IMF: The final targets are approaching and the market is already assuming what the conditions will be for a new agreement

The IMF would be tougher in its demands in view of the possibility of increasing its debt exposure to Argentina, something that it will have to be able to justify to its board and the shareholder countries.

Decisive weeks are approaching in the relationship between Argentina and the International Monetary Fund, in a context in which the Government seeks to sustain its economic policy scheme with an exchange rate gap under control at the cost of a lower accumulation of reserves. The ninth review of goals will begin shortly and later, with a date yet to be determined, negotiations towards a new program.

What the market is trying to interpret from the start is what dynamics the back-and-forth between Buenos Aires and Washington will have, and it is looking to the most recent agreements signed by the International Monetary Fund with other countries for some signal that will allow it to anticipate what conditions the board could impose on Argentina in exchange for more financing.

The Government is moving forward with its cards in hand: the June targets were over-fulfilled and the ninth review should not represent any challenge for the economic team – some USD 540 million would be added to the reserves for that reason – although there is a doubt among investors about whether the fall in reserves at the BCRA that worsened in the third quarter will leave the accumulation target for the end of September in compromised territory.

Officials prefer not to say whether the upcoming competition will be more or less frictional, but they assert, defensively, that the Fund raises objections to the economic plan despite the Government having met its goals, and they see a different yardstick compared to the Frente de Todos administration, which ended its mandate with a program outside any zone of compliance with objectives.

The June targets were over-met and the ninth review should not represent any challenge, although there is a doubt among investors about the fall in reserves

Of course there is a difference, and that is that the IMF would be tougher in its demands in view of the possibility of increasing its debt exposure to Argentina, something that it will have to be able to justify to its board of directors and shareholder countries. The bureaucracy of the IMF will return to activity after the summer recess in the United States and will resume its agenda, which will soon have a stopover in Buenos Aires.

In the case of the goals that ended on the last day of June, the outlook is favorable for the Executive Branch: the Central Bank must show an accumulation of reserves of USD 10.9 billion compared to December 2023 and according to private estimates, exceeded by more than 1.2 billion of dollars.

The IMF resumes its activity after the summer recess and Argentina will be at the top of the agenda (Bloomberg)

Fiscal targets were also over-met. According to a survey by the consulting firm PxQ, Emmanuel Alvarez AgisAt the end of June, the public sector had achieved a primary surplus, before debt interest payments – which is the number taken into consideration by the IMF – of $6.9 trillion. The target for that cut-off date was $4.6 trillion. With the latest available data, as of June, the primary surplus of $7.8 trillion is already $167 billion above the September target.

Thus, five weeks before the cut-off dates for the last goals of the financial program initiated in March 2022, the Government is on track to comfortably meet the fiscal objective and will have to accumulate some USD 1 billion more in net reserves to pass the BCRA’s foreign currency accumulation test.

From that moment on, the biggest discussion will begin about the implementation of a new, different agreement, which will eventually have additional financing. There are few details so far about that process, starting with the timing: : Talks have not yet begun formally and no date has been set, they acknowledge at the Treasury.

Talks have not yet begun formally and there is no set date, they acknowledge at the Treasury Palace

For this reason, the market still has a cloud of doubts about the continuity of the economic program and this is reflected in the price of Argentine assets and in the country risk. Will the new phase come or not with a contribution of dollars from the International Monetary Fund? Will the Executive Power wait for an electoral result favorable to the country? Donald Trump to get a “push” from the White House on the board? And the question that investors and analysts are asking most insistently: what will the IMF ask for in exchange for fresh funds?

In recent days, various market reports have addressed precisely this question and sought answers in the latest agreements signed by the organization. A report by the consultancy 1816 stated that “a priori we think that there will not be a new program (which is what would be needed to have disbursements from 2025) unless the exchange market is liberalized, prior action required by the Fund to approve recent disbursements to Egypt and Ethiopia.”

The Government exceeded the fiscal goal with the IMF

In a more extensive report, PxQ stated that “The organization’s ‘manual’ is not very different from that of the past: the arrival of financing is conditional on the implementation of a currency unification, elimination of trade and capital account controls, implementation of clear rules of intervention and contractionary monetary policy (interest rate increase) to contain the inflationary effect.”

“Taking into account the latest External Sector Report, the IMF considered that, after the devaluation in December and the subsequent appreciation, the real exchange rate was in equilibrium by the end of March. Since then, the exchange rate continued to appreciate, now reaching 17% below that equilibrium level,” continued the consultancy founded by Álvarez Agis.

Since March the exchange rate has been appreciating, now being 17% below that equilibrium level (PxQ)

Meanwhile, the FMyA consultancy (Fernando Marull and Associates) analyzed in detail the conditionalities of the latest countries that signed agreements such as the one Argentina would seek and the conclusions were:

• Egypt: “After the program extension was approved, the Central Bank of Egypt had to eliminate exchange controls and let the currency float the pound, which fell from $30 per dollar to almost $50 at the end of February. The Fund also called for further tightening of fiscal and monetary policies”;
• Pakistan: “The IMF had already set a devaluation of the rupee in January 2023 as a condition to access the last disbursement of the agreement it had with the country since 2019. With the Stand By In the middle of last year, the Fund called for deepening the fiscal consolidation process, carrying out reforms in the energy sector and completing the transition to a flexible exchange rate scheme that had begun in January. With the economy stabilised since the beginning of this year, the new programme aims to strengthen monetary and fiscal policies and undertake pro-growth reforms”;

Flexible exchange rates, an end to currency controls and a dollar at equilibrium were the conditions of the latest IMF agreements. REUTERS

• Ethiopia: “Prior to the approval of the program, the government devalued the birr, which went from $57 per dollar to $77.5. Unlike in the case of Egypt, the devaluation was carried out at a stage prior to the approval of the program, and not as part of the policies agreed upon with the Fund staff. Analysts believe that this move was one of the conditions imposed by the IMF to give the green light to the agreement,” concluded FMyA.

“The Fund will ask for some extra effort to grant new disbursements. Based on the agreements with the three countries, eliminating exchange controls will most likely be an unavoidable condition for accessing a new agreement and more disbursements. Since the government already has the objective of lifting the restrictions and eliminating the country tax, this should not be an obstacle. It will also be important to meet the goals in the two remaining reviews of the current program,” FMyA stated.

Eliminating exchange controls will most likely be an unavoidable condition for accessing a new agreement and more disbursements (FMyA)

Also in light of these latest signed agreements, PxQ concluded its report with four “patterns” that it identified that could be extended to Argentina in the event of an agreement to be negotiated:

1. Contractive monetary policy with a rate at the level of current inflation.
2. Devaluation of the peso to the level of “free” exchange rate.
3. Relaxation of controls over the trade and capital accounts of the balance of payments.
4. Authorization for intervention in the exchange market on the clear rules base.

“The longer the lifting of the cepo is delayed, with a crawling peg The lower the rate of inflation, the greater the jump needed to reach the real exchange rate requested by the IMF,” concluded PxQ.