The IMF on vacation until January 10th
First round of the game
Budget: the failed attempt to show political muscle
IMF what program?
A more challenging world
The attempt to reach some middle ground in the negotiations with the IMF, which seemed to have begun after the 14N elections, was adjourned to mid-January when the IMF comes back from vacation. Without a multi-year plan presented in the timeframe promised by the President, the failed attempt to pass the outdated budged through Congress to show the IMF “political muscle” in the negotiation, ended up becoming a blooper that ex post the government tries to show as an opposition that constantly comes up with obstacles.
Beyond the grotesque twist of the new articles and reorientations in spending included sideways in the committee debate, the truth is that the budget was obsolete in two ways: due to the underestimation of inflation and the inconsistency in the fiscal corrections against the slowdown in inflation taking into account the indexation of half of the expenditure. But, fundamentally, because even with the gradual concept that the IMF could validate, the numbers that were being discussed by the Government’s technical teams in Washington already included a higher nominality (dollar, interest rate, and inflation), a lower fiscal deficit and a scheme of different financing.
Meanwhile, on Wednesday, simultaneously with the government’s pyrrhic victory for the publication of the evaluation report of Macri’s failed program, the second capital maturity was paid to the IMF, net reserves fell to US$2.35 BB and the Argentina faces US$5.2 BB maturities in the first quarter without counting the payment to the Paris Club that was moved to May. The financial decompression that had been triggered in early December with the expectation of a quick agreement and the seasonal increase in the demand for pesos, is beginning to wane. The country risk returned to 1,754 bps and the blue-chip swap dollar to $208. The pedaling in the air scenario that we incorporated as a basis in our September memo, immediately after the result of the primaries, takes more and more shape.
We still consider that the three actors (the IMF, the government and the opposition) have incentives to prevent the economy from falling into arrears with the agency, but everything shows that as with the bondholders and the Paris Club, the negotiation is going to be against the ropes.
Anyhow, with this negotiation scheme and with the conditions imposed by the Argentine government (gradual adjustment with growth, without a reduction in spending and without structural reforms), it does not seem clear that progress can be made in an Extended Facilities program (EFF) that decompresses the maturity wall and gives some air to bond prices, lowering the dollar interest rate and narrowing the exchange gap. The risk is that, to avoid entering into arrears, a new Stand-by program will be attempted, which includes new disbursements that cover quarter by quarter capital payments against targets set.
Without additional dollars as in 2021 (taking the future prices of the agricultural complex, exports would fall between US$2 BB and US$3 BB, at current prices of LNG the cost of import energy increases at approximately an additional US$3.5 BB and tourism would have a higher demand for foreign exchange), the promise of fiscal correction with growth runs out of fuel. The statistical carry-forward that October data shows and provides a GDP increase of 2.0% for next year, is based on a level of imports that will not be financed in 2022. The goal of reserves to be agreed upon in the program and some additional financing from the international agencies will define the level of imports and therefore the resulting level of activity. For now, the additional US$12.5 BB that the budget project sent to Congress in September included as financial sources was reduced by half in the project rejected last week.
The truth is that it will be two years ahead with few joys. It may not implode if an agreement with the IMF finally extends the maturities (obviously it is not harmless the way it does it and if there are some fresh dollars behind), but the growth of the economy is going to be insignificant. The need to break out of the rigid anchors that operated this year (the dollar, rates, and fuels) ensures a higher level of inflation next year. Unless there is a downward adjustment of the unit margins in the sectors favored by the greater protection and the exchange gap (and not controlled by the Secretariat of Commerce) or an attempt is made to use wages as an anchor. A fall in the margins does not look easy if the exchange gap is not decompressed and the currency rationing relaxes. Meanwhile, the wage anchor, if materialized, can moderate price inertia, but it will have implications on activity. A short blanket to cover long legs.
It is a necessary condition a stabilization plan that includes structural reforms that underpin the systemic competitiveness of the economy in an increasingly dynamic world and reduce informality. For the moment, beyond the confirmation of the gradual reduction the double severance payments and the lifting of the ban on dismissals, there is not much in this regard.
