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Argentina Special June 2018

Argentina: Argentina clinches USD 50 billion loan from IMF

Argentina reached a USD 50.0 billion Stand-By Agreement (SBA) deal with the IMF, after weeks of financial turbulence caused the currency to depreciate sharply in early May. The final agreement exceeded estimates of a USD 30.0 billion SBA and should enable the country to comply with its external debt obligations and rebuild economic buffers. Notably, officials plan to treat the bulk of the loan as precautionary, and only draw on the first tranche of the program (USD 15.0 billion). While the full details of the program are outstanding as of 11 June, statements by Argentine policymakers and the IMF have revealed some of the program’s top priorities: reforming the charter of the Central Bank of Argentina (BCRA), reducing monetary financing of the deficit and drastically cutting the primary fiscal deficit. The deal will likely cause the Argentine economy to slow substantially in the short-term, dented by tough fiscal consolidation, but should help restore stability and reduce structural weaknesses in the economy through deep-seated reforms.

The Argentine government has committed to enhancing the Central Bank’s autonomy and credibility. The Bank will stop financing the government directly, which should ease upward pressures on the money supply. This measure is intended to make the economy more robust, as unrestrained monetary financing has been a cause of financial instability and higher inflation in the past. The BCRA is also set to have complete independence in setting inflation targets and to start releasing the minutes of the meetings to improve transparency. Together, these measures should lift confidence as they limit government interference and reduce the probability that the institution will tweak targets to achieve faster short-term economic growth. Finally, the Central Bank pledged to keep forex market interventions to a minimum and move towards a more free-floating exchange rate regime.

Authorities committed to ambitious fiscal consolidation targets as part of the IMF program, with tougher targets in 2019 and 2020 than set previously. The primary fiscal deficit is now targeted to narrow from 2.7% of GDP in 2018 to reach a balanced primary budget in 2020 (previous target: -1.2% of GDP). This would translate into budget cuts in the order of USD 19.3 billion for 2018–2021, and most of the cuts are expected to come from reduction of capital expenditure, subsidies in public utilities, and the delaying of infrastructure projects. These policies will dampen the domestic economy and weigh on growth momentum.

It is not certain that Argentina will be able to meet the tough targets under the IMF program. The current government has failed to meet its inflation and primary deficit targets set at the start of its mandate in late 2015. Similarly, the fragmented political opposition has coalesced recently and has been able to undermine government efforts to slash public spending in recent weeks. The budgets for the upcoming three years and the Central Bank reform have to be approved by the Chamber of Deputies and the Senate, which are both controlled by the opposition, suggesting that passing austerity budgets will be very difficult. In addition, President Mauricio Macri’s administration will have to balance complying with the IMF terms and passing budgets that are not too punitive ahead of next year’s presidential election. Achieving fiscal targets will also be conditional on the economy’s growth prospects, which depend on external and domestic factors. Increasing prospects of an international trade war, the impact of monetary policy normalization in the United States on the Argentine economy and a more pronounced impact of austerity measures on the domestic economy could further drag on growth, undermining fiscal consolidation efforts. Nevertheless, senior economist Mario Mesquita from Itaú BBA argues that the country can achieve the fiscal target in 2018 but more effort will be required to achieve the targets in 2019 and 2020:

“We think the targets are very challenging but feasible. A weaker currency and higher inflation favors a lower primary deficit in 2018. However, we note that a faster consolidation in 2019 and 2020 would likely need additional, and more structural, measures.”

The majority of panelists significantly revised their forecasts and for this month LatinFocus Consensus Forecast report expect the Argentine economy to expand 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, panelists expect the economy to expand 2.5%.

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