Closely monitor any government announcements related to capital controls to assess potential impacts on the operating environment
The IMF agreement appears to be more lenient than expected, which suggests that key operating challenges, such as price and capital controls, are unlikely to wind down quickly. Our main concern, however, is that Argentina will not follow through with IMF commitments, leading to another debt or currency crisis in 2023 or 2024. In the short term, however, this is a positive development. Assuming the agreement is signed, firms should expect a controlled peso devaluation led by the BCRA, gradually easing current FX tensions. Inflation will remain high in 2022, particularly given rising external pressures, but concrete targets should help anchor inflation expectations. MNCs should closely monitor any announcements on the government’s plan to exit capital controls, which has not yet been released, to assess the impact of potential improvements to the operating environment.
Overview
The Alberto Fernandez administration has reached a debt restructuring agreement for its close to US$ 45 billion loan from the International Monetary Fund (IMF). This week, the government presented a plan to Congress containing the fiscal and monetary targets agreed upon with the IMF. Congress is slated to review the new IMF deal, which requires congressional approval to pass, over the next couple of weeks, with the aim of signing the deal prior to the March 22 debt restructuring deadline.
The IMF agreed to disburse additional funds to Argentina as part of this new agreement. After signing the deal, Argentina will be able to access US$ 7 billion of the IMF’s special drawing rights. The agreement also includes quarterly check-ins with IMF staff, after which additional funding would be disbursed, totaling US$ 45 billion over the next two and a half years.
The agreement requires Argentina’s central bank to bolster its foreign reserves and cut down on monetary emission, gradually eliminating the use of money printing to finance government deficits by 2024. Additionally, the BCRA would raise the benchmark interest rate, which has been in negative territory since 2020. Other requirements include cutting energy subsidies, mainly for higher-income Argentines, and gradually relaxing existing capital controls.
Our View
Although the IMF agreement is likely to face pushback in Congress, particularly from within the Cristina Fernandez de Kirchner-led faction of the Frente de Todos ruling coalition, we believe that it will ultimately be approved, enabling Argentina to avoid an early 2022 debt and currency crisis. Still, implementation of the agreement will be challenging, particularly as the 2023 presidential election approaches. With the economy still recovering from COVID-19 and the ensuing energy and food price shock stemming from the war in Ukraine, Argentine voters are likely to respond negatively to government efforts to cut back spending. The Fernandez administration is therefore likely to return to old patterns as 2023 nears, likely leading to tensions with the IMF and efforts to renegotiate key goals and targets.
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