Argentina turns to the IMF to try to avoid devaluation – 06/13/2023 – Market

Argentina’s government, increasingly desperate, tries to avoid a currency crisis by seeking help from China and the IMF, and the Washington-based creditor finds itself in a quandary over how to support its biggest debtor.

Inflation in the country is expected to reach 145% this year, a recession is looming and the central bank’s net hard currency reserves are negligible. The Argentine peso is down nearly 40% against the US dollar in the parallel market this year.

The Peronist government is struggling to avoid a major devaluation or slide into hyperinflation during the politically turbulent season leading up to presidential and congressional elections in October — and economy minister and presidential hopeful Sergio Massa has emerged as a figurehead. central.

Massa announced a series of emergency measures to keep the economy afloat, including special exchange rates to encourage soy exporters to ship their crops and domestic debt swaps for longer maturities.

He will travel to Washington later this month to seek extra IMF funds, but his task has been complicated by a severe drought that has hit agricultural production and exports.

A trip by Massa to China in early June resulted in an agreement for Argentina to access an additional $5 billion (R$24.4 billion) from an existing currency swap deal in yuan. Massa is also trying to convince the New Development Bank, the Brics credit institution based in Shanghai, to allow Argentina entry.

The country has been isolated from international markets since its default in 2020 and needs to finance a budget deficit estimated by JPMorgan at 3% of its GDP this year. With net international reserves estimated at around US$ 1.5 billion (R$ 7.3 billion) negative, according to analysts at Ecolatina, in Buenos Aires, Massa’s hopes of getting dollars are in the IMF.

“O [plano] de Massa is to do the impossible so that the economic situation does not get out of control before the elections, but it has become very difficult to reach him because of the impact of the drought on soy exports”, said Salvador Vitelli, of the business consultancy Romano Group. “The The macroeconomic instability we face is not caused by drought, however, but rather by a series of failures and mismanagement.”

Federico Sturzenegger, head of the central bank in the previous conservative government of Mauricio Macri, was blunt: “Massa’s strategy is to take on more debt to sustain a very large fiscal deficit that the government has not corrected. It’s not much more complicated than that.”

Massa’s effort also serves another purpose: the minister does not hide his desire to be the presidential candidate of the Peronist movement, and the decision is imminent. Nominations for the national primaries end on June 24, and both President Alberto Fernández and Cristina Fernández de Kirchner, his powerful vice president and former president, have said they will not run.

The pressure for a bigger injection of money from the IMF comes despite Argentina’s failure to meet many of the targets defined in a credit program of US$ 44 billion (R$ 214.8 billion) agreed with the fund last year. It includes reducing the fiscal deficit, increasing revenue and accumulating reserves, according to a report presented in May by economists at the University of Buenos Aires.

However, IMF observers expect the fund to approve more money at its next review, scheduled for early July, to avert a bigger crisis and allow Argentina to return the money to the Washington-based lender.

“The fund doesn’t want to be responsible for Argentina going down the drain,” said Alejandro Werner, former head of the IMF’s Western Hemisphere department. “It also doesn’t want Argentina to be in arrears for a long period […] So there are many incentives for the fund to complete the review.”

The IMF said the fund team is engaging “very closely” with Argentina in the latest program review. “The focus has been on policies that strengthen the program to safeguard stability, increasing reserves and fiscal sustainability, while recognizing the impact of the drought,” the fund said.

A source at the Economy Ministry in Buenos Aires said Argentina wants funds to compensate for the loss of export revenue caused by the drought, with the amount still under discussion. Controversially, he also wants to use some of the IMF money to intervene in markets to support the peso. “What is being discussed is how much will be available to intervene,” the source said. “At the moment, this discussion looks good.”

Hector Torres, a senior fellow at the Center for Innovation in International Governance and a former executive director of the IMF, was skeptical. “Argentina’s central bank has run out of dollars, and the official exchange rate is clearly unsustainable,” he said. “The fund does not want to lead the country to default […] but I can’t see the board of the fund allowing the use of IMF resources to buy pesos in the exchange market.”

A source familiar with the talks said there was considerable frustration about Argentina. “There is very little support for further confusion,” the source said. “Massa should have made a big adjustment when he took office.”

For Sturzenegger, the fund could lend Argentina enough for next payments to the IMF, but not larger sums. “I think what the fund will do, instead of disbursing [todo] the remainder of the program funds, will only give money according to what Argentina has to give back to them […] So, I think the IMF will postpone the package issue [mais amplo] from Argentina to discuss it with the next government.”

The risks are both political and economic. Far-right candidate Javier Milei is strong in the polls and could lead primaries in August, which are held simultaneously for all political parties. Milei defended the dollarization of the economy, so a strong result for him could further destabilize the situation by raising expectations of a large devaluation.

“If he wants to dollarize the economy and he has a third of the votes in the polls, why would we have domestic debt?” asked one person familiar with the IMF talks.

Long considered the villain by many Argentines for its past role in austerity programs, the IMF has few good options.

“The fund will likely be criticized for doing a terrible thing, as well as a terrible program,” said Werner, who oversaw an earlier IMF bailout in 2018. “However, at the end of the day, they would not have been repaid anyway. Or you lend it to Argentina so they pay or they won’t. Both sides will stall and pretend.”

Translated by Luiz Roberto Gonçalves