Argentina Special September 2018

Argentina

Argentina: IMF boosts bailout, lending the government some breathing room

October 5, 2018

On 26 September, the IMF announced a revamped and upgraded financing agreement to crisis-stricken Argentina, giving President Mauricio Macri’s government an economic lifeline until next year’s general election. The revision of the agreement between Argentina and the Fund—delivered after protracted negotiations and the resignation of Central Bank Governor Luis Caputo—ensures additional financial support to the Argentine government and considerably reduces the possibility of credit default this year and next. The revised standby agreement (SBA) grants the country quicker and more flexible access to funds for budgetary support, contrasting the previous agreement which could only be used in case of necessity. This is a crucial change as, in the absence of support from the Fund, the government could have been compelled to turn to the markets to finance itself, which would have exposed it to further confidence crises amid capital flight and exchange rate storms. Although the deal requires further fiscal consolidation measures and thus likely intensified near-term economic suffering, the agreement could be the key to restoring confidence, shoring up government finances and thus promoting a more sustainable future growth trajectory.

Although the full details of the revised SBA are still pending and although the deal has yet to be approved by the IMF Executive Board, the revised agreement commits the government to stick to stricter fiscal goals than the ones included in the original agreement. A primary budget balance will have to be reached by 2019, one year earlier than in the previous agreement, improving to a primary surplus of 1.0% of GDP in 2020. (The 2019 budget, which includes necessary tax hikes and social spending cuts, is currently being examined by the Congress; however, with President Macri’s Cambiemos party lacking a majority in both chambers, it has so far failed to win its approval.) As a further point of the agreement, the Central Bank of Argentina (BCRA) had to abandon inflation targeting and committed to keeping the monetary base unchanged until June 2019 in order to curb inflation and limit exchange rate volatility. Additionally, the BCRA adopted an FX regime which combines a free-floating range for the peso alongside the prevention of excessive ARS/USD fluctuations through exchange rate interventions.

The revised SBA increased the original SBA amount of USD 50 billion by USD 7.1 billion to USD 57.1 billion. From this line of financing, USD 15 billion was already transferred to the Central Bank in June, following the approval of the original agreement. In what remains of the year, Argentina will receive USD 13.4 billion, well above the nearly USD 6 billion provided for in the original agreement, while the IMF will transfer the remaining USD 22.8 billion next year. The revision’s main goal is to dispel doubts about the country’s financing capability. With a total disbursement of USD 36 billion until the end of 2019—USD 19 billion more than stipulated in the June’s SDA—the Treasury will now be able to cover the primary deficit and repay debt interest on maturing debt.

Stabilizing the foreign exchange market, strengthening macroeconomic fundamentals and putting the economy back on a growth path will depend on whether investors and market operators trust the government to pursue the fiscal reforms and the Central Bank to stick to such a stringent policy rule. The outlook is littered with risks, especially stemming from the possibility of a vocal social backlash against the fiscal measures as well as from the scenario that next year’s elections deliver an unfavorable result to President Macri.

LatinFocus Consensus Forecast analysts are still taking the latest developments into account. Updated forecasts on GDP growth in 2018 and 2019 will be released on 9 October.


Author: Massimo Bassetti, Economist

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