Post on 06-Aug-2020
BBVA Research – Argentina Economic Outlook 2Q19 / 1
April 2019
Argentina Outlook
2Q19
Key messages
The weakness in global activity is prolonged and uncertainty continues. which has led to a reaction in the form of
economic policies, especially monetary ones, intended to soften the deceleration
In Argentina. domestic risks have intensified towards the end of 1Q19 due to the renewed volatility in the
exchange market and the rise in interest rates
As rates are likely to remain high throughout most of the year, we have revised our growth forecasts downwards
from -1% to -1.2% for 2019 maintaining the vision of positive inter-quarterly growth throughout the year although at
a lower rate
Inflation is not falling at the expected rate, probably due to the volatility of the exchange rate and the greater
indexation of the economy. We forecast inflation at 35% in December 2019 (vs. 30% in our previous estimate)
The exchange rate will depreciate in line with inflation to reach ARS 49/USD by the end of the year, with lower
tensions in 2Q19 due to the contribution of agricultural exports and sales by the Treasury. The key issue continues
to be the size that portfolio dollarization may reach if political uncertainty widens.
For whoever wins the elections, the management of the economy and access to financing in 2020 will require
continuing to fulfil the fiscal and monetary commitments agreed on with the IMF
BBVA Research – Argentina Economic Outlook 2Q19 / 2
BBVA Research – Argentina Economic Outlook 2Q19 / 3
Contents
01 International context
02 Argentina: 2019 will see key elections
BBVA Research – Argentina Economic Outlook 2Q19 / 4
01Global Environment
BBVA Research – Argentina Economic Outlook 2Q19 / 5
The moderation of growth has resulted in a shift of the monetary policy
of the US and the Eurozone. and new stimuli in China
Fed
Long pause in rate
hike. but an increase
could occur at the end
of the year.
Normalization
(reduction) of the
balance will end prior
to the date forecast
(September 2019)
Latin America and
other developing
economies
Margin for a looser
monetary policy
ECB
Delay in
monetary
normalization
Low rates for
greater periods
and greater
liquidity
(TLTROs)
Rate increases
are not
expected until
December
2020.
China
Additional monetary
stimulation: rate and
fund deposit cuts
Increase of public
deficit up to 2.8% in
2019
Tax cut (2% of GDP)
BBVA Research – Argentina Economic Outlook 2Q19 / 6
Protectionism: the agreement between the USA and China is delayed
while the EU begins to gain prominence as a focus of tensions
US
China European Union
Negotiations are
ongoing. so an
agreement is likely in
2Q19
USA threatens
higher tariffs on
EU vehicles
The EU hardens its tone against
China. seen as an “economic
competitor” and “systemic
rival”
BBVA Research – Argentina Economic Outlook 2Q19 / 7
Oil: supply adjustments provided support for prices in 1Q19
which nonetheless must be corrected downward
Oil: Brent prices(Dollars per barrel. end of period)
Production cuts have allowed an
increase in the price of oil (on average.
65 dollars per barrel in 1Q19)
The perspectives of lower prices are
maintained in the second half of 2019
and 2020. in line with the expected
slowdown in demand and the
expansion of supply in the USA .
We maintain the long-term equilibrium
level of $60 per barrel
Source: BBVA Research. based on INE data.
50
61
71
62
55
0
10
20
30
40
50
60
70
80
2016 2017 2018 2019 (f) 2020 (f)
Current Previous
BBVA Research – Argentina Economic Outlook 2Q19 / 8
Action by central banks and an absence of “accidents”
would enable the slowdown in world growth to be mild
More signs of global
deceleration
New stimulus
policies
01Protectionism:
a US-China agreement
remains probable. despite
the delay
02Brexit:
more uncertainty
over a greater
period of time
03Financial markets:
volatility limited
by the actions of
central banks
Assumption based on the evolution of the global environment without
“accidents”
04Oil
price moderation
after recent
upturn
Global growth gradually softens
BBVA Research – Argentina Economic Outlook 2Q19 / 9
2019 2020
1.7 2.3
Latam
Without “accidents” global growth will gradually slow
Up
Unchanged
DownSource: BBVA Research
2019 2020
1.0 2.5
Turquía
6.0 5.8
China
2019 2020
2019 2020
3.5 3.4
World
Eurozone
2019 2020
1.0 1.3
US
2019
2.52020
2.0
2019 2020
1.4 2.2
Mexico
BBVA Research – Argentina Economic Outlook 2Q19 / 10
Global risks: fear of an economic recession in the US and
the Eurozone continues despite greater support from central banks
Source: BBVA Research
Economic recession: high
Protectionism: high.
