ARGENTINA ECONOMY: CURRENT SITUATION AND OUTLOOK DANTE E. SICA abeceb.com Director 04/23/2015
DURING THE PAST 12 YEARS, THE ARGENTINA ECONOMY EXPERIENCED THE CYCLE OF GROWTH LONGER AND STRONGER OF ITS RECENT HISTORY. BUT GROWTH WAS NOT LINEAR. Stage 1: 2003-2007 Stage 2: 2008-2011 Stage 3: 2012 – 2015 DECELERATION + LOW GROWTH + HIGH GROWTH + LOW DOUBLE DIGIT DOUBLE DIGIT INFLATION INFLATION INFLATION 8.8 % 4.6 % 0.5 % GDP 2012-2014 Average 9.7 % 20.2 % 29.4 % Inflation INTERNAL AND EXTERNAL SAVINGS HIGH DECREASING DEFICIT WITHOUT FUNDING WHAT COMES NEXT? WHAT IS THE POLITICAL AND ECONOMIC SCENARIO WHICH WE ARE GOING TO FACE? Inflection point or continuity? 2
THREE DIFFERENT STAGES THE NUMBERS SPEAK FOR THEMSELVES… Stage 1: 2003-2007 Stage 2: 2008-2011 Stage 3: 2012 – 2015 THE ECONOMY OF THE THE ECONOMY OF THE THE ECONOMY OF THE SHRINKING SURPLUSES TWIN DEFICITS TWIN SURPLUSES Hoarding of FINANCING: IN 2011 THE ECONOMY RESERVES ISSUING+ RESERVES SHOWS AN ENERGY DEFICIT 6,0% Net Primary Balance 3,7% 4,0% AS % of GDP 2,0% 0,0% -0,3% -2,0% -0,9% -4,0% -4,5% -6,0% 8,0% 6,0% Current Account Balance AS % of GDP 3,7% 4,0% 2,0% 2,1% 0,0% Current Account Balance 0,0% -2,0% -1,2% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f
THREE DIFFERENT STAGES BEHIND THE TRANSFER OF A STEP TO THE OTHER, IS PRESENTED AN ENERGY POLICY WRONG FROZEN TARIFFS = LACK OF INVESTMENT = SUBSIDIES = FISCAL DEFICIT + ENERGY DEFICIT MONETARY EXPANSION TO FINANCE THE TREASURY VS ENERGY SUBSIDIES. AS % OF GDP. ENERGY DEFICIT. USD BILLIONS Monetary Expansion To Finance The Treasury Energy Subisidies Energy Deficit (right axis) 5,0% 8,0 4,2% 6,0 6,0 4,0% 3,8 4,0 USD billions 3,0% As % of GDP As % of GDP 2,0 1,6% 2,0% 0,0 1,7% 1,0% 0,4% -2,0 0,0% 0,0% -2,8 -4,0 -1,0% -6,0 -0,7% -0,9% -6,2 -2,0% -8,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 4
What will happen this year? 2015: A YEAR RULED BY POLITICS DAY-OVER-DAY ADMINISTRATION In order to avoid turmoil, the current administration spins over two axis: Stock of Reserves and Activity Level... it will remain doing so. 5
GOVERNMENT: DAY-OVER-DAY ADMINISTRATION. AVOIDING TURMOIL. KEEPING AN EYE ON RESERVES AND SOCIAL CLIMATE. THE LINK? THE LEVEL OF ACTIVITY Pressure on exchange Interest rate VERSUS Exchange rate Pressure on inflation Social announcements Imports take care take care R ESERVES= A CTIVITY= SOCIAL CLIMATE NOMINAL STABILITY Interest rate Offer Exchange rate Employment VERSUS Social unrest Imports 6
1 GOVERNMENT WILL ATTEMPT TO BOOST TAKE CARE OF ACTIVITY DEMAND Mainly through two channels: F I S C A L P O L I C Y E X C H A N G E R A T E P O L I C Y To contain the inflation, the government will use Already abound social announcements the exchange rate as anchor • Will not cut of subsidies for transport and Confianza del Consumidor(eje izq) Consumer Confidence (left axis) 55 70% energy in an election year Devaluación anual (eje der) Annual devaluation (right axis) 60% 50 • Will continue advancing public works to 50% 45 get to the PASO with the inaugurations 40% 30% 40 Devaluation 20% ! January ‘14 Public spending will grow 35 10% over revenues 30 0% Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 Devaluation= Fall of real salaries= drop of consumption NET PRIMARY DEFICIT = 4.5 % OF GDP TC a nov15 = 9,84
