Crisis lending surges as government obliges banks to assist

Credit lending is making a comeback in Argentina as the country seeks to flood its streets with pesos to mitigate the effects of the coronavirus.

Loans to private companies have jumped 10.4 percent or 57 billion pesos (US$887 million) since the government announced measures on March 17 aimed at assisting companies affected by an economic recession. The government is forcing banks to lend 320 billion pesos at rates of 24 percent, well below the key monetary policy rate of 38 percent.

“Small companies are in a delicate situation and need working capital – and they’re taking advantage of the low rates,” said Diego Chameides, head of strategy at Banco Galicia. “From now on we should continue to see stronger growth in these credits.”

The measures aim at improving people’s purchasing power and mitigating the impact of a slump expected from a lockdown aimed at curbing the spread of the coronavirus pandemic. Argentina was already heading for its third year of recession before the virus hit. GDP is now expected to contract 5.4 percent in 2020 from one percent previously, according to a Goldman Sachs forecast.

“The damage to the real economy is already palpable and anything that aims to improve the payment chain will be positive under these circumstances,” said Juan José Ciro, chief financial officer of Banco CMF. “The challenge is that there is a great distance from government intention to reality. That liquidity does not always flow smoothly.”

The strategy also involves risks to inflation already running over 50 percent annually. The money supply in the economy is growing on the recent government measures. The monetary base expanded by 28 percent in the first 25 days of March, compared to the prior month, according to Central Bank data.

“This is just the beginning,” Pablo Waldman, head of strategy at INTL FCStone Argentina, wrote in a report. “The monetary issuance has been very strong so far this month. The flood of pesos will put the heterodox plan of price freezes under maximum pressure.”