The Argentine government and the International Monetary Fund (IMF) on 7 June agreed to a Stand-By Arrangement (SBA) of up to $50 billion after suffering a speculative attack on the Argentine peso in May. This move revived protests in Buenos Aires from critics who claim that the IMF was responsible for Argentina’s economic crisis in the early 2001-02. The IMF’s executive board is expected to give a formal approval of the SBA on 20 June.
As summer begins, emerging markets are feeling the heat from a more risk-averse global economy. Since April, higher U.S. Treasury yields have been convincing investors to unload on assets denominated in foreign currencies; of which, are issued by deficit-driven governments. Chief among them was the Argentine peso, which lost over 20% in value throughout the month of May. Despite an unsuccessful intervention by Argentina’s central bank, the only guarantee that appeared to halt the run on the peso was an announcement to enter into talks with the IMF for financial assistance. By agreeing to a SBA, the IMF is supporting President Mauricio Macri’s reform agenda, and hoping to reduce risks that could spell a return to Argentina’s populist tendencies.
The IMF-Argentine relationship
Argentines have a bitter memory of the IMF. Many blamed the Fund for the economic and political collapse that took place in the early 2000s. And although technocrats in Washington have signalled that they’ve learned their lesson from requiring austere fiscal targets in exchange for aid, merely the name of the institution conjures the same anti-neoliberal resistance that introduced over a decade of populist administrations. Now the task at hand is to reduce a fiscal deficit that is largely being financed by international credit. Doing so has historically required painful austerity measures that have primed the electorate for a change in government.
To counter this, President Macri has opted to employ a strategy of gradualism – implementing a series of structural reforms piecemeal in order to reduce their social costs. The quick pace at which negotiations between the Argentine government and the IMF were concluded indicates how aligned both parties are on accomplishing this goal. Under the agreement, Macri must commit to balancing the primary balance by 2020, restoring the central bank’s independence, and lowering inflation – now expected to be over 25% this year. The political risks lie in how aggressive Macri will have to be in order to meet these targets amid an upcoming election year in 2019.
Macri’s reform agenda
The conditions of the SBA will require Macri to draft up a budget proposal for 2019 that will target a deficit of 1.3% – down from the current 2.7% for 2018. The proposal must pass through Congress, and a failure to do so could invite volatility back into Argentina’s capital markets. For Macri, this comes at an inopportune moment. Rising political tensions from the upcoming election year will prompt the opposition to be less amenable to spending cuts. Macri recently vetoed a bill passed by the Senate that would have brought back subsidies to energy and water prices.
To date, Macri has achieved some key legislative victories in Congress, including reforms to pensions, taxes, and the energy sector. But to overcome his coalition’s minority in both legislative chambers, Macri lobbied provincial governors to pressure opposition lawmakers from their provinces to support his proposals. This however, involves concessions; and concessions have costs. Heightened ambitions to balancing the federal budget is likely to limit the use of transferring federal funds to the provinces as a bargaining chip, and constrain Macri’s ability to ramp up support for his reform agenda.
2019 election outcomes
Currently, the opposition is divided between a steadfast, anti-government coalition led by former populist president, now senator, Cristina Fernández de Kirchner (2007-15), and a more moderate coalition who have distanced themselves away from her administration’s policies and alleged corruption. The odds of Fernández de Kirchner regaining the presidency are slim, but her base is sizeable enough to warrant a moderate opposition candidate a decisive win in a run-off. Argentina’s current electorate would likely split the moderate vote in a Kirchner vs. Macri general election, but a run-off between Macri and a moderate candidate holds a greater possibility of uniting the opposition against Macri. So far, no leading opposition member appears poised to realize this scenario, but heightened economic instability increases the likelihood of a contender’s ability to capitalize on public disaffection and hand the presidency back to the Peronists next year.
High stakes
Macri has received lavish praise from the international community for bringing Argentina back into capital markets and reversing many of the free-spending economic policies exercised by his predecessors. The peso’s whopping devaluation last May however, showed that it will take longer than expected to fix the imbalances those policies created. Higher than average gross financing needs means that maintaining a stable peso is paramount to avoiding a currency crisis – nearly 70% of Argentina’s debt stock is denominated in foreign currency.
With little room to maneuver in Congress, Macri is at the mercy of a more volatile global market, and will have to act aggressively to enhance Argentina’s competitiveness. The backing of the IMF makes this more of a reality. And although the SBA should anchor some fears, Macri’s success will ultimately be measured by his ability to prevent macroeconomic risks from occurring and bettering the opposition’s odds of swaying public opinion.
