Good news with many challenges that remain pending
The President announced this week the achievement of an agreement with the IMF. Although there is still a long way to go to achieve it, the principle of agreement It is very good news for the country before the alternative of no agreement and breach of the obligations of the national State with the credit institution, a situation in which they find themselves Somalia, Zimbabwe and Sudan. The scenario of no agreement would cause a severe deepening of the crisis of confidence that the country is facing, with the consequent economic, social and, therefore, political impacts, in the short term.
The achievement of an agreement, and subsequent fulfillment of the committed goals, would enable the country to refinance the bulky debt maturities with the agency, while receiving fresh funds. No reliable country faces the payment of its debts, since at maturity they obtain their refinancing and even additional funds at lower interest rates. However, the crisis of confidence that Argentina is facing forces it to make the payment of each due date, a situation that is unsustainable for any state or company.. In this way, the achievement of an agreement is fundamental to avoid the cessation of payments. This sets goals to meet, which are desirable in order to stabilize the economy, although they generate uncertainty regarding their achievement.
The proposed fiscal convergence is in line with a fundable and sustainable imbalance for the country. Although at the beginning of the year the Minister of Economy, Martin Guzman, raised differences with the IMF on the fiscal path to reach an agreement, these would have disappeared throughout the month. The goal of a primary fiscal imbalance equivalent to 2.5 points of GDP for the current year, converging to balance in the year 2025, it is reasonable for a program that seeks to reduce financing via inflationary tax.
The reduction of the deficit would reduce the financing needs, including the monetary issue. According to the minister’s statements, the monetary issue would be reduced from the equivalent of 3.7 percentage points of GDP in 2021 to 1 percent this year, given the reduction in financing needs. This issue would be demanded by the economy, helping to reduce imbalances in the peso market and therefore its unwanted effects; The issuance of undemanded pesos always results in increases in the demand for other assets and goods, which causes the deterioration of the country’s external accounts, the loss of reserves of the Central Bank, the widening of the exchange rate gap and the acceleration of the inflation.
The reduction of the deficit and, therefore, its monetization presents important challenges. Adjusted for windfall revenues, and taking into account the intertemporal dynamics of 2021 energy subsidies, the public sector begins 2022 with a normalized primary fiscal imbalance equivalent to 4.3 percentage points of GDP. Reducing the imbalance by 1.8% of GDP, in order to meet the 2.5% goal, will require additional efforts, beyond growth, given the premise that spending would grow moderately above inflation. The answer to this question would be found in the IMF statement, which mentions an agreement to progressively reduce energy subsidies, an account that represented in 2021 the equivalent of 3.0 points of GDP. The rate adjustment, necessary from a fiscal point of view and to encourage investment in the sector, is a political challenge for an impoverished country, in which 90% of family groups have total incomes of less than 190,000 pesos per month.
Despite the return of payments made to the IMF last year, the drought, the rise in energy prices and the substitution of gas imports from Bolivia for LNG (more expensive) raise doubts about the proposed accumulation of reserves, given the expected deterioration of the trade balance, and with an uncertain exchange rate policy. The need to increase exports is insisted on under the erroneous argument of the structural deficit of foreign exchange; however, it is not specified how this increase will be achieved and no changes in withholdings, exchange rate adjustment or measures for the development of the hydrocarbon sector are mentioned. At the same time, the tariff adjustment would accelerate the exchange rate’s lag with respect to inflation, generating more pressure on the foreign exchange market and, therefore, on the reserve accumulation goal. If trying to avoid this effect, the rate of depreciation of the peso accelerates, the cost will be paid in higher inflation, which in turn will demand higher interest rates given the commitment to ensure positive real rates. Although the achievement of an agreement results in a scenario superior to that of a cessation of payments, It should be borne in mind that it is a necessary but not sufficient condition to stabilize the economy.
Although programs with the IMF are usually assigned responsibility for what happens to economic activity, this is not true since it will depend on pre-existing imbalances and the impact that this could have on confidence. Given the existence of imbalances and without confidence, the adjustments are made by the market with total independence of the wishes of the government. Argentine history presents numerous examples of adjustments (the last 2018-2020) due to mistrust, and of expansions associated with the recovery of confidence.
Reversing the crisis of confidence is key to preventing the agreement from being recessive. If this is not achieved, the recession would affect the estimates of income and, therefore, the reduction of the fiscal imbalance and monetary expansion, revealing, after some period of relative stability, the recurring problems of the economy.
The agreement must be accompanied by the explicit support of the different sectors of the government coalition, as well as the opposition, trade unions and the private sector, in speech and in fact. Likewise, it should be borne in mind that the reversal of the secular economic, and therefore social, deterioration that the country has been experiencing for decades demands, in addition to an agreement with the IMF and its subsequent compliance, profound reforms not contemplated in it and that the “shortcuts ” They are only short-term palliatives, the final result always being more poverty.
The author is chief economist at Arriazu Macroanalistas