It’s now clear that Plan B for the financial risks of fiscal gradualism was sown by President Macri through his dense international diplomatic activity during the first half of his term. This, together with its declared intention to insert the country in the world, normalize the economy and move away from populism – when questions also arise about Mexico and Brazil – garnered strong support from the countries with decisive weight to reach a fast stand by the IMF.
International support was reflected in an unexpectedly high number of 50 Billion U$S, a very high percentage of the Argentine quota -1110%-, and a significant and unusual initial disbursement of 15 Billion U$S, which represents 22% of total IMF loans, making Argentina the main borrower. It would also have transcended that the supervision of the IMF could be somewhat more tolerant at the beginning, in 2018. Even if this were the case, the Government should avoid any temptation to waivers, given the few remaining degrees of freedom.
By 2018 the most difficult goals are those of reserves – only recently the exchange market has stabilized a bit – the monetary one – due to the interests of the Lebac and its only partial renewal – and inflation – due to the pass-through of the devaluation -, while the main fiscal goal-primary deficit of 2.7% of GDP-is on track to be met. For 2019, electoral, all the conditionalities are demanding. The Treasury, in particular, have the challenge of lowering the primary deficit to 1.3% of GDP-, with the radars of the IMF already in October in the Budget that goes to Congress.
But if something simultaneously unveils the Government, the IMF and the markets is the Financial Plan, which is not a formal goal, but it is where all those that are, come together since Argentina went to the IMF for lack of financing to cover the deficit and avoid defaults. If it meets the goals, it has access to additional disbursements – declared precautionary but legally accessible – by 35 Billion U$S, of which 18 Billion U$S until the end of 2019. Even so, it is uncertain that this will reach.
And that doubt is the one that underlies the weakness of the parities of the Argentine titles and the consequent resistance of the country risk to lower faster. Moreover, in the sustainability analysis of the IMF’s debt, it is concluded that in one of the scenarios the Argentine public debt is sustainable, but not with high probability, an assertion that some may find something euphemistic.
The IMF proposes two Scenarios, one Base, in which additional disbursements are not used, and another Adverse, in which all are used. In the Base Scenario, even assuming the rollover of all maturities within the public sector, the needs for deficit, amortization and cancellation of credit with the Central Bank reach 51.8 Billion U$S in the remainder of 2018 and 63 Billion U$S in 2019. The rollover of private maturities is assumed to be 90% (non-residents) or 95% (residents), and yet new financing is required by 18.5 Billion U$S in 2018 and 29.6 Billion U$S in 2019.
The Adverse Scenario assumes closer international financial conditions, greater depreciation of the exchange rate, recession in 2018 and a slower recovery, additional fiscal measures to prevent the primary deficit from exceeding 2% of GDP in 2019 and lower private rollover rates -75 % non-residents and 85% residents-. Financing needs remain high, 13.1% and 11.3% of GDP in 2018 and 2019, and with the lowest rollover lead to the use of all IMF disbursements. The need to access new indebtedness with the markets is also maintained.
The Financial Program is stressful even if we consider that the cancellation of credit with the Central Bank, by 6.2 Billion U$S in 2018 and 12.5 Billion U$S in 2019 is a less severe objective than it appears. The reason is that the Central Bank would use the funds to reduce the stock of Lebac, thus giving space in the market for the Treasury to deal with the placing of the necessary bonds for that cancellation.
The attraction of investors to move from short Central Bank debt to slightly longer Treasury debt is uncertain. The first direct exchange was not conducive. A 50% success would lower the financial needs of the Treasury in 9.3 Billion U$S in 2018/2019. So far the cancellation of Lebac is ahead of the Treasury payments to the Central Bank. But these have just started, for 12.6 Billion U$S, and it is a positive signal of vocation to fulfill the goals.
So that the Financial Program rests not only on the funds of the standby but also on the return of the confidence of the markets. The rollover assumptions of private maturities are high, even when the IMF based them on similar experiences of other countries, particularly if it is considered that the repayments to non-residents exceed 30 Billion U$S until the end of 2019.
The international financial situation can help, if the process of strengthening the dollar, rates rise, and commercial disputes they enter a stable dynamic. But that is exogenous. Internally, within the reach of the Government are the initiatives to meet the goals. As 2019 approaches, the polls and speculations regarding the elections will multiply, with which it is probable that the debt placements should shorten the deadlines, recharging the pre- and post-election deadlines. It is essential that the President continues with his intense global agenda. It will be necessary to maintain international support. And probably reinforce it.
Written by Julio Piekarz
He is an Economist (UBA and Cambridge). He was general manager of the Central Bank. Professor of Monetary Theory (Universities of Buenos Aires, Di Tella, Argentine Catholic and Argentina of the Company).