IMF or FML?
IMF or FML?
Update on the next steps for Milei's Argentina in terms of debt levels, dollarization, inflation and more.
Welcome Avatar! Argentina is one of the most indebted countries with the IMF after the organization gave the okay for a mega loan in 2018. Today we’ll go over the timeline for the end of the dollar restrictions, high inflation and the new fiscal adjustment included in the fine print of the renewed agreement with the IMF.
To support the new authorities’ strong policy efforts to restore macroeconomic stability and bring the program back on track, the IMF renewed the agreement with Argentina this January and released the $4.7 billion USD that was still part of the 2018 loan.
In the first days of February the IMF completed a country report on Argentina with a detailed outlook on the economy, inflation and more.
Autist note: you can download the full IMF Argentina country report from February here:
The organization proposes accelerating the crawling peg so that the peso does not lose competitiveness and better monitoring of interest rates:
[…] the authorities are committed to eliminate remaining distortive exchange restrictions and multiple currency practices in the near term, and to develop plans for gradually unwinding capital flow management measures, as conditions permit.
In this framework, the "Staff Report" of the Fund that was prepared after its mission in Buenos Aires in January highlights that:
Following the exchange rate realignment, FX policy should continue to secure reserve accumulation goals. Important steps are being taken to address the large commercial debt overhang and create a more transparent and rules-based system to import.
Indeed, under Caputo’s guidance Argentina has largely solved the commercial debt problem, the peso debt bomb under the LELIQs that were printing an additional monetary base every 2 months in interest, and reserve accumulation so far has been close to $5 billion USD.
That is a very impressive track record in just little over a month, but Argentina is far from being in the clear.
Some problems, like having multiple dollar rates and limits on access to dollars, still remain. However in the words of the IMF, there does seem to be light at the end of the tunnel:
Staff welcomes the recent streamlining of FX restrictions and controls following the large FX correction. However, further steps will be required to eliminate remaining MCPs and exchange restrictions, including by eliminating the tax on FX access to imports during the course of this year.
The export incentive scheme (allowing liquidation in the FX parallel markets) should also be removed. A plan should also be developed to secure an orderly and appropriately sequenced phasing out of CFMs and prudent exchange rate unification as imbalances are addressed and conditions allow.
So this means we could see a removal of restrictions and unification of dollar rates close to the second half of this year, is my bet. So until then, cuevas will still play an import role in day to day life in Argentina.
To support the Government in cleaning up the mess previous administrations left behind, international organizations such as the World Bank and the Inter-American Development Bank (IDB) will contribute around 1.3 billion dollars (still secured by Sergio Massa).
Another contribution to the stabilization of the economy will be the surplus energy trade balance of US$3.3 billion in 2024 and a growing balance from exports, which could reach US$25 billion in 2030. In this regard it is very positive to see important infrastructure developments around Vaca Muerta continue.
When Dollarization?
It seems the Milei government is moving closer to dollarization at a much faster rate than expected.
The peso ponzi liabilities of the Central Bank, —without counting new repurchases of Treasury debt from the BCRA and excluding the pesos issued—, are expected to drop another 26% and reach 2003 levels:
This is assuming that the repo rate (PASES) remains unchanged in nominal terms and inflation and the official wholesale dollar price from the Market Expectations Survey is met.
If these conditions are confirmed, we could be looking at an early dollarization. Around the second quarter the Government will be in a position to decide whether to maintain the course of monetary policy: if negative real rates continue to liquefy liabilities, they can try to dollarize early.
Or the government could take advantage of the greater room for maneuver granted by the demonetization of the economy, and shift its monetary policy to move to positive real rates and accelerate disinflation.
It is one option or the other: if a second stage of Caputo’s plan involves nominal rates above inflation, peso liabilities of the BCRA (and the Treasury) will grow in real terms and dollarization would be further and further away.
Originally the dollarization was a 2-3 year plan, so we’ll see how things play out.
Overall Outlook
The IMF updated its projections for the global economy, with a strong correction for Argentina's GDP:
In the case of Argentina, it reversed the latest growth estimate and proposed a -2.8% drop in GDP for this year, while inflation could be around 150% by the end of the year.
One important detail to keep in mind is that this recalculation of 5.6 points versus the previous estimate does not contemplate the adjustment and devaluation package of the Milei government. By 2025, the rebound in Argentine GDP would be 5%.
With regards to the inflation numbers, 150% seems low given the first MoM prints. However, from Q2 onwards, inflation should start dropping fast.
The IMF projects that inflation will drop from the 211.4% it marked in 2023 to 149.4%, but with an average that will reach 253.4%; That is, the year-on-year peak would be in mid-2024, with figures that could exceed 300%.
It will get worse before it gets better.
Final Thoughts
Personally I thing inflation will be closer to 400-500%, especially given the 200%+ increases still to come for home energy prices and other commodities that affect all prices, like gasoline, which will probably still see a 50% increase at the pump this year.
The solvency of Argentina’s financial system depends on sovereign credit to a very big degree, and the Government still lacks access to private financing in foreign currency.
The most likely scenario is that Caputo and Milei will try to stabilize the economy further, before actively pursuing the dollarization plan.
In the end, a lot will depend on how the BCRA reserves progress. Foreign currency reserves have been growing impressively, but this week we saw the first day of a stop in accumulation.
The liquidation of this year’s harvest looks very promising and could be a big boost to reserves, given the fact that the ridiculous export tariffs are still applied.
See you in the Jungle, anon!