Results and new Congress
Agreement with the IMF? What agreement and when?
Markets´ first reaction
A comment on a split dollar
Macroeconomics behind the defeat
The 14N confirmed the electoral performance of the primaries (PASO), with the ruling party losing by almost 9 p.p. nationwide to JxC, but bouncing back in Buenos Aires Province where the difference was reduced to only 1 p.p. While it was not enough to prevent losing the majority in the Senate and was only two seats short from losing the first minority in the Chamber of Deputies, the result in the province of Buenos Aires allowed the FdT balancing the Buenos Aires Senate and putting together an “Epic of the Victory” on which they will try to relaunch the administration.
The president’s prerecorded message confirmed Guzmán’s continuity, announced the search for an agreement with the IMF and the submission of a bill, just in the first week of December, with a “Multiannual economic program for sustainable development” that would have the endorsement of “everyone”. The call for consensus to endorse the plan and get the support of the IMF does not start on the right foot as the speech included furious criticisms to “Macri’s indebtedness” and the announcement that neither an adjustment in spending nor the development of structural reforms will be validated.
So far, there have been no messages within the ruling coalition contradicting the President’s announcement, which is no minor thing. Beyond various press operations after the measure, it does not seem that from the negotiation with the IMF will rise in the next two weeks a pre-agreed letter of intention with the agency that includes the guidelines of a program to be sent to Congress.
At the close of this report, the Minister of Economy announced that he would send a pre-agreed program to Congress, reducing the risk of his attempting to use Congress to pressure the IMF. But, at the same time, he confirmed that the agreement is not closed and that the timeframe could be lengthened.
The problem, once again, is that given the concentration of maturities with the IMF and the shortage of reserves in the Central Bank, this negotiation scheme against the ropes has inherent risks in terms of a soaring exchange rate and inflationary pressure. The deadline is 3/22 when the second payment of the month with the IMF for USD1.89 BB is due. Until then, there are maturities for USD8.274 BB, including the second coupon of the restructured debt with private holders for USD759 MM, with net reserves for only USD5.2 BB.
As with the negotiation with the bondholders and with the Paris Club, it looks like we are going to get into friction until then, increasing the odds of a “Pedaling in the air” scenario. The question is whether this will be the case until an agreement with the IMF closed against the ropes in March that prevents falling into arrears (for now, our new base scenario), or, quite the contrary, we actually enter in an arrears scenario with the IMF and stagflation for a government that still has two years in power ahead.
With no dollars in sight, the rapid rebound in 2021 will not be consolidated in 2022. The need to do away with this year’s three rigid anchors (the dollar, rates, and fuels) ensures a higher level of inflation next year. Unless there is a downward readjustment of unit margins in the sectors favored by the greater protection and the exchange gap (and not controlled by the Ministry of Commerce). A decline in margins that does seem easy to apply if the exchange gap is not compressed and the currency rationing becomes looser. If a stabilization plan that includes structural reforms that normalize the fiscal cost and fundamentally limit inequity in the labor market where only a third of the labor supply takes 51.3% of income (and half, including public employment, takes 80%), goes well, it will end up being much more progressive than the attempt to preserve the current status quo with an exchange rate gap above 110% and foreign currency rationing.
Looking again at the concentration in income distribution triggered by the exchange gap, the grotesque distortion of relative prices accumulated in the last two years and the explicit support for Alberto Fernández in Wednesday’s rally, we consider that the Peronist rally should no longer be go “combating capital”, but “protecting friends”.
