If the pandemic demonstrated anything, it is that countries like Argentina are in a much more disadvantageous situation than the developed world to face a pandemic. The economy ended with a fall of more than 10% and monetary issuance boosted the dollar in the informal market by 110%, raising poverty to 45%. With such an impact, It is not surprising that the same government that decided on a rapid and strict quarantine in March of last year now has doubts about which way to go from the rise in contagion cases and the latent risk of a second wave of Covid-19 in the country.
The first data to take into account about the impact on the economy that a new quarantine or something similar to a total closure of the economy would produce is that the 2021 Budget did not include any item in anticipation of this almost inevitable “second wave”. The Emergency Family Income (IFE), which had a palliative effect in the sectors most affected by the impossibility of transit, was totally eliminated. And in the case of companies, the ATPs for the payment of salaries were replaced by Repro II, a program that establishes the payment of salaries up to a maximum of $ 9,000 per employee of companies that go through a critical context.
The 2021 Budget was made based on the calculation of an economic recovery of 5.5%, but several economists calculate that in reality this rebound could be around 6% and even 7%. As there is a reversal in the openings, those projections will be more difficult to fulfill.
2021 already begins in a delicate context for the Argentine economy, with a free exchange rate that rose 110% last year, contained inflation and the projection of a high fiscal deficit. Going back with the opening of activities would add more gasoline to the fire at these pressures
Therefore, if restrictive measures once again affect productive sectors (be it businesses, industries, but also the self-employed), it would be inevitable to resort to more resources to face this impact. The problem is that there is nowhere to get that financing. The only option would be more monetary issuance, that is, to resort to a recipe similar to that of 2020, since the capital market is practically closed for Argentina. Of course, the space to do something similar to last year is much less. It would be unthinkable for the Central Bank to issue pesos for the equivalent of more than 7% of GDP, amid strong exchange rate pressures and contained inflation.
The Treasury is left with the possibility of financing part of that spending in the local market, which it has been doing since last year, but the ability of investors to buy debt in pesos is also limited.
The most developed countries have already approved millionaire resources to face the “second wave”. This is the case of the United States, whose Congress approved a new stimulus plan a couple of weeks ago for no less than 900,000 million dollars. Also in Europe there were new plans to massively boost activity. But in the Argentine case, the option of pouring million-dollar resources to cushion the fall of the economy before a new closure is much more complex.
It is not difficult to imagine the “domino effect” that a new economic shutdown would generate, even if it is partial. Inevitably there would be more money issuance to finance it and therefore more pesos that would put pressure on the exchange rate
With legislative elections that will be key in October, Alberto Fernández is obliged to handle himself with extreme caution. For something he did not repeat, as he did permanently in the first stage of quarantine, that “health matters more than the economy.” Having left that false dilemma behind, now the premise seems to be to reduce the health impact of a virus outbreak, but paying special attention to the impact on pockets. In addition, it would meet strong resistance from the general public, be it consumers, traders or industrialists.
It is not difficult to imagine the “domino effect” that a new economic shutdown would generate, even if it is partial. Inevitably, there would be a greater monetary issue to finance it and therefore more pesos that would put pressure on the exchange rate. The exchange rate gap has already increased to 100% between the official dollar and the free one in 2020 and the risk that it will continue to widen is by no means ruled out.
The primary fiscal deficit – which is estimated at a high 4.5% of GDP this year – would inevitably grow and would also put pressure on inflation, which would go against the government’s plan to contain prices for as long as possible. One of the main objectives that Cristina Kirchner herself outlined in the La Plata ceremony a couple of weeks ago was that wages and pensions are aligned with the increase in food prices and rates. This delicate balance, already difficult to achieve in a relatively normal situation, would become much more unlikely in the event of a reversal in the opening of activities.
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