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Argentina Special May 2018

Argentina: Argentina requests IMF assistance to avert financial crisis amid currency selloff

On 8 May, President Mauricio Macri announced he would seek IMF assistance to shore up the economy and avert a crisis. The monumental decision shook markets and followed days of financial volatility and growing uncertainty that led the Argentine peso to depreciate over 10% on 3 May, exposing the country’s economic vulnerabilities. While negotiations are currently underway, government sources confirmed on 10 May they are opting for an IMF Stand-by Arrangement (SBA) to cover an expected USD 30 billion in financing needs for the next two years. The SBA is a stringent IMF program that will likely require the country to push through deep-seated reforms and big spending cuts. Although the terms of the IMF loan agreement will likely exacerbate the expected economic deceleration in the short-term, the loan could restore confidence by correcting structural imbalances and building buffers in the medium-term. The IMF deal, however, also unsettles the political landscape ahead of next year’s presidential elections.

In addition to requesting the IMF deal, policymakers have made swift policy changes in recent weeks to stem investor flight. The Central Bank hiked interest rates three times in eight days, with the latest hike on 4 May bringing the 7-day repo reference rate to an all-time high of 40.00%. In addition, on the same day, the government announced that it will reduce public spending by USD 3.2 billion this year and seek to narrow the primary fiscal deficit target to a more ambitious 2.7% of GDP (from 3.2% of GDP previously). This mix of policies will likely inevitably weigh on the economy in the near term. However, the strong intervention by the Central Bank and the government should help pacify markets and restore financial stability.

The terms of Argentina’s agreement with the IMF will be key to the economy’s outlook, as tough conditions could see even more aggressive fiscal adjustment implemented along with painful reforms. However, there is a possibility that Argentina will secure a more favorable deal due to the current government’s strong pro-market inclination and the increased flexibility shown by the Fund in recent years when granting financial assistance to economies in distress. The loan should help stocks of international reserves stabilize, as well as the currency. Elaborating on this point, economists from JPMorgan point out: “The measures put in place will be sufficient to placate fears of significant portfolio outflows and give positive total returns from ARS positions.”

The decision to request IMF assistance will also likely have strong repercussions in the political arena, which could alter the economic outlook. Soliciting IMF assistance may result in declining political support for the government ahead of next year’s presidential election, giving an opportunity to the fragmented opposition to strengthen ahead of the vote. This could generate significant market uncertainty over the reelection of Mauricio Macri as president in 2019 and the future of his market-friendly reforms in Argentina.

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