The reserve requirements established in the agreement with the IMF have become unsatisfactory. But neither the agency nor the government is in the interest of a violation of the program. The Solomonic solution negotiated by Sergio Massa with the Managing Director of the Fund, Kristalina Georgieva It consists of a “substantial” reduction in the requirement not only for the end of March but for each quarter-end until the end of the year.
Economic officials in Washington: the three keys to the new negotiation with the Fund
Deficit, reserves and the turn of the IMF, among the subjects to be negotiated during the meeting this week in the American capital. The figures for the last quarter of 2022 and the objectives that will come
This is how they made it known both from the Fund and from the Ministry of the Economy, which also clarified that flexibility will be important. It will not be known until Tuesday what the agreed new targets will be, while at the same time the IMF officially announces that it has satisfactorily achieved the fourth revision of the program, namely the reserve targets, monetary and fiscal statements at the end of last December.
In his time at the G-20 ministerial meeting in India, Massa paved the way to give the IMF the “excuse” to validate the change in targets. According to the estimates he disclosed in his presentation, Russia’s invasion of Ukraine cost Argentina nearly $5,000 million. Of this total, a substantial part corresponds to the increase in energy imports (the price of gas has exploded) and another to the increase in international freight. On the other hand, the rise in the prices of agricultural raw materials would not have had a positive impact, still according to the figures prepared by Economy.
They estimate that the 3 soybean dollar could contribute $1,300 million to the Central Bank’s reserves
The figure represents half of what was accumulated in December, in the second stage of the plan. Although the government has not confirmed it, in the market they are waiting for the arrival of the measure as a means of maintaining central bank reserves and getting closer to IMF requirements.
Beyond the repercussions of the war, the drought also complicated the picture because it subtracted a large volume of foreign currency. According to calculations published by the rural producer Nestor Rouletlosses from lower wheat crop and now coarse crop will subtract $13 trillion from last year’s crop.
The government nearly missed the reserve target in December. But at that time, Massa was able to release a new “galley rabbit” with the second version of the 2 soybean dollar. But the liquidations at the time reduced the supply in early 2023, as evidenced by the sales record. of $900 million that Central has taken home so far in February.
With just over a month to go from the end of March, the government should accumulate just over $4,000 million in reserves. The IMF itself will disburse 5.3 billion dollars at the end of March, but a good part will be used to pay the installments with the agency itself. Then there are loans expected from the World Bank and other multilateral entities, but insufficient to meet the agreement. Between all, it would reach around 6.100 million dollars.
The only real source of dollars for the government are loans from organizations, at a time when there is very little supply of foreign exchange due to the drought and whatever was liquidated in December for the soybean dollar 2. The volume is insufficient to raise USD 4,000 million by March, as required by the agreement with the Fund
Progress has also been made with a possible “repo”, ie an agreement with international banks to add reserves. However, the fall in bonds over the past few weeks makes it necessary to put more collateral in place, so the danger is that these loans will become unprofitable.
The loosening of the reserve target is another nod from the IMF to make the government feel more comfortable in the elections. Accumulating fewer reserves will not lower inflation, nor will it improve wages, which the government desperately needs to improve its chances.
Revision and change of objectives: the details of the negotiation with the IMF and the rest of the program
The body will consider the impact of war and drought and make the announcement on Monday. But the budgetary and monetary objectives, considered as “anchor points” of the agreement, will not change. This would avoid asking for “waivers” for non-compliance
The lower accumulation of reserves avoids additional noise that would have been inconvenient for the government and certainly for the economy in the months preceding PASO. An explicit violation would jeopardize future disbursements and there was a chance that the agreement would fail.
All of this would have added more pressure on bonds, the value of the dollar and possibly economic activity at an already difficult time. It is a classic in Argentina that the trend towards dollarization increases in the months leading up to the elections and this year will be no exception, although the exchange rate cushions this impact in the short term.
The IMF has confirmed its lenient position with the government and that it is not prepared to step on the accelerator to demand in the middle of the electoral process. In 2024, it will be the turn of a much more demanding agreement with the next government, both from the point of view of budgetary or monetary objectives, and of future structural reforms.
The remaining objectives of the agreement will be maintained, as both parties have made it clear. This means that the primary deficit should fall to 1.9% of GDP, while the financing of the budgetary red by the Centrale via transitional advances should be minimal. “These are anchor points that will help us in the process of reducing inflation,” they acknowledge in Economy.
The Fund thus confirmed its position super light with Argentina since the signing of the agreement in mid-2020. What interests the bureaucrats in Washington is to help the government refinance the maturities, correct the objectives if necessary, and above all prepare the ground until the elections . Already in 2024, it will surely be the turn of a much more demanding agreement with the next administration, both in quantitative terms (budgetary objectives and reserves), and qualitatively, with various essential structural reforms.
The other task that Massa has done to avoid shocks until the elections is the refinancing until 2025 of the debt in pesos due to the Treasury in the second quarter. There are over 6 trillion pesos, which would be exchanged for new securities that are gradually expiring over the next two years. Debt maturing in the second half of the year is not so worrying, because most of it is in the hands of the public sector.
The Treasury managed not only to refinance itself, but to place more debt in pesos at Friday’s auction. However, the investment conditions did not go beyond July (that is, before the PASO) and the interest rate is already close to 120% per annum.
Neither IMF flexibility nor a super debt-to-peso swap in itself implies a reduction in inflation or an improvement in real wages. But these are steps that would allow the government to reach the elections without the outbreak of a new crisis.
The objective is to eliminate the risk of another reprofiling of the debt in pesos, like the one that happened in 2019 immediately after the PASO. And it also seeks to avoid a substantial monetary issue by the Central in case investors accelerate the process of dollarization of their portfolios.
But neither flexible targets with the IMF nor a swap of debt into pesos imply a substantial improvement in the economy or favor a possible candidacy of Sergio Massa. For him or any other pro-government candidate, inflation must come down, wages recover and the economy recovers. For now, these are goals that seem distant, increasing the chances of the opposition to win the next election.