2 THE OTHER GOAL IS THE LEVEL OF RESERVES KEEP AN EYE ON RESERVES WHAT WILL BE DONE ? The government needs reserves in order to SUSTAINING THE EXPECTATIONS NOT RESTRICT THE OFFER Gives stability, and thus to keep under control It need to release imports the exchange market Issue: the panorama does not look simple. A) The trade balance will fall again (-8.3%) What will be To finance tourism and the "savings" dollars, two trade surplus B) done ? are needed. C) Maturities in dollars are over double in 2014. 8
WHAT WILL BE DONE? THE BOTTOM LINE OF THE WIDOW'S CRUSE USD13.300 M IN RESERVES Thus, apart from keeping restrictions on imports, FURTHER AGREEMENTS WITH CHINA & RUSSIA Swap: USD 3.100 have already entered. An additional USD4.500M net are expected Funding of public works: some dollars have already entered. The estimate for the rest of the year USD3.000 M. NOWADAYS IT IS ADVANCING WITH RUSSIA ANY ADDITIONAL PLACEMENT + GRIESA YPF, CABA and national government (USD 1.400 millions) have already achieved placements. It is expected that the provinces and YPF will seek to raise funds. In the net, the contribution would be USD 6.000 M RENEGOTIATION OF BODEN 2015? Bonden 2015 renegotiation cannot be ruled out. A 50% acceptance could mean a USD 2.500 M 9
SO, WHAT WILL HAPPEN WITH THE LEVEL OF RESERVES? 2 scenarios are likely: renegotiation and without renegotiation. But in both cases without arrangement with holdouts. Reserves to December 31 USD M 31.443 28.774 25.499 Con canje del boden With BODEN renogotiation 2014 2015p 2015p 10
BUT THERE ARE RISKS IN THE GOVERNMENT'S STRATEGY I Ability of BCRA to absorb “pesos” If the Central Bank is unable to absorb all the pesos that issued to finance the Treasury, the transfer to prices can be quick. II Fall in competitiveness The nominal exchange rate used as anchor + higher dollar appreciation worldwide + daunting inflationary risk = COMPETITIVENESS LOSS III Escenario internacional Brazil in recession and devaluation. Lower commodity prices. US normalize monetary policy, while Europe expands. 11
I Ability of BCRA to absorb “pesos” THE FUNDING OF THE TREASURE WILL STAND AT ALMOST 5 POINTS OF THE GDP THROUGH MONEY ISSUANCE THE CENTRAL BANK ASSISTANCE TO THE GOVERNMENT’S BUDGET NOW IS The policy of THE 3RD MOST IMPORTANT “TAX encouraging REVENUE” demand requires Resto de funding imp; 16,9% Iva; 29,4% Retenciones; 7,5% 4.5% of GDP Asistencia del BCRA al Ganancias; Tesoro; 22,5% 23,7% FINANCED BY THE BCRA