Withdrawal of the Fed: significantly less than
three months ago
Economic recession: growing
• Brexit:
• Italy:
• Increase of eurosceptic forces in Parliament
Protectionism: growing
ECB exit risk: significantly lower than three months ago
Disorderly deleveraging: relatively greater than three
months ago
Protectionism: high.
US.
EZ
-S
ho
rt-t
erm
pro
bab
ilit
y +
- Severity +
CHN
Financial vulnerabilities may amplify the severity of risks
BBVA Research – Argentina Economic Outlook 2Q19 / 11
02Argentina: 2019 will continue
in electoral mode
BBVA Research – Argentina Economic Outlook 2Q19 / 12
Despite strict compliance with monetary targets.
volatility returned to the foreign exchange market
Source: INDEC, BCRA and BBVA Research
Peso/dollar exchange rates and ranges in
non-intervention zone(ARS/USD)
The high inflation of February (3.8% MoM) raises doubts
regarding the capacity of the monetary program to
quickly reduce inflation and improve consumption
recovery prospects
The BCRA is attempting to recover credibility by
increasing outperformance of monetary base targets
and further tightening monetary policy after the
abrupt Leliq rate drop in February
Monetary Base targets(AR$ billion)
Source: BCRA and BBVA Research
2730333639424548515457
2730333639424548515457
jun
.-18
jul.-1
8
ag
o.-
18
sep.-
18
oct.-1
8
no
v.-1
8
dic
.-1
8
en
e.-
19
feb
.-19
ma
r.-1
9
ab
r.-1
9FX rate CB lower bound CB upper bound
1,150
1,200
1,250
1,300
1,350
1,400
1,450
30
/se
p/1
8
15
/oct/18
30
/oct/18
14
/nov/1
8
29
/nov/1
8
14
/dic
/18
29
/dic
/18
13
/ene
/19
28
/ene
/19
12
/fe
b/1
9
27
/fe
b/1
9
14
/mar/
19
29
/mar/
19
daily data 20d averageOriginal target Revised target
BBVA Research – Argentina Economic Outlook 2Q19 / 13
An inflationary inertia that is difficult to tame casts
doubts on the credibility of the Central Bank
Source: BCRA and BBVA Research
Central Bank survey inflation expectations(% change YoY)
Inflation expectations increased as the extremely tight monetary
policy seems insufficient to reduce inertia quickly in a context
of continuous adjustment of utility rates and greater indexation
in the economy (pensions and to a lesser extent, wages)
Inflation will continue close to 4% MoM in March and April due
to tariff adjustments and a core inflation impacted by food
prices. Considering monetary policy lags, inflation is expected
to fall to 1.9% MoM in 2H19, but will end the year at 35% YoY
Contribution to inflation by component:(Incidence and % change MoM)
0
10
20
30
40
2019 2020
Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19
+ 21.7pp
+ 13.0pp
0%
1%
2%
3%
4%
5%
6%
7%
Jan-1
8
Fe
b-1
8
Ma
r-1
8
Apr-
18
Ma
y-18
Jun-1
8
Jul-1
8
Aug
-18
Sep
-18
Oct-
18
Nov-1
8
Dec-1
8
Jan-1
9
Fe
b-1
9
Ma
r-1
9
Apr-
19
Ma
y-19
Jun-1
9
Jul-1
9
Aug
-19
Sep
-19
Oct-
19
Nov-1
9
Dec-1
9
Seasonal Regulated Core CPI
Source: INDEC and BBVA Research
BBVA Research – Argentina Economic Outlook 2Q19 / 14
Demand for money at minimum levels and
a persistent monetary hangover
Source: INDEC, BCRA and BBVA Research
Growth of monetary aggregates(% YoY change)
Demand for pesos % of GDP(average last 4 quarters)
After the 2018 run on the currency, the demand for
pesos remains at historical lows and is unlikely to
recover quickly in a context of political uncertainty
and exchange rate volatility
After the elimination of the main money creation factors, the
Monetary Base contracted 8% since the end of 2018 but is still
growing 30% YoY due to the expansion resulting from the
dismantling of Lebac bills in 2H18
Source: BCRA and BBVA Research.
