The International Monetary Fund mission left Argentina last weekend. The official statement published on Friday by the Washington-based organization suggests that an agreement between the two parties is still distant. In its very particular language, it states that guidelines for a program were discussed, a clearly ciphered message indicating that the substance of an agreement is not near.
Our vision is that an initial agreement on how and when to eliminate the primary deficit is missing. Also, it is not clear that there is an agreed path for exchange rate policy. The FX spread is unsustainable at these levels. And no reasons arise indicating that the spread reduction will occur by lowering of the ceiling instead of rising the floor. The October exports’ bad print, even with rising prices, is a good example of how difficult it is to manage an economy with this distortion. The Government insists that the IMF is not calling for devaluation, but it is unclear where the reserves will come from in order to prevent the peso from weakening. Let us bear in mind that there is a surplus of pesos in Argentina and about 300 billion more are about to be issued in December. Can the demand for pesos increase so as to clean up that surplus? Although the economy is normalizing, we do not see the monetary hangover being cleaned up that fast.
In this political economy environment, the fastest imaginable timing for an agreement with the IMF is February, but March or April are more likely. Regardless of the differences with the Argentine authorities, it is unlikely that staff will want to go to the board before January 20, the day of the presidential handover in the United States.
The program with the IMF currently has many ownership issues and the mission probably perceived this. While Minister Guzmán tries stay in balance to display a better environment and meets with important businessmen, and gives signs of fiscal adjustment (new pension formula, IFE elimination, utility price hikes), the rest of the government does not seem as persuaded. The senators’ letter to the IMF was followed by statements from the president showing that he not only has to juggle judicial matters but also, he has got to be careful when he talks about the economy. Not only did he somewhat endorse the letter against the IMF, but more recently he spoke against free trade, he allowed the tax on fortunes and the motion that restricts the use of scorched land to move forward. More recently, businesses were threatened using the supply law, another measure that does not go hand in hand with reasonable pro-investment policies. Even with all these setbacks, we still see an agreement in the Q1-2021 as the most likely scenario.
In this context, however, proposing a set of structural reforms will be a very complex endeavor for the staff. It is not that the fiscal, monetary and exchange rate issues are simple, but in certain circumstances, politicians will swerve in the absence of alternatives. In Argentina, the trigger is the lack of reserves. The CB no longer has its own liquid reserves and, on top of this, the price of gold is falling, depressing the value of the gross reserves. The good news is that deposits in dollars halted their fall. Selling structural reforms that go in the direction of improving long-term productivity seems to be a difficult mountain to ascend because the discursive angle to advance along that path is unclear, not even from the most “pro-market” sector of the coalition.
Against this background, we foresee a busy summer. High inflation, probably a leap in the exchange rate in the first quarter and regulatory changes typical of a scenario of macroeconomic volatility. The interesting thing is that, after the United States election, the world went into risk-on mode. Perhaps with a more concrete sign, Argentina could take advantage of some of that improved global mood. For now, the variable that helps is the price of soybeans which is at a 6-year high, partly explained by expectations of drought in Argentina.
Econviews Weekly 25th November 2020