Even with new IMF backing, Macri faces trouble ahead

Published September 28, 2018, 7:10 AM

by Francine Ciasico

By Agence France-Presse

President Mauricio Macri warned Argentines Thursday they faced painful months ahead after his government pledged tough austerity measures to meet the terms of an enlarged $57 billion bailout from the IMF.

People walk past a bank's branch decorated with images of old Argentine peso bills, in Buenos Aires, on September 26, 2018.
People walk past a bank’s branch decorated with images of old Argentine peso bills, in Buenos Aires, on September 26, 2018. (AFP / MANILA BULLETIN)

“We have very difficult months ahead of us,” said Macri the day after his government agreed a revamped $57 billion deal with the IMF to emerge from a severe economic crisis.

“We knew it would not be easy, we are convinced that this is the only way,” Macri said in a televised speech from the presidential palace.

Argentina’s currency has lost half its value against the dollar in 2018, hurting the purchasing power of millions of ordinary Argentines, along with inflation that is forecast to reach over 40 percent by the end of the year.

“This must be the last crisis. Once the storm is over we will have growth again.”

Even with the increased package, Macri’s center-right administration has its back to the wall, with disbursement being linked to his pledge to erase the budget deficit from 2019.

Without a majority in Congress, Macri will have to convince a hostile Peronist opposition to adopt a 2019 austerity budget with sweeping spending cuts.

The revamped agreement will allow the South American country “to leave behind the turbulent path of recent months,” Finance Minister Nicolas Dujovne said after the deal was announced Wednesday.

But as if to prove there is no quick fix, Argentina’s under-fire currency wobbled again on Thursday.

The peso — which has shed half its value against the dollar this year — dipped 2.3 percent shortly after markets opened.

Setting the tone for the battles ahead, Axel Kicillof — former economy minister in the previous leftist government of Cristina Kirchner — called Macri’s austerity measures “a shame” and said governors and lawmakers would not vote for it.
Currency woes

Buenos Aires originally secured a $50 billion loan back in June, but quickly burned through an initial $15 billion tranche to fight a run on the currency, in the process raising interest rates to 60 percent.

However, Macri revealed last month that he had asked for an accelerated disbursement of the remaining $35 billion, prompting talks on a larger IMF loan.

Daniel Artana, chief economist with the Latin American Economic Investigation Foundation, said Macri had inherited a broken economy from Kirchner in 2015 and was heading in the right direction.

“Argentina is committed to doing what it needs to do, it’s a steep drop in the budget deficit, but Kirchner’s economic legacy was a ticking bomb,” he said.

But with unions fighting Macri’s cuts tooth and nail with daily street protests, getting to the holy grail of a zero deficit will be a painful process.

The primary fiscal deficit was 6.0 percent in 2015, 3.9 percent in 2017, and is expected to be 2.7 percent in 2018.

After the peso depreciated by half this year — on Thursday was trading at over 40 to the dollar — the agreement announced in New York “is a plan to put out the fire,” said economist Roberto Cachanosky.

“It’s not because you have money that everything is settled,” he said, referring to the IMF’s early disbursement of 19 billion available over the next few months.

Analysts say a key point is that the funds available would cover Argentina’s 40 billion of external debt repayments due before the end of 2019, lowering the risk of rolling over the debt.

Moody’s analyst Gabriel Torres pointed out that “once it regains market confidence,” Argentina will have to find other sources of financing in the future.

The agreement may give Argentina much-needed “room to maneuver, but it does not solve the problems.”

“Argentina is a very vulnerable economy, dependent on commodities and also commodities that are affected by the climate,” like grains and cereals.

Aggravating the crisis was a drought that decimated soybean exports.