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ECONOMY | 28-01-2022 22:10

Argentina's government agrees new financing deal with IMF

President Fernández announces ‘reasonable’ deal with multilateral lender; Government commits to progressive reduction of fiscal deficit; Guzmán says Central Bank financing of the Treasury will be trimmed; Argentina won’t make any repayments to Fund for next four years.

After months of negotiations, President Alberto Fernández on Friday announced that Argentina has reached a credit agreement with the International Monetary Fund that will allow the country access to new financing and buy it time to help it repay its US$44.5-billion debt.

"I want to announce that the government of Argentina has reached an agreement with the International Monetary Fund," said the Peronist leader in a video filmed from the garden of the Olivos presidential residence.

Argentina was due this year to pay back US$19 billion of its US$44-billion debt to the IMF. Fernández said that the country had been living with "a rope around its neck, a sword of Damocles, and now it has a path it can follow." 

Declaring that the deal with the multilateral lender would "put the present in order and build a future," the president described the deal as “reasonable.”

Argentina has pledged to slowly reduce its fiscal deficit and cut the Central Bank’s financing of the Treasury as part of an economic programme agreed with the IMF, Economy Minister Martín Guzmán later revealed.

 The deal would give Argentina at least a four-and-a-half year grace period before starting to pay back its debt, he added.

“This decision opens a path we can walk, and will allow us to take other steps toward a country with more work,” Guzmán told reporters in Buenos Aires. “We reached the best agreement we could achieve.”

The deal, which still needs to be approved by the country’s Congress and the IMF’s board of directors, would help refinance over US$40 billion of outstanding debt Argentina has with the lender stemming from a record bailout given in 2018. It also provides the first framework of an economic plan under President Fernández, who has opted to govern through a patchwork of short-term policies. 

 

Repayments

Friday’s announcement came on the same day the government made a US$730-million repayment, the first capital maturity of the year, to the multilateral lender. Another US$370 million was due to be paid on Tuesday.

According to the terms of the record 2018 credit-line signed with the Mauricio Macri administration, Argentina was due to pay back US$19 billion in total this calendar year. The country then faced repayments of US$20 billion next year and a further US$4 billion in 2024.

The government had repeatedly said the repayment schedule was unsustainable given their lack of Central Bank reserves, and was pushing to restructure the timetable. 

"We had an unpayable debt that left us without a present or future, and now we have a reasonable deal that will allow us to grow [the economy] and fulfil our obligations throughout our growth," said Fernández in his address from Olivos. "This understanding plans to sustain the economic recovery that has already begun."

The main difference between Argentina’s new and old deal lies in the payment deadlines: while the stand-by arrangement concentrated maturities between 2022 and 2024, the new extended fund facilities agreement will extend those deadlines to the period from 2026 to 2032.

International Monetary Fund Managing Director Kristalina Georgieva said she was "encouraged by today’s progress between IMF staff and Argentina’s authorities."

Argentina remains mired in an economic crisis, though, with inflation at 50 percent and poverty over 40 percent.

 

'No austerity

Fernández said the deal crucially would not force the government to reduce public spending and would allow it to increase investment in public works, factors he hopes will calm the concerns of opponents in his ruling coalition.

Hardline Kirchnerite lawmakers had even floated the idea of default this week, suggesting it would not be the worst of outcomes.

"Compared to previous ones Argentina signed, this deal does not include restrictions that would delay our development," declared Fernández on Friday. 

Under the new deal, Argentina has committed to progressively reducing its fiscal deficit from three percent in 2021 to just 0.9 percent in 2024, Guzmán confirmed. The gradual reduction – to 2.5 percent in 2022 and 1.9 percent in 2023 – would "not prevent the recovery" of the economy, said the minister.

It would also allow for public spending to evolve "without an adjustment," a reference to austerity measures. The government has enforced strict exchange controls since coming to power in 2019.

Argentina has also agreed to reduce monetary emission, trimming the Central Bank's assistance to the National Treasury. In 2021, monetary financing to the Treasury ended at around 3.7 points of GDP, which was a reduction from the 7.3 points of monetary financing, recorded at the worst moment of the pandemic in 2020," said the minister. 

The government will also "strengthen tax administration" and "attack tax evasion and  implement measures to attack the problem of money-laundering," added Guzmán.

The new deal provides for a US$5-billion increase in Argentina's international reserves, which currently stand at about US$38 billion.

"The negotiations were really difficult," said Guzmán. "We worked very hard politically and technically."

"It is the best agreement that could be reached," he concluded. 

Markets reacted favourably to news of the deal, with the so-called ‘blue’ dollar dropping from 221 to 212 pesos per greenback on Friday. The Buenos Aires Stock Exchange closed up 2.67 percent and Argentine stocks on Wall Street gained between seven and nine percent.

 

Repayments

In 2018, former president Mauricio Macri agreed a record US$50-billion stand-by agreement with the IMF, which was later extended to US$57 billion. But the loan, the largest in the Fund's history, did not stabilise Argentina's economy. 

When Fernández took office in December 2019, he refused to accept the final US$13-billion disbursement.

After successfully restructuring a US$66-billion debt with private international creditors in 2020, Argentina began negotiations with the IMF to delay repayments.

Guzmán said the new agreement would not be ready for a few weeks as the two sides needed work on the "memorandums of understanding."

But he said the repayments would start four years after the agreement is finalised and end six years after that.

From the beginning, the government insisted that the path to reducing its fiscal deficit was through economic growth rather than reducing public spending.

Macri had introduced unpopular austerity measures to comply with the terms of the IMF bailout, but despite initial signs these were stabilising the economy, he was unable to halt soaring inflation and poverty.

The country experienced three years of recession until registering a 10 percent increase in GDP in 2021, although the economy had shrunk by as much the previous year as it suffered the worst effects of the coronavirus pandemic.

"Argentina achieved the same thing with the IMF today as it did in 2020 with private creditors: kicking the ball forward. The only big difference is that the IMF itself is going to refinance the payments," economic analyst Sebastián Maril told AFP. "You can celebrate today but our problems will be to be able to meet the goals and see how we pay all the debts we kicked."

"The agreement is good news for Argentina and for the IMF. Neither wanted a long, hard fight," analyst Benjamin Gedan of the Wilson Center in Washington told the same agency.

If the deal gets approved, Argentina must abide by the budget targets in the programme and pass quarterly reviews with IMF staff in order to keep receiving debt relief. That’s a difficult task with next year’s presidential election, and a ruling coalition divided after its loss in the midterms.

“It’s clearly a step in the right direction,” said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Management in London told Bloomberg. “But as with all IMF deals with Argentina, this one is fraught with implementation risk.” 


 

Main points of the agreement 

– Argentina will aim for a primary fiscal deficit of 2.5 percent in 2022, 1.9 percent in 2023 and 0.9 percent in 2024

– Plans to reduce Central Bank assistance to the Treasury to one percent of GDP in 2022, 0.6 percent in 2023, and “near zero” in 2024

– Argentina will continue with FX policy currently in place, without large devaluation jumps

– The plan targets US$5 billion in additional foreign reserves in 2022

– Government won’t seek labour reform or privatise public companies

– Argentina will continue with price controls as part of its inflation strategy

– Plan also targets positive real interest rates

 

– TIMES/AFP/NA/BLOOMBERG

 

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