2%
4%
6%
8%
10%
12%
14%
1Q
06
4Q
06
3Q
07
2Q
08
1Q
09
4Q
09
3Q
10
2Q
11
1Q
12
4Q
12
3Q
13
2Q
14
1Q
15
4Q
15
3Q
16
2Q
17
1Q
18
4Q
18
Monetary circulation outside the financial system
Private M2 in pesos
0%
10%
20%
30%
40%
50%
dic
-17
en
e-1
8
feb
-18
ma
r-1
8
ab
r-18
ma
y-18
jun
-18
jul-
18
ag
o-1
8
sep-1
8
oct-
18
no
v-18
dic
-18
en
e-1
9
feb
-19
ma
r-1
9
Monetary circulation outside the financial system
Monetary base
Private M2
Private M3
BBVA Research – Argentina Economic Outlook 2Q19 / 15
… has led to a reinforcement of tight monetary policies
The BCRA announced that it would reduce
the Monetary Base expansion to 0% in 2H19
(previously 1% MoM) and reduced the slope
of non-intervention zone bands from 2%
MoM to 1.75% MoM
Limiting CB purchase of foreign currency to
USD 50 million per day in March and April,
maximum at 2% of the Monetary Base
Absorption via Leliq intensified with 2 daily
bidding sessions and improving the ratio for
repo rates, which caused interest rates to
increase to 68% at the end of March 2019
The BCRA set a 62.5% floor on the Leliq's
rate for April. We estimate that interest rates
will remain high throughout Q2 and Q3 and
will only be reduced in the last quarter to
40% YoY
Source: BCRA, INDEC and BBVA Research
Interest rates and inflation (%)
0
10
20
30
40
50
60
70
80
Dec-1
5
Ma
r-1
6
Jun-1
6
Sep
-16
Dec-1
6
Ma
r-1
7
Jun-1
7
Sep
-17
Dec-1
7
Ma
r-1
8
Jun-1
8
Sep
-18
Dec-1
8
Ma
r-1
9
Jun-1
9
Sep
-19
Dec-1
9
Inflation yoy Badlar rate Policy/ Leliq rate
BBVA Research – Argentina Economic Outlook 2Q19 / 16
GDP will contract by 1.2% in 2019 due to a weaker quarterly growth
in the face of extremely tight monetary policy
Quarterly GDP growth- previous and
current estimates(Seasonally adjusted % QoQ change
and original series YoY change)
Source: INDEC and BBVA Research
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
3Q
19
4Q
19
q/q prev. q/q current y/y prev. y/y current
GDP fell 1.2% s.a. QoQ in 4T18 (BBVA
Research (e) -1.4%). leaving a slightly lower
than forecasted statistical drag for 2019
However, quarterly growth, although
positive, will be weaker in Q2 and Q3 due
to high interest rates and greater exchange
rate volatility
Unemployment will gradually increase to
11 % in 2Q19, which may result in
moderation of wage demands. Considering
the acceleration of inflation in the first four
months of the year. it is difficult to assume
that there will be an average real wage
recovery in 2019
In light of the weakness of domestic
demand, the external sector will contribute
positively to growth by 5.4 pp. in 2019
BBVA Research – Argentina Economic Outlook 2Q19 / 17
Insufficient revenue growth leads to greater adjustment in spending
maintaining the annual zero primary deficit target
Source: IMF and BBVA Research
Economic subsidies(% GDP)
Income and expenses, previous and revised(% GDP)
Lower collection of export taxes will be compensated by a
reduction in capital expenditures and in part by automatic
adjustments in Co-participation transfers to provinces and
spending on pensions (due to the acceleration of inflation)
The current administration will achieve a 60% reduction in economic
subsidies in terms of GDP, but after the last devaluation and the
acceleration of inflation, the margin for adjustment through
additional utility rates increases has fallen
Source: ASAP. Ministry of the Treasury. INDEC. and BBVA Research
Budget II Review IMF III Review IMF
TOTAL REVENUE 28.4 28.1 26.4
Taxes 19.7 19.8 18.2
VAT 7.8 7.6 7.4
Export taxes 2.4 2.5 1.7
Import taxes 1.0 0.8 0.7
Other taxes 8.5 8.9 8.4
Social security 6.6 6.3 6.0
Non-tax revenue 2.1 2.0 2.2
PRIMARY SPENDING 28.4 28.1 26.4
Wages 3.6 3.6 3.3
Goods and services 0.9 0.8 0.8
Pensions 9.7 9.6 9.2
Social spending 2.6 2.6 2.3
Economic subsidies 1.6 1.5 1.4
Capital spending 0.9 0.9 0.8
Other 0.3 0.3 0.2
Transfers to provinces 8.8 8.8 8.4
PRIMARY RESULT 0.0 0.0 0.0
2019
3.9
3.43.5
2.11.9
1.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2014 2015 2016 2017 2018 2019 est.
