Argentine strategy for agreement with IMF hits a wall of doubts

Argentina’s defense of its fiscal spending plan is putting it on a new collision course with the International Monetary Fund (IMF), although analysts believe that the South American country will be forced to change its position and close a deal to avoid a even bigger crisis.

The Argentine government and the IMF have been in constant talks for more than a year.

Argentina seeks to avoid a debt default with the IMF in a year in which payments of US $ 19,000 million are looming, part of the loan for some US $ 45,000 million that the agency granted and that must be renegotiated to help restore Argentina’s credibility with the markets.

Argentine Economy Minister Martín Guzmán said last week that the biggest difference in negotiations with the Fund was over the speed at which the country should reduce its fiscal deficit. Guzmán presented an economic plan that entails deficits for five more years and monetary issuance.

Guzmán pointed out that the Fund’s proposal “it would stop the economic recovery that Argentina is experiencing“, While his plan would give”continuity to this strong recovery”.

Asked by Reuters, there were no comments from the IMF, but last month the agency reported that Argentina needed to reduce the monetarization of its fiscal deficit and raise interest rates above inflation.

Many international investors reacted with disappointment to Guzmán’s recent remarks.

The details of the presentation (of the minister) were “disappointingly scarce“Said Stuart Culverhouse, head of sovereign and fixed income research at Tellimer in London.

Without a sharp increase in farm prices, “unclear where growth will come from, in the absence of a credible policy framework”He added.

For her part, Siobhan Morden, managing director of Amherst Pierpont Securities, described the plan as a “challenging approach to insist on a failed economic model.”

“Minister Guzmán’s presentation seemed more political theater than any rational technical discussion of an economic program”He stated in a research note.

The Argentine government’s strategy appears to be based on demanding leniency from the IMF to counter what it perceives to be a politically motivated program approved in 2018 to benefit then-pro-market president Mauricio Macri.

But the body itself has criticized the previous plan for considering it too fragile to address the political and economic reality of Argentina, and for over-accepting the government’s overly optimistic economic projections.

Guzmán’s proposal also appears to be based on optimistic forecasts.

The Argentine plan predicts economic growth at almost twice the current market consensus rate, which is shared by the IMF. In addition, he estimates that inflation will reach only 33% in 2022, while many expect it to remain above 50%.

An agreement with the IMF is widely seen as Argentina’s only option to avoid an economic collapse. If an agreement is not reached, a default would be triggered with the Paris Club, who, last year, put as a condition an agreement between the IMF to renegotiate its debt with the country.

The Argentine government, with its sovereign dollar bonds yielding close to 20% over various maturities, is already out of international debt markets, limiting the country’s options to print more money to finance the deficit, according to many. economists.

“In the absence of access to external markets and in the midst of low domestic savings, a slower path of fiscal consolidation implies greater monetary assistance and, therefore, higher inflation and greater financial imbalances in terms of the official exchange rate gap / parallel”Said Diego Pereira, chief economist for the Southern Cone and Peru at JP. Morgan said in a client report.

The wholesale exchange rate in Argentina is around 103.6 pesos per dollar, while in the informal or ‘blue’ market, it reaches 208 pesos per dollar. The gap exceeds 100%.

The moment of truth

On Thursday, Argentina’s central bank (BCRA) raised the rates on its 28-day bond by 200 basis points to 40%, an implicit annualized rate of 48.3% according to JP.Morgan, although still below the forecasts of inflation greater than 50%.

Goldman Sachs called the measure “a very small step on a long road to monetary and financial normalization“, and said that “the current mix of monetary and fiscal policies, and the broad set of financial and capital controls is unsustainable and inconsistent with socially inclusive growth in the medium term ”.

Analysts agree that a deal is likely eventually, given the stakes.

“First, it avoids defaulting on the IMF, which in itself would not trigger a (sovereign) bond default, but would negatively affect the price.”Said Carlos de Sousa, emerging markets debt strategist at Vontobel Asset Management in Zurich.

An agreement is also the scenario that Pereira of JP Morgan estimates, although he predicted that the negotiations could experience a temporary stagnation in the coming weeks.

In the end, the pain of any fiscal adjustment likely to be required by the IMF would be far less than the economic turmoil caused by a possible default on the Fund’s loans, Pereira said.

“An agreement with the IMF before the end of March seems a necessary condition to avoid more disruptive scenarios”He added.