Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The agreement will not demand deep economic adjustment or
structural reform, which suggests that some of the main hurdles for
doing business in Argentina, such as strict labor laws and the high
corporate tax burden, are unlikely to be improved before the 2023
presidential election.
With the deal, Argentina would avoid defaulting on its IMF
liabilities in 2022 but shifts the risk to beyond 2023.
The more achievable set of policy targets, such as reducing the
primary deficit by only 0.5% of GDP in 2022, while continuing to
allow central bank funding of government spending (albeit capped at
1% of GDP) are indicators of improving debt and currency positions
but are unlikely to prove sufficient to boost confidence in the
peso during 2022.
A final agreement must still be approved by Argentina's
Congress, where it is likely to face opposition from the radical
Kirchnerist faction of the ruling coalition. Although this is
likely to delay the approval, it is unlikely to derail it
altogether.
Unlike past IMF conditionality globally, the new 10-year
Extended Fund Facility (EFF) worth USD44.5 billion would not demand
deep economic adjustment, instead setting gradual primary
fiscal-deficit reduction targets from 3% of GDP in 2021 to 2.5% in
2022 and a zero primary deficit in 2025. Neither does it demand
structural reform in areas such as labor markets, pensions, or
taxes. This suggests that some of the main hurdles for doing
business in Argentina, such as strict labor laws and the high
corporate tax burden, are unlikely to be improved before the 2023
presidential election, as these would be politically unpopular
measures with the electorate.
Default risks
Argentina and the IMF will now work towards reaching a
staff-level agreement, while the final deal must be approved by
Argentina's Congress and the IMF's Executive Board. If all the
stages are completed Argentina would avoid defaulting on its IMF
liabilities in 2022, when it faces USD19 billion in repayments. The
agreement would allow 4.5-year grace on the new EFF, but its
repayment schedule would extend to 2032. During the early period of
the facility, the IMF would conduct reviews every three months and
could halt disbursements if Argentina fails to meet its commitments
regarding fiscal targets, curtailing borrowings from its Central
Bank of the Argentine Republic (Banco Central de la República
Argentina: BCRA) (printing money to finance state spending) and
increasing its foreign reserves. In the event of not meeting the
targets set, the IMF would be allowed to introduce new requirements
relating to macroeconomic policy, indicating that extended
renegotiations remain possible. We assess that the agreement
reduces the risk of default in 2022 but shifts it to beyond
2023.
The IMF has elected a cautious but more achievable set of policy
targets. For 2022, reducing the primary deficit by only 0.5% of GDP
while continuing to allow central bank funding of government
spending (albeit capping this at 1% of GDP) are indicators of
improving debt and currency positions but are unlikely to prove
sufficient to boost confidence in the peso during 2022. Further
uncertainty is whether Argentina's monetary policy approach will
also change only gradually. One of the IMF's policies to reduce
inflation is to set positive real interest rates. However, the real
monetary policy rate is currently about -14%. IHS Markit projects
high inflation (51.8% in 2022). However, if Argentina complies with
the fiscal targets, inflation expectations should decline.
Domestic
challenges
The absence of IMF-led deep economic adjustment includes
permitting continued spending on public infrastructure and
maintaining targeted social programs. Direct subsidies to the
population amounted to nearly 3% of GDP in 2021, and they are
likely to remain at approximately the same level in 2022. This will
prevent the ruling Peronist coalition Front of All (Frente de
Todos: FdT) from alienating its support base ahead of the 2023
election and align with its current policies that seek a gradual
reduction in the fiscal deficit, including by reducing utilities'
subsidies, which amounted to 3.2% of GDP in 2021. However, this is
likely to become a point of contention, as the government estimates
that tariffs should increase by 20-35%, while IMF demands are
likely to push the increases to 180%, as estimated by sources close
to the negotiation quoted in Argentine media. This would delay
reaching a staff-level agreement.
Once the agreement is settled, it must be approved by Congress,
where is likely to gather enough legislative support from the
members of the ruling FdT, loyal to President Fernández, but will
find reluctance from the more radical Kirchnerist faction, loyal to
the vice-president Cristina Fernández de Kirchner (CFK). It is also
likely to be backed by the opposition coalition Together for Change
(Juntos por el Cambio: JxC). Kirchnerist opposition is likely to
delay the agreement but not to derail it altogether.
Labor unions have supported the agreement as it does not propose
changes to labor laws. This mitigates the risk of industrial
action, including strikes by the powerful truckers' unions, which
have the potential to disrupt cargo and transport nationwide for
24-48 hours. However, radical left-wing social organizations will
oppose the fiscal tightening trajectory proposed. Such groups are
likely to stage localized protests consisting of roadblocks in
Buenos Aires city center at 9 de Julio Avenue, the Obelisk, Plaza
de Mayo, and near Congress building and entrances to the city, such
as the Pueyrredón Bridge, General Paz, and 25 de Mayo.
Posted 24 February 2022 by Carla Selman, Principal Research Analyst, Country Risk, IHS Markit and