Itaú BBA - Evening Edition – Fiscal deficit increases in Argentina, affected by COVID-19

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Evening Edition – Fiscal deficit increases in Argentina, affected by COVID-19

Abril 22, 2020

We expect the economy to begin a slow normalization in 2H19

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COVID-19 effects worsened the fiscal balance. The treasury ran a primary deficit of ARS 125 billion in March, compared with a deficit of ARS 13 billion in the same month of 2019. We estimate that the 12-month rolling primary deficit as of March increased to 1.1% of GDP, from 0.6% in February and 0.4% in December 2019. The nominal deficit, which includes interest payments, likely reached 4.3% of GDP. Tax collection dropped, affected by the lockdown, amidst an already weak economy. Total revenues decreased by 11.9% yoy in real terms in March, dragged down by falling tax collection (-7.9% yoy, adjusted by inflation) led by weak VAT revenues (-15.3% yoy). Primary expenditures rose 14.5% yoy in real terms, driven by higher subsidies and further assistance to provinces. Pensions and social benefits increased 12% yoy due to a sharp upward adjustment of child benefits and social plans, and to a lesser extent by a one-off bonus payment to pensioners. We expect a dramatic deterioration of the fiscal accounts in 2Q20. Most of the announced increases in government spending to deal with the negative effects of COVID-19 and the contraction of the economy due to the lockdown will be evident in that quarter. We expect the economy to begin a slow normalization in 2H19, leading us to forecast a primary deficit of 2.4% of GDP for this year, from 0.4% in 2019. However, we note that risks are tilted to the downside. ** Full story here

Trade surplus remains wide. The trade balance posted a USD 1.1 billion surplus in March, similar to the surplus registered in same month of last year. Thus the last-12-month trade surplus remained at USD 17.3 billion. At the margin, seasonally-adjusted annualized surplus dropped to USD 16.0 billion in 1Q20 from USD 20.0 billion in the quarter ended in February. Total exports decreased by 6.9% yoy in 1Q20 (down from 0.8% yoy in the quarter ended in February). On a sequential basis, exports plummeted by 46.5% qoq/saar (from 26.0% in the February). Agricultural exports including manufactured products declined by 2.7% yoy in the first quarter of the year, mostly driven by lower sales of soy bean flour, pellets and oil seeds (down from 2.8% growth in February). Sales of industrial products fell by 11.9% yoy in the period, from an 8.0% yoy decline in the quarter ended in February. Total imports declined by 18.6% yoy in 1Q20, in line with weak economic activity. At the margin, imports fell by 6.8% qoq/saar (-12.8% in February). Consumer goods imports (including cars) dropped by 21.8% yoy in the period. Imports of intermediate goods were down by 14%, while purchases of capital goods and parts declined by 22.1%. We expect a wider trade surplus this year. We forecast a surplus of USD 17.5 billion (from USD 16 billion in 2019), mostly due to subdued imports, given the sharp contraction in activity linked to the measures to contain the spread of COVID-19.


Tax collection came in at BRL 109.7 billion in March, in line with our call (BRL 109.4 bn) and slightly worse than consensus (BRL 111.2 bn). Tax collection decreased 3.3% yoy in real terms in the month. The weakness came particularly from revenues related to consumption (PIS/COFINS), which decreased 12.5% yoy in real terms. Excluding revenues from the REFIS/PRT, tax collection decreased 2.9% yoy in real terms, with the 3mma rate going to 0.3% yoy (from 1.0% in February), receding even before the full impact of the coronavirus crisis.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 45,757 confirmed cases (up by 2,678, vs 2,498 yesterday), with 2,906 confirmed deaths (up by 165, vs 166 yesterday). Find our weekly monitor for Covid-19 here.


Think-tank Fedesarrollo’s industrial and retail confidence indexes dropped to historical lows in March, as the Colombian economy shut down amid the Covid-19 crisis. Industrial confidence came in at -35.0% (0 = neutral), 38pp lower than one year ago (+9.8% in February). The previous low was recorded in March 1999. Compared to March last year, there was an important drop in the expectations for production in the upcoming quarter, moving from +35.7% to -43.3% (+32.7% in February), while the volume of orders moved further into negative territory at -45.1% (-22% one year earlier; -5.3% in February). Inventory levels also posted a notable increase. Despite the weakening of the Colombian peso, lower oil prices and the lockdown measures to contain the pandemic are weighing on Industrial confidence. The survey also shows that industry leaders expect significant job shedding ahead. Meanwhile, retail confidence deteriorated pointedly to -30.8% (+27.5% in March 2019 and +28.3% in February), as the outlook for the economic situation in the upcoming semester collapsed to -62.8% (110pp lower than last year; 37.6% in February). Additionally, the current economic condition sub index fell 66pps to -26.4%. The previous retail confidence low was in late 1999 at -18.3%. Overall, the widespread fall in sentiment (consumer index in early March came in at -23.8%, dropping 25pp from last year), is in line with the expectation of a sharp activity deterioration ahead. We see the dual shocks (coronavirus and oil prices) to result in a growth contraction of 1.4% this year (+3.3% in 2019), but risks are tilted to the downside.


In an extraordinary meeting, Banco de Mexico (Banxico) cut its policy rate unanimously by 50-bp (bringing it to 6.00%). Banxico cut its policy rate despite the recent rating downgrades to PEMEX (rated now by two out of three rating agencies as junk), a risk noted in the past monetary statements. We also note Javier Guzman, a hawkish Board member which had a dissident vote in the last monetary decision (voted for 25-bp cut, while the rest of the members voted for a 50-bp cut) was now on board for a more significant rate cut.

The balance of risks for economic activity is significantly biased to the downside. Banxico estimates preliminary an annual contraction in economic activity of more than 5% during the first half of the year due to the outbreak. While the Board is still cautious over the balance of risks for inflation as uncertainty has increased meaningfully, the Board expects inflation to converge to Banxico’s target. The widening of slack conditions and lower energy prices (in the short-term) should put downward pressure to inflation. However, the depreciation of the exchange rate (depending on the magnitude and persistence) could pressure inflation to the upside. Still, the Board expects inflation to converge to Banxico’s target (in the last statement the Board expected a slower convergence).

We expect Banxico to continue easing its monetary policy stance, reaching a rate of 4.50% before the end of 2020. In all, the Board seems more convinced of the need of lower rates amid the widening of slack conditions and lower inflation, reducing upside risks to our policy rate forecast. At the same time, the decision to cut the policy rate by 50-bps indicate Banxico is not willing to adopt a significantly looser policy stance than the one we are expecting. ** Full story here.

Tomorrow’s Agenda: INEGI will publish the inflation figure for the first half of April at 8:00 AM (SP time). We expect bi-weekly CPI to fall 0.65%, while core inflation will likely print at 0.24%. INEGI will also announce February’s retail sales, which we expect to slow down to 1.6% yoy (from 2.7% in January).

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