:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/MVTHVVAYYRFQDFQUPFQO6OYC4A.jpg "A report by consultancy firm Equilibra warns of the consequences of a non-agreement.")
Buenos Aires — With maturities with the International Monetary Fund (IMF) looming, the Argentine government is negotiating a new debt repayment program against the clock. Next week, Foreign Minister Santiago Cafiero will travel to the United States to meet with Secretary of State Antony Blinken in an attempt to obtain Washington’s support, given its influence over the multilateral lender.
Reaching an agreement is one of the main objectives for the administration of President Alberto Fernández, given that failure to do so would imply serious consequences for the economy, including the possibility of spiraling inflation, that could climb to 85% annually, as well as a total closure of the South American country’s future access to credit.
Read More: Argentine Exports Hit Highest Level Since 2012
According to an analysis by consulting firm Equilibra, despite the two parties’ desire to reach a successful conclusion, there are several factors that could cause the negotiations to fail.
- The main risks: The low propensity of the IMF’s technical staff to accept a lax economic program implemented by Argentina’s government, a government coalition that understands that the program cannot include measures that would harm economic reactivation, such as austerity; the difficulty of persuading several countries with influence on the IMF’s board, and the difficulty of passing any agreement made with the IMF through Congress, are just some of the reasons that could frustrate an understanding, according to the Equilibra report.
Possible Scenarios
“Beyond a specific factor or the combination of factors that could cause the negotiations to collapse, we imagine in this scenario that, as time passes, and in spite of continued assurances that the negotiations are in good faith and making progress, there are no clear signs on the horizon that an agreement is near. A situation like this at the end of February and the beginning of March would provoke greater tension in the financial markets, and we would begin to see a higher country risk and a greater exchange rate gap than the one we are projecting,” the report states.
Also Read: Investor Interest Blossoms in Argentine Green Bonds
Equilibra estimates that, come March, “due to the willingness of both parties and with negotiations not yet closed, the IMF would find some mechanism to prevent Argentina from entering into arrears”.
- Exchange Rate Gap and Country Risk: “The negotiation would continue during the second quarter of 2022, but without reaching a successful conclusion, raising the country risk above 2,000 basis points and the exchange rate gap could climb to 150%”, the report warns. It also states that the second quarter is, for seasonal reasons, “the quietest period of the year for the exchange market, since a greater flow of agro-currency is available at the end of the harvest”.
“This context would allow to continue negotiating without the delay necessarily leading to an exchange rate jump,” the report points out, although it clarifies that “by the end of July, the inflow of foreign currency to the exchange market starts to deflate.”
Thus, “by mid-year, we imagine that the tug-of-war will reach a solution. It could be that, in the face of a stagnation of talks or slow progress, the IMF would ask the Argentine government to resume negotiations later; otherwise, not finding common ground between what the IMF demands and what the political wing of the Frente de Todos demands, the economic team would submit to Congress the best possible agreement negotiated with the IMF, the approval of which would fail, as occurred with the 2022 Budget Bill″, according to the report.
The Consequences of No Agreement with the IMF
- “It could generate an upheaval in the government” and “it would be very likely that, once the negotiation has failed, the government would make changes to its economic team”, Equilibra predicts.
- “Default with the IMF would imply the closing of access to financing from most international financial organizations, such as the IDB and the World Bank, and even compromising future disbursements already agreed”, the report states. “The Paris Club would trigger punitive interest and the private sector would lose export letters of credit, preferential access to international markets, and foreign direct investment.”
Also Read: South Atlantic Oil Is Newest Crusade of Argentina Green Movement
- The flow of available U.S. dollars would be significantly lower. Another consequence would be related to exports, since they would suffer “as a result of a larger exchange rate gap, the difficulty for private companies to pre-finance them, and the loss of access and privileges to international markets”.
- More exchange rate pressure could be expected, in a context of scarcer firepower from the Central Bank and foreign currency outflows on capital accounts.
- “A non-agreement crisis would lead to a jump in the official dollar, which we project to be around 35% by the end of the third quarter.”
- “Inflation would accelerate during the spring, taking it to an average of 8% per month, reversing the real recomposition of public services tariffs at the beginning of the year, and sinking the purchasing power of salaries”, the report predicts, estimating that inflation would jump from 50% in 2021 to 85% in December 2022.
- GDP would have “an average decline of 2% compared to 2021, but the fall in seasonally adjusted terms would be 8% during the whole year”.
Also Read:
