Even with new IMF backing, Macri faces trouble ahead
BUENOS AIRES: Armed with a topped-up IMF loan of US$57 billion, Argentina’s government prepared for a battle to stabilize its currency and tame runaway inflation, but it faces steep challenges to implement harsh cuts ahead of polls next year, analysts said.
Even with the increased package, President Mauricio Macri’s centerright government has its back to the wall, with disbursement being linked to his pledge to erase the budget deficit from 2019.
Without a majority in Congress, Macri will have to convince a hostile Peronist opposition to adopt a 2019 austerity budget with sweeping spending cuts.
The revamped agreement will allow the South American country “to leave behind the turbulent path of recent months,” Finance Minister Nicolas Dujovne said after the deal was announced Wednesday.
But as if to prove there is no quick fix, Argentina’s underfire currency wobbled again on Thursday.
The peso – which has shed half its value against the dollar this year – dipped 2.3 per cent shortly after markets opened.
Setting the tone for the battles ahead, Alex Kicillof – former economy minister in the previous leftist government of Cristina Kirchner – called Macri’s austerity measures “a shame” and said governors and lawmakers would not vote for it.
Buenos Aires originally secured a US$50 billion loan back in June, but quickly burned through an initial US$15 billion tranche to fight a run on the currency, in the process raising interest rates to 60 per cent.
However, Macri revealed last month that he had asked for an accelerated disbursement of the remaining US$35 billion, prompting talks on a larger IMF loan.
Daniel Artana, chief economist with the Latin American Economic Investigation Foundation, said Macri had inherited a broken economy from Kirchner in 2015 and was heading in the right direction.
“Argentina is committed to doing what it needs to do, it’s a steep drop in the budget deficit, but Kirchner’s economic legacy was a ticking bomb,” he said.
But with unions fighting Macri’s cuts tooth and nail with daily street protests, getting to the holy grail of a zero deficit will be a painful process.
The primary fiscal deficit was 6.0 per cent in 2015, 3.9 per cent in 2017, and is expected to be 2.7 per cent in 2018.
After the peso depreciated by half this year – on Thursday was trading at over 40 to the dollar – the agreement announced in New York “is a plan to put out the fire,” said economist Roberto Cachanosky.
“It’s not because you have money that everything is settled,” he said, referring to the IMF’s early disbursement of 19 billion available over the next few months.
Analysts say a key point is that the funds available would cover Argentina’s 40 billion of external debt repayments due before the end of 2019, lowering the risk of rolling over the debt.
Moody’s analyst Gabriel Torres pointed out that “once it regains market confidence,” Argentina will have to find other sources of financing in the future.
The agreement may give Argentina much-needed “room to maneuver, but it does not solve the problems.”
“Argentina is a very vulnerable economy, dependent on commodities and also commodities that are affected by the climate,” like grains and cereals.
Aggravating the crisis was a drought that decimated soybean exports.
Economists on all sides agree that the IMF has taken the reins of the Argentine economy.
“From now until the elections (October 2019), it’s the IMF who is making the economic policy,” said Miguel Angel Broda.
“It is a total triumph for the Fund. Macri has handed over Argentina’s monetary sovereignty to the Fund,” said Kicillof, who fears the crisis will only worsen.
Recovery still seems far off for South America’s third- largest economy.
Industrial output saw its third consecutive monthly decline in July, down 5.7 per cent, and further disappointing data is expected for August and September. The government estimates the economy will contract by 2.0 per cent this year.
Growth has been slashed, with a paltry 0.5 per cent forecast for next year. — AFP