The honeymoon that resulted from Argentina’s successful external debt restructuring was short-lived. A new round of onerous capital controls and impending negotiations with the International Monetary Fund (IMF) create a highly uncertain market outlook. Meanwhile, we expect a double-digit contraction of GDP in 2021 due to one of the world’s longest and strictest economic lockdowns as COVID-19 continues to impact the region. Economic relief to mitigate the country’s lockdown has been limited; the only way for the government to finance spending is through monetary expansion, which will eventually impact inflation. Businesses should pressure-test assumptions for the market now, revise scenarios and contingency plans, and encourage agile decision making especially amid this volatile environment. You can find more information on Argentina’s original deal with the IMF below.
Following May 2018’s peso crash, Argentina secured an IMF stand-by agreement (SBA) loan for USD 50 billion over the next three years. This agreement was larger and quicker than the market expected. The good news is that the IMF funds ensure Argentina’s sovereign solvency and will help avoid another run on the Argentine peso. However, the conditions of the loan will negatively impact Argentina’s economic outlook for 2018 and 2019. Here is what MNCs should know:
What are the conditions of the IMF loan?
- Fiscal deficit goals: The government of Argentina will not be forced to change its 2018 primary fiscal deficit target of 2.7% of GDP (Macri’s government had already announced a more ambitious fiscal target before contacting the IMF from the previous 3.2% target). The real cuts begin next year, with a deficit target of 1.3% of GDP in 2019, 0% in 2020, and a surplus of 0.5% in 2021
- Central bank independence: The IMF requires the absolute independence of the Central Bank of Argentina (CBRA), which the executive branch often influenced. This should give newfound confidence to the Central Bank to anchor inflation expectations and carry out an independent, hawkish monetary policy
- Inflation goals: As part of the CBRA’s requirements, the IMF asked it to create new inflation goals in an attempt to “double down” on inflation and create realistic inflation goals that will help anchor inflation expectations. The CBRA has no explicit inflation goal for 2018. The new year-end goals come into play next year: 17% in 2019, 13% in 2020, and 9% in 2021. These goals are higher than the previous goals of: 12% in 2019, 9% in 2020, and 6% in 2021. Even though the new goals may not seem like an improvement, the new goals reflect Argentina’s current inflation realities and help establish monetary policy credibility
- Monetization of the fiscal deficit: The IMF outlawed the CBRA from monetizing the fiscal deficit, which means that the Central Bank will not be able to buy sovereign bonds from the market and use that cash to finance the fiscal deficit. This has been one of the primary causes of Argentina’s chronic inflation
- “Lifeguard clause” specifically for Argentina: the loan includes an unprecedented “social lifeguard” clause that will allow Argentina to be flexible with its fiscal deficit goals so long as the rationale is to increase emergency social spending. This way, the IMF loan funds can be used as a social safety net. It will also make the IMF’s overall program slightly less burdensome on poorer Argentines than traditional SBA loans of the past by ensuring that critical spending on this part of the population is maintained
Signposts to watch
Multinationals should monitor the following signposts which will affect Cambiemos’s political capital in the medium term:
- Congress must approve 2019 budget (September) and the new charter for the Central Bank: The most difficult aspect of adhering to the IMF’s conditions will be to approve 2019’s budget. The steepest one-year cut in spending must occur in 2019, which is also an election year. This means that negotiations around where to cut expenditures will be tense and lengthy. The same process must take place for the new charter for the Central Bank, which will formally establish rules of its independence. This will unlikely be as contentious as the 2019 budget, but it is a more time-sensitive issue
- Wage negotiations: These will likely intensify as it becomes clearer that the government’s wage contracts of 15% agreed upon by most sectors will not be sufficient. DuckerFrontier expects inflation to end the year around 25%
- Approval ratings of opposition politicians: Not only are the approval ratings of politicians from Cambiemos important, but so are the ones of opposition politicians. This is because they will be a barometer to measure Peronists creating a viable alternative to Cambiemos’ policies and unifying around one candidate. Right now, the political opposition in Argentina remains fragmented
To learn about the implications for your business, fill out the form to watch an exclusive video featuring DuckerFrontier’s Director for Latin America Research, Pablo Gonzalez, and Southern Cone Expert, Alex Schober.