BBVA Research – Argentina Economic Outlook 2Q19 / 18
Higher than expected roll-over rates reduce
financial needs for the rest of 2019
2019-20 Financing Programme(USD millions)
Source: Ministry of Finance and BBVA Research
High renewal level for LECAPs in 1Q19 and
the fact that part of maturities have been
transferred to 2020 reduce the need for
Letes/Lecap roll-over to 35% in the rest of 2019
100% renewal of LETES but since they expire
within the year the renewal requirement
remains at 45%
The composition of the expenditure by currency
allows the combined average required rollover
rate for LETES/LECAP to be reduced to 40%
Intra-public sector financing will be zero for
the year, despite net cancellations in 1Q19
An average roll over rate of 67% this year
means that in 2020 no new debt would need
to be issued, only a total renewal of all
maturities (35% denominated in dollars)
2019 2020
Primary deficit 0.0 -5.2
Plan gas payments 0.6 0.6
Interest on private sector debt 11.6 15.2
Amortizations of debt held by private sector 30.8 26.2
IFIs (non-IMF) 3.0 3.0
Dollar denominated bonds 3.9 4.0
Peso denominated bonds 1.7 7.5
Repo 2.9 2.2
Letes in dollars 9.9 4.5
Lecap and Lecer in pesos 9.4 5.0
FINANCIAL NEEDS 43.0 36.8
Initial balance 4.7 0.6
Rollover of intra public sector debt 1Q 3.8 0
IMF 22.5 5.9
IFIs 4.3 3
Private sector financing 8.3 27.3
Rollover international markets 0 0
Rollover domestic markets 0 11.1
Repo 0.5 1.5
Letes in dollars 4.5 4.5
Lecap and Lecer in pesos 3.3 5
New issuances in domestic markets 0 5.2
SOURCES 43.6 36.8
Sources - Needs 0.6 0.0
ROLLOVER Letes in dollars 45% 100%
ROLLOVER Lecap and Lecer in pesos 35% 100%
BBVA Research – Argentina Economic Outlook 2Q19 / 19
Exchange market: high volatility but finishing
in line with inflation
Source: BCRA, CEC-CIARA and BBVA Research
FX rate, export settlements and BCRA
intervention (USD Million y ARS/USD)
Real multilateral exchange rate index (REER)(base Nov. 2015 = 1)
The record harvest of corn and soybeans will add USD 4.5 million to
exports in 2Q19. In turn, sales of USD 60M in Treasury dollars per day
starting in April will contribute 3 billion to the supply of foreign
currency in 2Q19 and USD 9.6 billion for the year
The real exchange rate will remain close to
the lower band but slightly depreciated with
respect to the IMF's equilibrium estimates (16%)
and the long-term averages (7%)
18
21
24
27
30
33
36
39
42
45
48
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
Jan-1
8F
eb-1
8M
ar-
18
Apr-
18
Ma
y-18
Jun-1
8Jul-1
8A
ug
-18
Sep
-18
Oct-
18
Nov-1
8D
ec-1
8Jan-1
9F
eb-1
9M
ar-
19
Apr-
19
Ma
y-19
Jun-1
9Jul-1
9A
ug
-19
Sep
-19
Oct-
19
Nov-1
9D
ec-1
9Grain exports CB sales Treasury sales FX rate
1.00
1.25
1.50
1.75
2.00
2.25
1.00
1.25
1.50
1.75
2.00
2.25
Dec-1
4
Apr-
15
Aug
-15
Dec-1
5
Apr-
16
Aug
-16
Dec-1
6
Apr-
17
Aug
-17
Dec-1
7
Apr-
18
Aug
-18
Dec-1
8
Apr-
19
Aug
-19
Dec-1
9
REER REER lower range REER Upper range
Long-run average= 1,45
Source: BCRA, Haver, INDEC and BBVA Research
BBVA Research – Argentina Economic Outlook 2Q19 / 20
Dollarization of deposits (% of the total)
Electoral uncertainty, the persistence of inflation and the
perception that the capacity for BCRA intervention in the FX
market is limited reinforce negative expectations, making it
difficult to lower inflation and reduce fiscal spending
Appetite for assets in pesos and for Argentine assets in
general will remain low maintaining negative country
differentiation due to doubts regarding economic
stabilization and the electoral cycle
Source: BCRA and BBVA Research
Confidence indexes, inflation and exchange
rate(Base 100 = Oct. 18)
Source: INDEC, BCRA, Di Tella University and BBVA Research.
