today. In particular, the brutal recession halted demand almost entirely, except for food, and in more and more sectors the adjustment is taking place through wage reductions to try to maintain employment, which again reduces consumption. In addition, part of the fiscal policy is aimed at freezing public rates, with a strong impact on the basic basket and business costs. And the stable dollar, without excessive regulations on the current account, maintains the price of tradables in pesos. If we add up what happens with oil prices, it is not surprising that March wholesale prices rose just 1%, accumulating just 3.6% in the year.

Dal Poggetto: It is true that, in the face of the current quarantine context, the mechanisms of inflation propagation are damped and the transfer to prices of a devaluation in the exchange gap and / or in the official dollar is less while maintaining "social isolation " On the one hand, the tariff lag is clearly moderating with a barrel of oil at these levels. On the other hand, a jump in the distributive bid is not expected at this juncture where the priority of the unions is to sustain the jobs in the "non-essential" sectors and to reduce the risks of contagion of their affiliates in the "essential sectors". " Added to this are the government controls with the supply law under the arm, which two months ago seemed anachronistic and today are beginning to be endorsed in the world against a "war economy". Certainly, it is not evident that this low transfer to prices will continue once the restrictions begin to be lifted and the monetary issue remains.


Bárbara Gueretza Echagüe: "The dollar is the unit of account of the Argentines. Since 1945, there have been 4 hyperinflations and an average inflation of 45%."

Slim: The real exchange rate is in line with a surplus checking account. The Central Bank today buys foreign currency. However, monetary expansion that is not absorbed, either by the demand for money or by sterilization operations by the monetary authority, is channeled through parallel exchange rates. With gaps of 30-40%, although far from ideal, the economy can work. The current gaps, which are around 70%, generate negative incentives in many sectors. For example, for agricultural producers not to liquidate (soybean time is coming) and for importers to advance purchases, putting pressure on the official dollar. The gale of surplus pesos of these weeks and an inadvisable rate policy put noise in the stock market dollars. We see that the corrections in the official dollar will continue, from mid-May, accompanying soybean sales. There is no back on international reserves to sustain a real appreciation of the peso.

Dal Poggetto: In an economy with a very rigid stocks, the value of the official dollar is defined by the BCRA and for the moment it has been moving based on a crawling peg accompanying inflation. However, the pressure on the exchange gap could increase, due to the peso shock to finance the fiscal gap, and the attempt to expand directed credit without seeking savings mechanisms at a reasonable rate that allow the BCRA to reabsorb part of those pesos.

Gueretza: The dollar is the Argentine unit of account. Since 1945, there have been 4 hyperinflations and an average inflation of 45%. This means that when there is fear, people run to their refuge of value and that accelerates the rise of the dollar. When there is panic it is difficult to say where it can go, because by definition nobody wants to sell and everyone wants to buy. In the official market, the exchange rate will be calm as long as the external surplus is maintained, which today is significant. In parallel markets, the dollar may rise if, again, we implement a wrong exit from quarantine. The gap is a variable to monitor, because the larger it is, the faster the strengths that today allow Argentina to cope with the crisis disappear: external surplus and reserves.

Kiguel: The exchange rate is a key variable to understand both inflation and personal finance. The Central Bank has imposed strong exchange controls that limit the possibility of buying dollars at the official exchange rate and gives the government room to manage it day by day. In practice, the official exchange rate at an anchor for prices, especially for imported products, is expected to rise a little more than prices this year. But as in the past, the market finds an escape valve to buy dollars, which is the famous stock market dollar or MEP dollar. Today there is a gap of more than 50% between the MEP and the official exchange rate, indicating that the demand for dollars remains strong and that people are still betting on keeping their savings in dollars. What can narrow the gap? On the one hand, a rise in interest rates that makes investments in pesos more attractive, to which would be added a successful debt restructuring, which would eventually lead to capital inflows and more supply of dollars.

Pérez Duhalde: It is a classic. In a context of greater monetary expansion and very negative real rates for savings in pesos, the alternative dollars were going to awaken: the MEP and CCL dollars would widen the gap with the official administered dollar, all in a context of greater volatility. The official dollar and the gap remain thermometers to monitor. Above all, considering the negative collateral effects that it would have in terms of inflationary acceleration, increased expectations of devaluation and increasing pressures on the official exchange rate, which will deepen the recessionary impact.

Source: clarin

All business articles on 2020-04-25

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