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February 1, 2021

The Week at a Glance

Argentina: The Tailwind and the Deficit

BY Miguel A. Kiguel, Alejandro Giacoia, Andrés Borenstein, Lorena Giorgio, Rafael Aguilar, Isaías Marini

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( 4 mins)

With the vaccination processes underway in most of the world, the general feeling is that the worst of the pandemic is behind us, although there is a way to go that will probably take much of 2021. The world grows at 5.5% in 2021 and the emerging markets even more. Against this background, the world economy provides tailwind for Argentina. Central banks show no sign of withdrawing stimulus and much of the world’s sovereign debt has negative yields.

Those returns make debt sustainability scenarios resist values much higher than what we are used to. Germany, Netherlands, Austria, France among others issue debt at negative rates. Spain does the same with debt of less than 7 years, Greece and Portugal are practically at zero. With almost all the public debt of the United States trading at negative real rates, making room for more fiscal policy, at least in the short term. That is precisely what the International Monetary Fund is asking countries: not to withdraw stimulus, something only seen in the 2008 crisis. Our index of external financial conditions has been in a comfort zone since August. The IMF also clarifies that the previous statement has contraindications for countries with high inflation and debt sustainability problems, almost written for Argentina.

Prices of raw materials are flying. Soy flirts with 500 dollars a ton, corn is above USD 210, and copper is above 3.5 dollars, something that hits relatively little in Argentina, but benefits Chile, an important trading partner. Brazil is going to recover in 2021 almost everything lost in 2020, leaving it with a “growth deficit” of only 1 point. Good news.

With a focus in Argentina this scenario can imply two things. Either the tailwind is used to make an adjustment, or it is used to not make an adjustment. This apparent contradiction deserves explanation. There is a group in the government led by Minister Guzmán that wants to close an agreement with the IMF as soon as possible. The vision that the agreement will allow to refinance the maturity of USD 2.4 billion with the Paris Club that operates in May. In that sense, Guzmán also suggested a 30% salary anchor, a number that goes below inflation, giving a signal that he is willing to go for an adjustment, even in the electoral year. The vision of the Ministry of Finance is that the agreement with the IMF would bring credibility, lower country risk, it could get some net financing with organizations and return as quickly as possible to the voluntary debt market, perhaps in 2022 or the end of 2021. The vision it would be that adjusting with this tailwind can become expansive and consequently good news for politicians.

There is another view closer to hard-line Kirchnerism, which prefers to take advantage of the greater inflow of funds derived from more favorable terms of trade to accumulate reserves. This makes it possible to pay maturities with money from the BCRA and to agree with the IMF after the elections, preventing the opposition from using the implicit adjustment in the program as a workhorse. For this to be possible, it is necessary to maintain tough exchange restrictions and a brake on imports, which in turn has an impact on the level of recovery. This implies that the fx spread does not decrease or it only goes down marginally.

The president seems to move between one group and another without making decisions. This week he participated in the Davos forum and visited Chile in a signal that could be interpreted as a nod to moderation. Even though in his speeches he spoke well of the IMF, his reading of capitalism resembled that of Kirchnerism more than that of the real world, sowing doubts about what his intentions are. The negotiation with the IMF is not closed, so he can play double headed for a while. But into the second quarter, a decision will have to be made that will be almost exclusively political, but with medium-term economic implications. Closing a quick agreement can exempt the BCRA from financing the 2022 deficit. Doing so towards the end of the year implies a delay in the fiscal adjustment and almost certainly a return to the voluntary market that will come later and perhaps a tougher adjustment in 2022.


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