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Argentina Special November 2018

Argentina: IMF approves additional financing, boosting short-term fiscal outlook

On 26 October, the IMF formally approved the upgraded standby agreement (SBA) announced in late September, which should cover the government’s financing needs for 2019 and grant President Mauricio Macri some breathing room ahead of next year’s general election. The Fund also completed the first review of the program, allowing Argentine authorities to access over USD 5.0 billion immediately and the government is set to receive another tranche of over USD 7.0 billion by year-end. The fiscal conditionalities attached to the agreement broadly match the measures contained in the 2019 budget approved one day earlier by Argentina’s lower house of Congress, which targets a 0% of GDP primary deficit for 2019. The revised agreement seems to have persuaded investors so far: The peso has strengthened since its announcement, while risk of financial turbulence has diminished notably—although it remains elevated.

The new deal increases the original SBA amount of USD 50 billion to USD 56.3 billion and imposes stricter fiscal conditionalities, that were largely implemented in next year’s budget and revealed recently by the IMF. The 2019 budget includes both spending cuts and additional revenue streams. The bulk of spending cuts will come from a sharp contraction in capital expenditure, further reductions in energy subsidies and the transfer of responsibilities for transportation subsidies to provincial governments. On the revenue side, the re-imposition of export taxes and a hike in the wealth tax will provide the most sizable increase in resources. Meanwhile, the full details of the upgraded SBA revealed that next year’s disbursements will be front-loaded, with hefty payments stipulated before the election cycle. The Argentina government is scheduled to begin repaying debt in the second half of 2021. Additionally, the Fund projects the monetary base to grow by 1% month-on-month in the second half of 2019, while the agreement commits the Central Bank of Argentina (BCRA) to keep the monetary base unchanged until June 2019.

The agreement seems to have succeeded in stabilizing the foreign exchange market—a crucial prerequisite for sustainable growth. Restoring investor confidence and reducing the country’s macroeconomic imbalances, however, is key to the long-term success of the deal. It is, therefore, essential that both the Central Bank and the government stick to their commitments, despite the ongoing economic contraction—which will probably be exacerbated in the short-term by the fiscal and monetary tightening—and the temptation to relax expenditure restraint in the run-up to next year’s general election to be held on the 27 October 2019.

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