About this year they indicated that “the pandemic disrupted the economic policy objectives” that had planned “to control liquidity” and therefore “the demand for foreign currency, calming exchange and inflationary tensions.” The result: the fiscal deficit soared, as a result of the collapse of income due to the collapse of activity and the expansion of spending to mitigate the damages of the pandemic / quarantine.
Ecolatina remarks that “BCRA assistance to the Treasury reached record levels”, which can be accounted for at 1.6 trillion pesos which represents 6.3% of GDP. The consulting firm also remarks that there was “a strong sterilization via LELIQs and passes”, which imply 0.9 trillion less pesos destined for this area and a reduction of 3.4% in GDP. However, the monetary base would close the year close to 10% of GDP, in line with the 2012-2015 highs.
“In this context of strong aversion to saving in pesos, its excess supply shifted to the parallel dollar first, increasing devaluation expectations and accelerating pressures on the official dollar later” they conclude.
Ecolatina also analyzes that the debt restructuring sought to “calm tensions”, but the result was not as expected: “Although the agreement with private creditors did indeed bring relief at the medium-term macroeconomic level, it did not manage to appease the dollar appetite” .
The consulting firm highlights the continuous loss of Reserves, since the net ones drilled the u $ s7,500 million and the liquid ones are close to u $ s1,000 million, which derived according to the report, in which the Central Bank decided to strengthen the stocks, “further complicating the normal operation of the activity.”
“Going forward, it makes sense to ask what will happen to the fiscal red and what will be its source of financing: between both variables, they will determine what will happen to the pesos and, consequently, what level the exchange rate pressures will reach” they argue.
Regarding the 2021 Budget, the report warns that it is observed that the Ministry of Economy forecasts a primary deficit of 4.5% of GDP for next year, in an economy that would recover part of the lost ground with 5.5% growth projected and a slowdown in the inflation which would go from 32% this year to 29% in 2021.
Ecolatina analyzed that the budget is “important in terms of activity, too ambitious in terms of inflation” but that to “determine the assistance of the monetary authority to the National Treasury, it is necessary to work with different assumptions of rollover of the services of the debt (principal and interest) of the public sector “.
The consulting firm maintains that “thanks to the successful restructuring of sovereign hard currency bonds, maturities with private companies are practically nil next year” and that if the repayment of the IMF and Paris Club loan were to be extended, “there would be no net disbursements with international financial organizations.” This implies that “a refinancing of total services in foreign currency would be achieved, so that the assistance of the Central Bank to the Treasury in foreign currency would not be necessary.”
Regarding public debt services in pesos, Ecolatina developed three scenarios: “The first is conservative, since it assumes that in 2021 a rollover of only 100% (similar to this year, affected by the antecedent of the April reprofiling). The second assumes a 110% refinancing and the third, 120%. The intermediate scenario seems the most likely, but the extremes cannot be ruled out. “
In the event that the scenario of a rollover of 120% of debt services in pesos in 2021, the Treasury’s net placements would reach about 1.4% of GDP (508,000 million pesos, according to Ecolatina estimates), this would subtract the assistance of the Central Bank, since that it would be necessary to cover a fiscal gap (primary deficit minus net loans) of 3% of GDP. “In this case, the BCRA would have to turn to the Treasury next year (via temporary advances and profits) almost 1,080,000 million pesos, which represents around 40% of the monetary base that we estimate for the end of 2020” they analyze .
In this regard, in the Ecolatina report they project what would happen: “If we assume that in an electoral year the Central Bank does not” want “the monetary base to rise more than inflation, it would have –Other things being equal– to sterilize via LELIQs and pses “only” ARS 210,000 million (almost 20% of the assistance), leaving the stock of sterilization instruments at stable levels (below 10% of GDP) “.
The consultant also analyzed what would happen if the rollover out of 110% of the Treasury services in pesos: “Net placements would reach 254,000 million pesos (0.7% of GDP), so the BCRA would have to turn next year ARS 1,333,000 million (3.8 % of GDP) to the Treasury, equivalent to 45% of the monetary base at the end of 2020 “.
In this regard, they argue that “if the Central Bank does not allow the monetary base to go beyond inflation, it should sterilize about 460,000 million pesos, that is, 1.2% of GDP or 35% of assistance.” In response, the stock LELIQs and repo transactions would exceed 10% of GDP, practically doubling at the end of 2019 (5.5%). “In this framework, although this stock of sterilization instruments would reach the peak of 2018, the level of tension would be significantly lower: unlike the LEBACs, the LELIQs are in the hands of commercial banks that have almost no alternatives other than to stay in these letters “they analyze.
Finally, Ecolatina, projected what would happen if she only managed to do rollover of services in pesos that mature (100%): “As there are no net loans (pessimistic assumption, but not impossible), the Central Bank would have to cover the entire primary deficit (almost 1,600,000 million pesos, 4.5% of the GDP). Without an active sterilization policy, this would mean a 53% expansion of the monetary base in 2021 “.
If the premise that the monetary authority does not allow the monetary base to exceed inflation, it would have –Other things being equal– to sterilize about 460,000 million pesos (1.9% of GDP or 45% of assistance). “In response, the stock of LELIQs and passes would exceed 11% of GDP, a level that a priori it seems unstable “analyzes Ecolatina.
Finally, they conclude: “It is important to highlight that if inflation ends up being higher in 2021 than budgeted, the less will be the sterilization effort of the BCRA necessary for the monetary base to grow in line with the rise in prices, since the higher will be the collection of inflation tax ”.
The consultant allows us to think of three different inflation hypotheses: “30%, aligned with the 2021 budget; 40% aligned with our inflation prospects for next year; and 50%, a little above the price increase projected by the REM by 2021 (47%). As can be seen in the table, the sterilization (measured as the stock of LELIQs and passes in relation to GDP) necessary for the monetary base to grow in line with the rise in prices, is less the higher be the projected inflation rate. “