Buenos Aires — Following the renegotiation of the record debt taken on with the International Monetary Fund (IMF) in 2018, Argentina now faces the challenge of meeting the targets set, as it faces accelerating inflation and the increase in the cost of the natural gas imported by the country, and which could prove to be stumbling blocks as the country strives to meet the goals set with the IMF.
The process of reviewing the progress made so far is being carried out virtually and slowly, official sources told Bloomberg Linea, but which did not specify when the first litmus test for the country will be completed, and on which the second disbursement of funds to the country depends.
In its most recent communiqué, the IMF assured that dialogue with Argentina is making “good progress”, and ratified that there will be no changes in the targets set so far. However, several economists see serious difficulties for Argentina achieving the three main targets for 2022.
The three targets relate to the country’s international reserves, its primary deficit and monetary issuance, according to Matías De Luca, an economist at consulting firm LCG.
Argentina has committed to meeting these goals on a quarterly basis, and the IMF continuing to disburse funds depends on the country’s compliance, while the country must also avoid default, De Luca told Bloomberg Linea.
#1 Foreign Reserves
According to De Luca, the foreign reserves target “is not going very well”, although he clarified that “it always depends on the disbursements from the Fund”.
He estimated that the goal could be met this year, but that 2023 will be “the most difficult part’'.
“The difficult part is on the reserves side. As of May 16, the accumulated net reserves against December 31 is $2.78 billion, while the target is $4.1 billion. In other words, $1.32 million remain to be found, and the drawback is that net disbursements during the second quarter are only $284 million,” he said.
Diego Piccardo, an economist at Fundación Libertad y Progreso, says “the target of the accumulation of net reserves is unlikely to be met, if at the time of the year with the highest liquidation of foreign currency the Central Bank was barely able to buy some dollars”.
“What plays in Argentina’s favor is that this year there is a ‘surplus’ of disbursements from the IMF, and part of those net disbursements (around $4.4 billion) will swell the net reserves, making the goal more attainable”, he told Bloomberg Línea.
#2 Monetary Issuance
Regarding monetary issuance, De Luca said that between the end of April and the end of May, $254 million was issued, while around $376 million is planned during 2022.
“The accumulated limit for the second review is $438.5 million. That is to say, for now they are meeting the issuance goal,” he said.
“The monetary target sets a ceiling of $438.5 billion by the end of June and, currently, up to May 12, there is $288.5 billion in temporary advances so far this year, although it seems that in the last few days there was an additional $90 billion, almost reaching the ceiling for this quarter. And this has set off the alarm bells in the Economy Ministry led by Martín Guzmán, as he put all his efforts into achieving a ‘roll over’ of the debt in pesos to compensate for the higher fiscal deficit”, Piccardo says.
“The only way for this goal to be met in this quarter is if the debt tenders are very successful. However, the annual target is unlikely to be met,” he predicted.
#3 Fiscal Deficit
Piccardo said that, by the end of June, “the Treasury should have an accumulated deficit of $566.8 billion”, while “the March goal was met thanks to Guzmán’s creative accounting to create income where there was none, something that he will rarely be able to continue doing in the revisions that follow”.
“The most likely thing is that the targets will end up being recalibrated,” he added.
“Recalibration does not mean that the targets as a percentage of GDP will change, but rather that, given the failure of the assumptions of the agreement, such as 48% annual inflation, the nominal targets will remain old,” he explained.
“Likewise, beyond the recalibration, the fiscal target is unlikely to be met due to the spending increases that we are observing and the lack of significant progress in the reduction of economic subsidies”, he added.
What Happens if Argentina Fails to Meet the Targets?
“If Argentina doesn’t comply with any of these points, either the agreement will fail, which is unlikely to happen, or Argentina will ask for a waiver, based on the fact that it has demonstrated its willingness to comply,” De Luca said.
Piccardo added that that fiscal and monetary goals “are naturally interconnected since, if the fiscal target is not met, monetary financing needs will grow”.
“In the event of default, we don’t see the Fund getting tough on Argentina, and in that sense, the agreement serves as a bridge to December 2023. They will most likely grant waivers on every default, maintaining the discourse that the deviations are caused by external shocks, such as the war in Ukraine,” he said.
The Challenges Beyond the Targets
Federico Moll, director of consulting firm Ecolatina, assured that the program with the IMF “is focused on correcting certain relative prices that in recent years have lagged behind”.
“Tariffs is the first point. Although the agreement with the Fund does not solve this issue, there is no defined trajectory for tariffs and, therefore, it is not at all obvious how the fiscal deficit will be corrected in the coming years”, he said.
In addition, Moll also referred to the exchange rate as a factor to take into account.
“The official exchange rate does not reflect the market price of the dollar and, therefore if there is going to be a change to the currency exchange control, there is going to have to be a movement in which, in the best of cases, will be a small adjustment,” he said.
“There will be no lifting of the currency exchange control without an exchange rate jump behind it. That is the main challenge, which the agreement with the Fund either orders or pauses, but it does not solve the issue in the least”, he warned.