The Big Idea
Argentina | From watching event risk to watching the data
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The final signoff on Argentina’s International Monetary Fund program should alleviate important event risk for the sovereign credit and shift focus back to data and execution. The latest spike in February inflation at 4.7% month-over-month serves as a reminder about the challenges of adjusting relative prices while managing social and political pressures. Next the hard work begins on reducing the primary fiscal deficit.
The IMF program is easily making its way through the legislature after months of socialization. The consensus view that a weak IMF program is a better alternative than default. The earlier jitters about potential pushback from either Kirchnerismo or the opposition were just political theatrics. The IMF program was easily approved with a staggering 79% majority in the lower house, equally diffusing the blame among the political establishment. The IMF legislation should fly through the Senate to under the influence of the senators and with final IMF board approval ahead of the March 21-22 deadlines.
The hard works soon begins. Argentina needs to execute the targets and avoid non-compliance and subsequent defaults on the unrelenting IMF payments. There is no breathing room with the upfront payments from the IMF only sufficient to honor Argentina’s obligations through the second quarter of this year. There is no quick fix with a continuing cash flow deficit, a low stock of capital and onerous IMF debt payments that depend upon IMF loan disbursements.
The only target that matters is the fiscal anchor for a virtuous circle of confidence that reduces central bank monetization and stabilizes the foreign exchange rate. The fiscal target near term is more relevant than the monetary target. The upfront IMF disbursements as well as the additional loans from other multilaterals buffer the monetary pressures.. There has also been some relief on the blue-chip foreign exchange rate with a frontloading of agro-exports on fears of higher export taxes that has allowed for near $1 billion in USD purchases month-to-date. The foreign exchange reserves target may start to complicate hitting targets for the end of June while the near-term fiscal targets dominate on budget revisions and subsidy hikes.
The fiscal target first needs endorsement after a revised 2022 budget that also coincides with a structural benchmark deadline of April 15. The backbone of the revised fiscal target includes adjustment to subsidies with a call for a public hearing next month on updated energy tariffs effective June 1, 2022. The upfront structural benchmarks all target the fiscal sector and aside from the subsidies, most focus on non-committal or non-controversial action plans, studies, transparency, and best practices.
The global energy shock certainly complicates the politically feasibility of the tariff adjustments and the gradualist adjustment strategy. The public hearing should clarify the specifics with a progressive approach that targets high-income residential consumers. There is not much budget flexibility. There is a reluctance to reduce capex with a commitment to a real increase in current spending that avoids the counter-cyclical austerity bias. That’s why it comes as no surprise that the current headlines suggest risk of more export taxes on sharing the benefits of the agricultural windfall.
The progress on the fiscal target should either complicate or reassure on IMF relations and overall investor sentiment for a gradual adjustment. The latent threat of IMF default on still onerous payments that requires loan disbursements should encourage compliance. There is no quick fix for still severe macro imbalances that sustains still distressed levels on bond prices. Our investment strategy follows this slow turn with asymmetric upside of low bond prices and high current yield of the quasi-sovereigns and corporates. The Province of Buenos still offers high current yield of ~9% as well as lower recurrent default risk that translates into potentially much higher medium-term returns relative to the sovereign.
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