On Friday, the IMF Executive Board completed its first review of the Argentine 3-year Stand-By Arrangement (SBA). As a result, the revised SBA was upsized to $56.3 billion (SDR40.71BN), up from $50bn under the original program of which $15bn were disbursed in June. With the approval, the IMF will disburse $5.7bn (SDR 4.1bn) immediately, and likely another $7.7bn before the end of the year.
As reported before, the revised SBA augments and frontloads the access to IMF funding: compared with the original SBA access to IMF funding was increased by $19 billion through the end of 2019, to $36.2bn total (up from $17.5bn in the original June SBA). Specifically, US$13.4bn will be disbursed during the remainder of 2018 (on top of $15bn disbursed in June), and another $22.8bn in 2019 (≈$5.7bn/quarter). Finally, $5.9 billion are planned for 2020-21
Furthermore, Goldman notes that the IMF program would no longer be treated as precautionary and the authorities intend to use IMF funds for budget support.
On fiscal policy the new program envisages a zero primary fiscal balance in 2019 and primary surpluses starting in 2020 (although in a curious concession by the IMF, the press release does not mention the 1% of GDP surplus for 2020 that the authorities announced a month ago).
Under the new program, the main innovations relate to monetary and FX policy: in order to “decisively reduce inflation” and inflation expectations the Central Bank will shift toward a “stronger, simpler, and more verifiable monetary policy regime, temporarily replacing the inflation targeting regime with a monetary base target”. The monetary authority will now target zero nominal growth of the monetary base from now until June 2019 (the targets for December and June will be adjusted for seasonal factors given the usual pick up in money demand in those months).
According to Goldman’s Alberto Ramos, the new program restrains activism in the FX market. The IMF press release states that “in the event of extreme overshooting of the exchange rate, the BCRA may conduct limited intervention in foreign exchange markets to prevent disorderly market conditions. Such intervention would be unsterilized.”
FX policy will now have a clear rules-based framework: as long as the ARS/USD trades within pre-set moving bands there will be no FX market intervention (which the authorities label the no-intervention zone). Starting October 1, the central bank set the ARS/USD lower-limit at 34 and the upper-limit at 44; the limits will be increased daily at a 3% monthly rate until the end of the year. If the currency starts to trade above the upper-limit the central bank would automatically sell up to US$150mn/daily (a non-sterilized intervention which would imply a contraction of the monetary base).
This is in essence is a rules-based mechanism for intervention. If the currency trades below the lower-limit the central bank may (not automatic) buy Dollars into reserves. Key here is that the central bank will not defend the ARS/USD bands. There is no hard commitment to keep the ARS/USD trading within the band. In fact, the new framework is simply a trigger for reserve sales: US$150mn/daily if ARS exceeds the upper-limit of the band. It is possible for the ARS to remain above the upper-limit for a prolonged period of time with the central bank simultaneously selling (non-sterilized) US$150mn for days in a row.
As previously indicated by the central bank, the base money target will be enforced through daily open market operations with 7-day Leliq central bank bills (exclusively with banks) and also through adjustments in reserve requirements. In our assessment this will imply a severe liquidity squeeze and monetary contraction in real terms with clear implications for activity. Finally, the new money-supply based monetary framework has been supplemented by a commitment not to allow “short-term rates to fall below 60 percent until 12-month inflation expectations decisively fall for at least two consecutive months.” As a reminder, the 7-day Leliq rate is currently tracking at around 72%. Since the money supply is now exogenous the Leliq rate will be endogenous and will fluctuate according to variations in money demand.
Bottom-Line: Argentina was compelled by market circumstances to forgo the previous strategy of gradual fiscal adjustment; and in the process lost valuable degrees of autonomy to manage and steer the adjustment. The authorities responded to rising market pressure decisively and in the classical way (higher rates and tighter fiscal policy) and a significant risk premium has been built into most Argentine financial assets.
The availability of US$36.2bn in IMF funds through end-2019 (conditional on successful program implementation and IMF Executive Board program review approvals) plus close to US$7bn (≈US$4.5bn net) in ex-IMF multilateral funding should allow the authorities to meet the Oct-18 through Dec-19 fiscal funding needs even under conservative partial debt-amortization roll-over assumptions.
Meanwhile, the economy is set for a major hit: Since the inception of the new monetary regime, short-term 7-day Leliq rates have been tracking consistently above 70%, and the ARS has traded on the strong side (trending towards the lower-limit of the no-intervention band). Inflation accelerated significantly in September (6.5% in the month with the annual rate surging to 40.5%) and inflation expectations have deteriorated further. Real activity data has been weak but the brunt of the sharp tightening of financial conditions on activity has yet to be felt. In all, Goldman summarizes that “the economy is traveling along a very volatile macro-financial path, with significant economic and social/political risks.”
Macri’s standing in the polls has dropped to all-time lows, with support for him falling to 31% in early September as Argentina fell into its second recession in three years. Every step that Macri has taken to shore up the economy has made him less popular and has given ammunition to his political opponents. Turning to the IMF for help has been seen as an especially unpopular move because many local believe that the country’s last sovereign default was caused by the IMF. It’s truly a lose/lose situation for Macri that has been reflected in his approval rating.
Overall, the challenge for the authorities is to stay the course and deliver unwaveringly on the fiscal commitments.