Avoids implosion and stops the deterioration of relative prices, but it closes with more inflation and stagnation
The contents of the agreement
Conditions
The impact of the war
About the dollar account
About the peso account and infla-tion
Monetary consistency behind the program
The movement of the IMF in late January when it announced that there was an understanding put an end to the perverse game of chickens Argentina had been taking part in. The program does not solve the serious macro and micro imbalances the country faces in a particularly dynamic world but prevents implosion and tries to gradually begin to undo the deterioration of the balance sheet of a Central Bank that had literally run out of net reserves and maintained almost 8.8% of the GDP of remunerated liabilities, in an economy whose country risk had approached 2,000 basic points.
The program includes three goals for effective compliance: a gradual fiscal consolidation path consistent with a 2.5% of GDP primary deficit in 2022, a more aggressive monetary financing reduction path consistent with transfers of only 1% of GDP in 2022 and a net reserve target consistent with a level of USD9.600 million at year-end.
Regarding fiscal consolidation, it includes a possible path of reduction in subsidies (0.6% of GDP) consistent with the commitment of a scheme of gas and electricity rates that, on average, are not below the inflation included in the agreement. It also includes the expectation that the interest rate will be positive and that the real exchange rate will not fall behind, on average, compared to the levels at the end of 2021.
Although none of the three are goals of effective compliance, the program aims to limit the deterioration of relative prices going forward by indexing the dollar, the interest rate and tariffs to inflation, which based on the initial inertia ensures a higher inflation in 2022 than the 50.9% of 2021. The latter is not included in the projections of the program that incorporate for 2022 a nominal GDP of $70.3 trillion, resulting from an economy growing at 4% (range of 3, 5/4.5%) and inflation of 43% (range of 38/48%). Our numbers point to a similar nominal GDP, but with a different composition: growth of 0.8% and inflation with a floor of 60%.
The memorandum included three novelties that did not arise from the understanding: it has more fresh dollars at the start (USD7,000 million over March’s maturity), more than half of it can be used to finance the Treasury in 2022, and the capacity of Argentina’s Central Bank (BCRA) to intervene in the dollar futures market is almost tripled (up to USD9 BB in December). The three novelties help underpin the BCRA’s reserves at the start and reduce the Treasury’s needs for pesos in the market, given the aforementioned program parameters.
Added to the political risks of an agreement, which is born with great divergences within the coalition of a government not accustomed to having its actions delimited, is the impact of the international price shock triggered by the war in Ukraine. Although the enormous volatility makes the scenario very sensitive to the day and time in which the prices are taken, the truth is that a priori the impact on the dollar account seems to be offset. The same does not occur with the peso account, where the entire increase in energy imports (almost USD6 BB) corresponds to spending by the Treasury, while only a portion of the increase in agricultural and energy exports is “appropriated” by the Treasury through duties. With these data, the ability to reduce the subsidy account recommended in the memorandum by 0.6% of GDP does not seem viable and even with higher inflation helping to limit spending on pensions indexed to the past, it will be difficult to achieve the goal of the 2.5% primary deficit agreed upon. Our projection of the primary deficit, taking a price of Brent oil at USD100 per barrel and one of LNG at USD33 per million BTU, amounts to 2.9% of GDP. A waiver for this is feasible given that the memorandum itself includes a paragraph explaining the upward and/or downward risks of the change in the global scenario with respect to the current one at the time of writing.
Regarding the dollar account, the commitments assumed to accumulate reserves mean that, on average, net energy imports remain the same as in 2021. The lower level of imports and the drought reduce the statistical carry-forward of 3% of GDP from January and the economy would grow on average 0.8% over 2022. Depending on how the BCRA reacts to the IMF recommendation of a “positive interest rate” and on what happens to salaries, with wage negotiations closing around 43%, which marks the inflation projection of the memorandum, but that in all cases include reopening clauses subject to inflation that only in the first quarter would accumulate more than 15% (closer to 6% than to the 5% in the projection of our price survey for March). The harder you try to sustain the level of activity, the greater the pressure on prices mounted on the current inertia.
It does not seem likely (or recommended) that the IMF grant a waiver for the other two objective variables of the program, reserves and monetary financing. At the end of the day, the only anchor that remains is the agreement with the IMF itself and its attempt to recapitalize the BCRA’s balance sheet. For now, the deviations that we mentioned are associated with the international scenario, although there is certainly an additional risk associated with a government coalition that is not used to handling itself with restrictions, let alone in the face of an electoral year.
