Tough macroeconomic adjustment is supported by IMF program, while more severe stagflation raises political uncertainty
From the second week of August until the end of September, Argentina suffered its second currency crisis of the year, with the peso depreciating from 28 to 42 pesos to the dollar. The first currency crisis had happened at the beginning of May, and lasted until the end of June, when the price of the dollar jumped from 20 to 28 pesos.
A new negotiation with the IMF, when the IMF staff had not yet completed the first revision of the previous standby agreement, helped to cope with the second currency crisis. This happened after the government agreed to deepen its fiscal adjustment for the rest of 2018 and, particularly, for 2019. The Central Bank in turn decided to apply a more severe monetary contraction, at least through June 2019.
The new agreement with the IMF, approved by the Board on October 27th, means a significant increase in the loans to be disbursed in coming months (from $13.5 billion to $21 billion) and during 2019 (from $9.9 billion to $29 billion) and an increase in the size of the overall program 2018-2020 of around $7 billion. As a consequence, the new program reduces the loans to be disbursed after 2019 from $26 billion to $7 billion, transferring the stress on the financing program from the months prior to the election in 2019, to the first year of the new administration.
The monetary policy announced by Guido Sandleris, the new president of the Central Bank, appointed the same day of the announcement of the second agreement with the IMF, consists of the commitment to keep the monetary base unchanged from October 2018 to June 2019 while it does not purchase foreign exchange, and to let the peso to float freely between bands, from 34 to 44 pesos per dollar. If the price of the dollar reached the upper limit of the band, the Central Bank will be able to sell $150 million each day in a competitive bid, and if the price of the dollar reached the lower limit of the band, the Central Bank would start to buy foreign exchange, increasing the monetary base by the same amount of the purchases.
The new monetary policy employs LELIQs (7-day Central Bank debt to the banks) as a tool of monetary regulation, to control the monetary base. At the same time, the Central Bank will continue reducing the stock of LEBACs, and the Treasury will continue selling LETES (Treasury bills in dollars) and LECAPs (Treasury bills in pesos). As a consequence, the interest rates in pesos have skyrocketed.
The nominal interest rates paid on LELIQs increased from 60% to 72% annually (from 5.1% to 6.1% as monthly effective rate) and the nominal interest rate paid on LECAPs for 180 days jumped from 50% to 56% per year (from 4.2% to 4.7%, as the monthly effective rate), similar to the change in the interest rate paid on the remaining stock of LEBACs. The interest rate paid on 30-day time deposits by the banks increased from 38% to 45% (from 3.2% to 3.6% as the monthly effective rate), the BADLAR interest rate (on 30-day deposits by more than 1 million pesos) jumped from 43% to 52% per year (from 3.6% to 4.4% as the effective monthly rate).
As interest rates paid on LELIQs, LECAPS and time deposits increased significantly, the peso appreciated and by October 27th, the exchange rate was down below 38 pesos per dollar, closer to the lower limit than to the upper limit of the floating band. For the time being, there is a sense that the second currency crisis has been overcome, but at the same time, the recession is accentuating, and inflation is accelerating, as a consequence of the pass-through of the previous devaluation. Therefore, the stagflation that showed up in Q2 has been aggravated in Q3, and the prospects for Q4 2018 and Q1 2019 are much worse than those forecast in our July quarterly report. The renewal of growth in Q2 2019 is still a possibility, but much less likely than in July. Overall, most forecasters, including the government and the IMF, have increased significantly, both the estimates for the inflation rate and the decline of GDP.
The risk of running out of resources to service the public debt during the rest of 2018 and during 2019 has almost disappeared, but there is increasing uncertainty about what will happen immediately before and after the October 2019 presidential election. That explains why, in spite of the success of the government in stabilizing the foreign exchange market and the improved figures in the trade and the current account of the balance of payments, country risk has not declined. It continues at around 660 basis points, a level reached in September after the second currency crisis.
The risk of a debt crisis in 2020 depends mainly on the political course of events and on whether President Mauricio Macri gets reelected for a second term. If he’s not reelected, the probability that the new government will start announcing a compulsory debt restructuring is very high.
Political uncertainties make any forecast on the course of the economy for 2020 and after a completely futile exercise. That is why we are only providing forecasts for 2018 and 2019.
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