Understading with the IMF
The political risk after the understading
The economic impact of the understanding
– The Financial Program and the Monetary Consistency
– The dollar account and the 2022 growth
– Fiscal correction calls for higher inflation
The maddening chicken game in the negotiation with the IMF, including the threat of default on the USD731 million due last Friday of January after having disbursed USD3.8 billions since September, and a Central Bank (BCRA) with hardly any reserves, (net reserves today at just USD144 MM), ended without a head-on collision and reduced, for the time being, the risk of the country falling into arrears with the agency on March 22.
The understanding reached is for an amount similar to the effective disbursements of the fallen Stand By program (USD44.490 BB). The sui generis Extended Fund Facilities program would have a duration of 2.5 years including ten quarterly reviews, a 4.5-year grace period for the payment of capital and a payment term of 10 years as from the rescheduling of the last disbursement. That is, the last amortization would fall in 2034. Additionally, the USD4.5 BB paid so far (including last Friday’s amortization) would be returned to Argentina.
The understanding includes: an agreement on the gradual path to reduce the fiscal deficit (2.5% in 2022, 1.9% in 2023, 0.9% in 2024 and equilibrium in 2025), a more aggressive path to reduce monetary financing from the BCRA (1%, 0.6% and 0% in 2022, 2023 and 2024 respectively), a policy objective of accumulating International reserves of USD5 BB in the first year (similar to those returned), a commitment to a positive real interest rate (although it was not specified how it would be set), a commitment to an increase in public services rates (it was not how it would be done either) and it does not include structural reforms.
The minister of economy made it clear that the understanding does not include a discreet jump in the official FX rate and the IMF did not deny it. Although the IMF specifically clarified that behind it there is a commitment to stop backwardation of the exchange rate as it did in 2021 when the dollar rose by 23% and inflation by 50.9%. Read: the IMF is demanding a higher rate of devaluation, close to the inflation rate which, simultaneously with the correction of public services rates necessary to reduce subsidies (a necessary condition to reduce the deficit with no structural reforms and without changing the pension mobility), a priori determines a higher inflation in 2022 than the 50.9% in 2021 and not lower.
How much higher? It will depend on the magnitude of the increase in rates and how INDEC allocates them to the CPI, on how the monetary/ exchange balance (interest rate/ official dollar and gap) is coordinated against the financial program requirement in term of financing in the peso market and fundamentally the handling of the background distributive struggle (wages/margins), in a context where the greater scarcity of dollars will further uncertainty about stock replacement as well as reduce the strong statistical carry forward left by December’s activity.
The million-dollar question is what will happen with the demand for pesos in this scheme where fiscal gradualism and the lack of structural reforms will hardly reduce the economy’s dollar interest rate enough to reopen the credit. And if the dollar rate does not decompress, no interest will allow the exchange gap mounted on the BCRA’s current balance sheet to be disarmed in a sustained way.
The higher aggressiveness in reducing monetary financing than that of the fiscal deficit forces the Treasury to obtain more pesos in the local market. Assuming that the dollars returned by the IMF are destined to build Reserves (they would not be allowed to apply the same regime as they did with the SDRs in 2021), they would only have access to extra financing from agencies. Rearranging the financial program for 2022, and even considering the inflow of the 60% of the dollars from agencies promised in the program, financing is required in the local peso market for the equivalent of 2.2% of GDP. This is consistent with a rollover of peso debt of 130% of total maturities (including interest and amortizations).
Is it possible to find increased demand for pesos that allows the BCRA to disarm remunerated liabilities and turn it to Treasury financing without the demand for pesos being uncoordinated and without the interest rate triggering an “unpleasant dynamic” of the remunerated liabilities? If the program finally materializes, the BCRA could start buying reserves (including the return of the payments made to the IMF up to now) and, like last year, this dynamic decompresses part of the exchange rate gap – today at 110%. How much and until when? Those are the one-million-dollar questions.
In 2021, a dollar moving at 1% per month, an interest rate of 3.16% per month, and a negative slide in agricultural prices triggered the acceleration of the settlement of exports: the BCRA purchased dollars until June and the exchange rate gap hit the floor that month. It went from 130% in October 2021 to 60% in May 2022. The market believed that there would not be a discreet jump in the dollar until after the election. And in 2022? We believe that, if this “equilibrium” is coordinated, for a few months the official dollar can beat the exchange rate gap and get closer to the inflation rate, at least until the harvest process is over.
The understanding still needs to be transformed into an agreement with the staff, which the Congress has to pass, and only then would be elevated to the Board of the organization. For the moment, it is not on the list of topics to be discussed in extraordinary sessions. The timing is against us and the irrationality of the government coalition that recently concluded the understanding with the IMF when the BCRA was literally running out of reserves and keeps trying to stay away from the costs of a program that promises not many joys. Meanwhile, the opposition is trapped in the game and criticizes the program from the right – for the moment an understanding – but seeks mechanisms to avoid having to vote for it.
