The central bank kept the benchmark interest rate (7-day repo rate) unchanged at 40% at its first scheduled monetary policy meeting in May. The decision came after the central bank had increased the reference rate by 1,250 bps in three inter-meeting decisions. The monetary authority maintained, unusually, a wide corridor, with the lending rate at 47% and the borrowing rate at 33%, to provide flexibility to domestic asset yields’ response to high-frequency shocks.
The central bank will continue to intervene in the secondary market of its short-term bills to guarantee the transmission of the monetary policy rate to the rest of the market interest rates. The monetary authority acknowledged that the stress on the exchange market was due to a deep shock to emerging markets rather than an isolated volatility episode. Consequently, it reduced the exchange interventions oriented to mitigate the depreciation of the peso and allowed the peso to float (and weaken) with only occasional interventions.
The central bank reaffirmed its use of the interest rate as the monetary instrument and the floating exchange-rate regime. In its statement, the monetary authority indicated that it expects to narrow the repo-rate corridor as soon as market instability diminishes. Finally, it anticipated that the real interest rate will remain significantly higher than in the recent past for the near future.
On a separate note, the Argentine government has initiated discussions with the IMF to obtain credit support. In separate statements, President Macri and Minister Dujovne confirmed that Argentina is working on an agreement with the international institution to seek “preventive financing.” We note that the country has been forced to tighten its macro policies faster, given the recent deterioration of financial conditions in emerging markets. The gradual approach of the Macri administration’s strategy to reduce macro imbalances can only be sustained as long as there is available financing.
The details of the final arrangement are not known at this stage of the negotiations. The IMF offers a variety of credit lines. The standard line is the so-called Stand-By Facility, in which the country pledges to meet certain quantitative indicators and adopt specific policy measures. The presence of conditions to access the funds may be a political restriction for Argentina’s administration, given the perception of lack of ownership that this type of arrangement involves. Alternatives are the Flexible Credit Line (FCL), which requires countries to have very strong economic fundamentals, and the Precautionary and Liquidity Line (PLL), which helps countries with sound policies to meet actual or potential balance-of-payments needs. Colombia, Mexico and Poland have used the FCL, while Morocco and Macedonia have used PLL. Argentina seems to better m eet the PLL’s criteria (implementation of and commitment to maintain sound policies) than the FCL’s, which are stricter (no expected needs for IMF resources and making progress toward limiting external vulnerability).
Argentina could access USD 30.0 billion from IMF under the PLL. The size of the line can reach 7 times the value of the Argentine quota at the IMF (currently SDR 3.2 billion or USD 4.6 billion), as was the case for Morocco in 2012. The amount covers the country’s near-term foreign-currency debt service (excluding multilaterals and short-term bills). Principal and interest payments would total USD 8.9 billion in 2H18 and USD 19 billion in 2019. Currently, Argentina has not had any outstanding financial arrangement with the IMF since 2005, while the last Stand-By program was arranged in September 2003.
We think the discussions with the IMF help to deal Argentina’s vulnerability (wide current-account deficit and low net reserves), but it is a risky bet for Macri from a political point of view. Although the FCL (unlike the standard IMF credit lines) does not condition disbursements to specific macro policies, the fact is that the government is already adopting tough measures on the monetary and fiscal fronts, so it would be very easy for the opposition to build a narrative in which the government is losing ownership of its economic policies. On the other hand, if the support package calms the market down, adjustments could be less harsh, preserving economic growth and Macri’s support. Elections are only at the end of 2019, so there is time to fix the economy. ** Full Story here.
Inflation surprised to the upside in April. Consumer prices gained 0.3% from March (0.2% one year before), above both our call and that of the Bloomberg market consensus (0.1%). The main surprise came from the food and non-alcoholic division and housing services explaining around 0.2pp. Annual inflation came in at 1.9% (1.8% previously). Core inflationary pressures remain contained as spare capacity in the economy and indexation lead to historically low non-tradable price gains. Going forward, the recent weakening of the Chilean peso could lead to the tradable price component becoming less of a drag. Overall despite the upside surprise, inflation remains low, so the central bank’s scenario of stable rates continues to be relevant.
In a context of still-low inflation (yearend rate below the 3% target) and a broad-based activity recovery this year, we see no rush for rate hikes by the central bank. Furthermore, the recent weakening of the exchange rate mitigates the downside risks for inflation, reducing the likelihood of rate cuts. ** Full Storyhere.
In contrast with the firming up of several activity indicators in 1Q18 – such as gross fixed investment, foreign trade (both exports and imports), and industrial production – private consumption expanded at a moderate pace in February. The monthly proxy for private consumption grew 1.9% year-over-year in February, below the growth rate observed in 4Q17 (2.2%). According to calendar-adjusted data reported by the statistics institute (INEGI) growth was also 1.9%, decreasing the three-month moving average growth rate slightly (to 2% year-over-year in February, from 2.2% in January) which has been trending down since early 2016.
In our view, private consumption will accelerate moderately in 2018 supported by a stronger real wage bill. Notably, the real wage bill has accelerated substantially over the past months, posting quarter-over-quarter annualized growth of 6.4% in March (from an average of 2.9% qoq/saar in 2017, and 4.6% in 4Q17). Specifically, the factors supporting the real wage bill are robust formal employment (which is consistently growing above 4% year-over-year) and the substantial fall of inflation (which improves real wages). On the negative side, consumer credit is slowing down given higher domestic interest rates; consumer confidence has weakened in the first four months of the year (with a better result in April, but not enough to offset the year-to-date deterioration); and remittances converted into pesos are less supportive (because of MXN appreciation) althoug h they remain growing strongly in USD terms. ** Full Story here.
Day Ahead: Statistics institute (INEGI) will announce April’s CPI inflation at 10:00 AM (SP Time). We and the consensus expect a -0.31% month-over-month variation. Assuming our forecast is correct, headline inflation would decrease to 4.58% year-over-year in April (consensus: 4.59%).
Weekly Elections Monitor – This is the second edition of our weekly report on the 2018 elections, containing the following topics: (i) Joaquim Barbosa (PSB) announced on his official Twitter account that he does not intend to be a presidential candidate. (ii) The latest national poll on voting intentions, carried out by Instituto Paraná, showed declines for Lula (PT) and Marina Silva (REDE), and gains for Jair Bolsonaro (PSL) and Joaquim Barbosa (PSB) compared to previous surveys. (iii) Regional surveys, carried out by Instituto Múltipla in Pernambuco and FIERN/CERTUS in Rio Grande do Norte, indicated that Lula remains strong in these states, but his voting intentions declined in both states if compared to previous polls (especially in Rio Grande do Norte). (iv) In social media, Bolsonaro still has the highest number of followers, but his growth is slowing down. João Amoedo (NOVO) showed substantial increase of followers in the recent weeks. (v) The local news flow highlighted difficulties and standstills regarding possible alliances between pre-candidates. (vi) Our monitor of economic policy signals highlights interviews by Persio Arida, Geraldo Alckmin’s (PSDB) chief economic advisor; Mauro Benevides Filho, one of the responsibles for Ciro Gomes’s (PDT) economic program; Marina Silva (REDE); and Álvaro Dias (PODE). ** Full Story here.
Day Ahead: The Central Bank announced the rollover of 8,900 FX swap contracts expiring in June 1st.