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The IMF Deal Won’t Save Argentina’s Peso

The International Monetary Fund’s $50 billion aid package means Argentina won’t need to depend on foreign capital for a few quarters. But BNP Paribas thinks it will not protect the peso from a sell-off. Peso to 27.5.  Photo by STR/AFP/Getty Images.

The Argentina peso has survived a month of negative headlines and the return of the IMF to its shores. But for BNP Paribas, it’s time to go short again.

“Why short the peso now?” asks Gabriel Gersztein, head of Latin America strategy for BNP Paribas in São Paulo. He answers his own question, noting that a weaker Brazilian real tends to impact the peso and intervention from the Argentine central bank in the peso-dollar market will be sporadic. The peso is going to 27 and change, he thinks. “From a macro viewpoint, a weaker peso is one of the necessary elements to level out Argentina’s lingering macro imbalances, including the need to increase tax revenue,” he says. Of course, any move to reflate prices in Argentina, a country with 25% annual inflation, will be met with fierce opposition from the populace, especially those who support Peronist politicians.  Argentina’s president Mauricio Macri has a little over a year to lower inflation, get the economy growing to make up for subsidy cuts and high interest rates of 40%. If he is not a smashing success on this front, Argentina returns to the populist, quasi-socialist policies of Cristina Kirchner once more.

For now, investors are pleased with the IMF program and believe Macri has time to pull this off without the usual backlash from voters come 2019.

The IMF’s $50 billion loan is more hands-off than usual, with Macri’s economic team more in charge than the much maligned multilateral institution. The IMF money gives Argentina a degree of freedom from dependence on foreign financial markets to honor its public debt in the coming quarters.

But the IMF is still the IMF. It does not give away money for free. Some conditions will not be easy to comply with. The main commitment Argentina has to honor is to tighten the pace of fiscal consolidation—meaning austerity—in a year of weak economic growth. This is a huge negative for Macri’s reelection hopes next year.

“Electoral risk is now a factor,” says Gerzstein.

Argentinians protesting on June 1 against the government’s economic policies and the IMF. Photographer: Sarah Pabst/Bloomberg.

The IMF requires a faster pace of fiscal consolidation for the primary balance in 2020 and requires a primary surplus of +0.5% in 2021. If the Peronistas return in 2020, the IMF can kiss their targets goodbye.

There was some flexibility on the inflation target, but the IMF is gunning for 17% next year, from 25.6% currently.  Considering that three consecutive rate hikes this spring did not put a dent in inflation, it is safe to assume interest rates in Argentina are not coming down. This is a wet blanket for economic growth.

The IMF thinks inflation can come down to 13% by 2020 and 9% in 2021, which is almost half of what the central bank there is now forecasting.

Economic Minister Nicolas Dujovne reiterated this week the importance he is putting on currency markets. He hasn’t ruled out intervention, but it is probably unwise for the central bank to keep rifling through dollars to shore up the peso.

Nomura Securities analyst Siobhan Morden thinks they will move to a managed floating exchange rate, rather than let the peso totally tank against the dollar. Intervention is still on the table, but only to reduce excessive volatility when the locals go into panic mode.

On a positive note, Morden thinks Macri can manage the economy without having to go to Congress for support. There is no doubt the opposition parties will go against Macri, selling the story to the populace that he is doing the IMF’s bidding and giving away sovereignty to foreign bankers.

The Argentina economy is hanging on. GDP growth of somewhere between 0.4% and 1.4% is forecast for the year.

In addition to Argentina’s own domestic problems, the Federal Reserve is increasing interest rates. A strong dollar is a headwind for emerging markets in general. Every time the dollar flexes its muscles too much it has been a hurricane for those countries. Macri definitely has his work cut out for him. The peso lost 1.7% of its value against the dollar as of midday Friday in New York.

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