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec-0
0
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
Dec-1
6
Dec-1
7
Dec-1
8
Dec-1
9
FX restrictions market
End of convertibility
system
Restrictions in FX market
Tax amnesty
2018 devaluation
But FX volatility fuels uncertainty... and the demand
for dollars
90
100
110
120
Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19
Consumer Confidence Index Gov. Confidence Index
FX CPI
BBVA Research – Argentina Economic Outlook 2Q19 / 21
However, the potential for damage is much
lower than in 2018
Dollarization in the financial system(USD million)
After the dismantling of Lebac bills in 2018, assets in
pesos that could potentially be dollarized are half the
amount that they were in 2018, while net reserves are
45% higher than in the previous year
Despite a strong increase in 4Q18, fixed terms deposits in
pesos now amount to the same amount that dollar-denominated
deposits in the financial system, although they have not fallen in
nominal pesos. The ratio of private loans/deposits is now 72%
Source: BCRA and BBVA Research
Assets in pesos vs. International reserves(USD million)
Source: Finance Minstry , BCRA and BBVA Research
0
20,000
40,000
60,000
80,000
Dec-1
7
Jan-1
8
Fe
b-1
8
Ma
r-1
8
Apr-
18
Ma
y-18
Jun-1
8
Jul-1
8
Aug
-18
Sep
-18
Oct-
18
Nov-1
8
Dec-1
8
Jan-1
9
Fe
b-1
9
Ma
r-1
9
Term deposits in pesos Private sector deposits in dollars
Private sector loans in pesos
0
10,000
20,000
30,000
40,000
50,000
60,000
Dic-17 Mar-19
Net reserves Lebac not held by financial system
Letes/Lecap in pesos Increase in term deposits in pesos
BBVA Research – Argentina Economic Outlook 2Q19 / 22
The 2019 current account deficit will fall to USD 9.5 billion, one
third of 2018's, reducing Argentina's external vulnerability
Source: INDEC and BBVA Research
Exports, imports and goods and services balance (USD millions)
Reserve ratios (USD Millions)
Exports will increase significantly in 2Q and 3Q19 due to
the improvement of USD 4.500 M in agricultural production
and to a lesser extent demand from Brazil while imports of
both goods and services will continue to fall
Reserves will increase both due to the trade surplus as well as
the lower capital outflows with contributions from a new swap
with China, enough to cover all short-term debt maturities and
110% of existing pesos
Source: INDEC, Treasury, BCRA and BBVA Research
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2015 2016 2017 2018 2019 e
International Reserves 3 months imports
20% of Private M3 100% short tem debt
-5,500
-500
4,500
9,500
14,500
19,500
24,500
1Q
-18
2Q
-18
3Q
-18
4Q
-18
1Q
-19
2Q
-19
3Q
-19
4Q
-19
1Q
-20
2Q
-20
3Q
-20
4Q
-20
Exports Imports Trade Balance
BBVA Research – Argentina Economic Outlook 2Q19 / 23
Gradual external and fiscal adjustment
reduces the debt burden … slowly
External Sector(%)
Fiscal Sector(%)
Public Debt as % of GDP(%)
International reserves/GDP(%)
Source: INDEC, Finance Ministry, BCRA and BBVA Research
-8
-6
-4
-2
0
2
4
6
2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)
Primary fiscal balance/GDP Total fiscal balance/GDP
-10
-5
0
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)
Current account/GDP Exports/GDP Imports/GDP
0
20
40
60
80
100
120
2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)
External public debt/GDP Public debt/GDP
0
5
10
15
20
25
2004 2006 2008 2010 2012 2014 2016 2018 2020 (e)
International reserves/GDP
BBVA Research – Argentina Economic Outlook 2Q19 / 24
(e) Estimate.
Source: Indec. BCRA. Haver and BBVA Research
Annual macroeconomic forecasts
2017 2018 e 2019 e 2020 e
GDP (% YoY) 2.7 -2.5 -1.2 2.5
Inflation National CPI (% YoY. EOP) 24.8 47.6 35.0 25.0
Exchange rate (vs. USD. EOP) 17.7 37.9 49.0 55.0
Monetary policy rate (%. EOP) 28.8 59.3 40.0 29.0
Private consumption (% YoY) 4.0 -2.4 -2.9 3.2
Public consumption (% YoY) 2.7 -3.3 -2.6 -1.0
Investment (% YoY) 12.2 -5.8 -12.3 6.1
Fiscal balance (% GDP) -5.9 -5.0 -3.3 -2.3
Current account (% GDP) -4.9 -5.2 -2.2 -1.5
BBVA Research – Argentina Economic Outlook 2Q19 / 25
April 2019
Argentina Outlook
2Q19