Argentina, IMF in talks

Argentina, IMF in talks
Argentina is currently in talks with the IMF to avoid a financial crisis and rescue its currency from depreciating further. The Peso has fallen 25% against the dollar since..

Argentina is currently in talks with the IMF to avoid a financial crisis and rescue its currency from depreciating further. The Peso has fallen 25% against the dollar since the beginning of 2018.

The IMF has been criticised for backing the Argentinian policies that resulted in an economic crisis 17 years ago.

Background

Argentina is a South American nation rich in resources. It boasts a well-educated workforce and is the second largest economy in South America after Brazil. Argentina was first colonised by the Spanish in the 16th century. The country gained independence from Spain in 1810 and the first stable nationwide government was founded in 1862. The 1930s Great Depression severely affected Argentina’s agricultural output and resulted in a series of coups that ended in the 1980s. Argentina adopted a free-market approach in the 1990s.

The 1998-2002 Argentine Great Depression caused the country’s economy to shrink by 28%. The country defaulted on $132 billion in loans. In 2001, President Adolfo Rodriguez Saa declared a default on the state’s foreign debt. A Joint Economic Committee of the United States Congress published in 2003 stated: “Three big tax increases in 2000-2001 discouraged growth, and meddling with the monetary system in mid-2001 created fear of currency devaluation. As a result, confidence in Argentina’s government finances evaporated.” The state ended the Peso’s fixed exchange rate to the US dollar, began freezing bank deposits, and converting dollar deposits and loans into Argentine pesos at unfavourable rates. In 2002, 60% of Argentines were below the poverty line. Unemployment was at an all-time high and there were widespread protests across the country.

Argentina’s GDP growth rebounded in 2003 to grow at 8.5% annually for six years. Growth began to slow following the 2008 recession. President Mauricio Macri, who was elected in 2015, took steps to liberalize the Argentine economy by lifting capital controls, floating the peso, removing export controls on some commodities, cutting some energy subsidies, and reforming the country’s official statistics. As of 2017, the Argentinian economy was growing at 2.5%, and public debt was approximately 54% of GDP.  

Analysis

Earlier this month, Argentina appealed to the International Monetary Fund (IMF) for an emergency credit package of $30 billion. The Peso has fallen 25% against the dollar since the beginning of 2018. Argentina has taken some steps to address the crisis. On May 4th, Argentina’s central bank raised interest rates for the third time, to 40%. This week, the bank held the interest rate steady and stuck to its 15% inflation target. 12-month inflation through April was at 25.5%.

President Mauricio Macri said that Argentina’s request for a “high-access stand-by arrangement” from the IMF would allow Argentinians to “face the new global scenario and avoid a crisis like the ones we have faced before in our history”. A “high-access stand-by arrangement” allows a country with large financing needs to draw on an approved amount if and when needed. This arrangement can last up to three years.

“During the first two years, we have had a very favourable global context, but today that is changing, global conditions are becoming increasingly complex due to several factors: interest rates are rising, oil is rising, currencies of emerging countries have been devalued, all variables that we do not control,” Macri said. However, the announcement was met by protests within the country, where a number of citizens still hold the IMF responsible for the 2001 crisis.

For its part, the IMF judged that Argentina was “sustainable with a high probability” and agreed to work with the Argentinian government. According to Brad Setser, a senior fellow at the Council on Foreign Relations, “Sustainable, with a high probability, countries can borrow large sums from the IMF without having to worry about locking in their private creditors in some way.” The IMF also said that a target exchange rate for the peso will not be a prerequisite for a financing deal, and that President Macri would have “full ownership” of the programme.

IMF Managing Director Christine Lagarde noted that Argentina had “been engaged in a fundamental and welcome transformation of its economy” since Macri took office. However, “Argentina is now facing significant financial volatility, in part as global financial conditions have tightened and also following the drought that undermined Argentina’s agricultural output.”

Lagarde said that the IMF “fully endorses” Argentina’s goals including “creating a clear path to strong, sustained, and equitable growth and robust job creation; restoring market confidence through a clear macroeconomic program that lessens financing needs and puts public debt on a firm downward trajectory; and importantly, protecting society’s most vulnerable during this transition.” Details are still under discussion.

Assessment

Our assessment is that the Argentinian government is taking measures to step up its economic management and avoid another economic crisis. As stated previously, we believe that wide fiscal and current account deficit, high inflation, and a rapidly expanding pile of foreign debt have put Argentina at risk and reduced investor confidence. However, the country does not have unmanageable amounts of debt yet and the IMF has noted that the country may avoid a crisis if it can adjust. 

Read more: Stronger growth ahead, says IMF

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