I Ability of BCRA to absorb “pesos” THUS, THE CAPACITY OF THE CENTRAL BANK ABSORB PESOS AND THUS PREVENT EXPANDING THE EXCHANGE GAP MUST BE CLOSELY MONITORED. Inflation. Accumulated in the year. Currency gap 86,6% 11,9% 85% 75,6% 75% 61,1% 65% 6,4% 55% 47,4% 45% 42,8% 35% 31,1% 25% dic-13 ene-14 feb-14 mar-14 abr-14 may-14 jun-14 jul-14 ago-14 sep-14 oct-14 nov-14 dic-14 ene-15 feb-15 mar-15 abr-15 Ene mar 14 Ene mar 15 Nowadays the inflation slows and y the parallel dollar remains relatively stable … ... but risk remain WILL LET AN INFLATION OF 25% OR 30%? 13
II Fall in competitiveness TO FLATTEN THE EXCHANGE RATE WITH THE INFLATIONARY INERTIA COULD LEAD TO EXCHANGE APPPRECIATION AGAIN . Real Exchange Rate Devaluation vs Inflation 90% 1,25 Accumulated 77,1% 1,20 80% 73,7% 1,20 1,15 70% 61,3% 1,15 potential risk: 1,12 1,13 60% soaring? 1,10 50% 1,07 55,8% 35,7% 1,05 40% 1,00 1,00 24,2% TCR Mul 35,3% 30% Inflación 0,95 Brasil 20% 0,94 Tipo de Cambio 0,90 10% 8,7% The high dollar price 0,88 worldwide does not help. 0,85 0% dic-13 feb-14 abr-14 jun-14 ago-14 oct-14 dic-14 feb-15 abr-15 jun-15 ago-15 oct-15 dic-15 0,80 dic-13 feb-14 abr-14 jun-14 ago-14 oct-14 dic-14 feb-15
II Fall in competitiveness REAL EXCHANGE RATE IN THE LONG RUN: WHERE SHOULD WE GO TO? Real AR X USD Exchange Rate TCR AR$ x US$ TCN required so as to have the same TCRM in the period ( DEFLACTED BY IPC ABECEB AND CPI) 9,5 9,08 TCN IPC IPIM average IPC IPIM average 1,52 1,15 1,24 $ 11,79 $ 9,41 $ 9,92 vs historical average 1,52 1,09 1,11 $ 11,92 $ 9,08 $ 8,98 8,5 vs 75-83 2,45 1,44 1,74 $ 19,22 $ 11,93 $ 14,08 vs 83-88 0,91 0,92 0,91 $ 7,12 $ 7,59 $ 7,34 7,5 vs 91-00 1,74 1,23 1,43 $ 13,64 $ 10,18 $ 11,59 vs 03-11 6,5 1,32 1,08 1,18 $ 10,38 $ 8,96 $ 9,55 vs 2008-2014 5,72 1,23 1,12 1,16 $ 9,64 $ 9,31 $ 9,44 vs 2014 5,16 5,5 1,11 1,05 1,07 Currently 8,70 5,01 4,5 3,89 3,5 2,97 2,82 2,5 2,07 1,68 1,70 1,55 1,53 1,14 1,81 1,5 0,93 0,87 1,47 0,84 0,59 0,5 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
III International Scenario IT WILL BE FOLLOW CLOSELY THAT WILL HAPPEN IN THE WORLD CHINA 'S SLOWDOWN POLICY DIFFERENCES WITH THE MAIN CENTRAL AND HUGE HARVEST BANKS AROUND THE GLOBE RESULT APPRECIATION OF THE CURRENCY OF OUR TRADE PARTNERS COMMODITIES PRICES SIGNIFICANTLY LOWER THAN 2014 Added to this weakness LATAM …led by Brasil IN FACT, THE BIGGEST CONCERN FROM THE EXTERNAL THE FRONT IS PASSED TO BRAZIL …. Not only because of the depreciation of the Real , but also expectations for the activity continue adjusting downward (-1.2%), amid a complex political scene 16
THE RESULT HAS BEEN THE STAGNATION OF THE ACTIVITY LEVEL GDP yearly Var % 9,4 6,8 3,0 0,9 -0,5 -1,5 -2,5 2009 2010 2011 2012 2013 2014 2015e 17
¿ What’s next? INTERNATIONAL SCENARIO : CYCLE CHANGE….GROWTH AND OPPORTUNITIES AWAITING FOR ARGENTINA But TO BE ABLE TO CAPITALIZE THE OPPORTUNITIES THE NEXT ADMINISTRATION WILL HAVE TO INCLUDE THE CHALLENGES IN THE AGENDA MACRO IMBALANCES & STRUCTURAL DEFICIENCIES
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