Argentine bond issuers, including provinces and companies, will likely limit their fixed-income borrowings, now that the government has signed a three-year standby arrangement for $50bn from the IMF, LatinFinance has heard.
“Argentina agreeing to fiscal tightening gives a commitment for investors to assess the longer-term trajectory of the credit,” one investor said. “This is a lot more positive when it comes to getting your money back,” he said, adding the agreement was one of the largest he had ever seen between the IMF and a sovereign issuer.
The market had expected Argentina to close a smaller deal around $30bn at a later date, the US consulting firm Capital Economics said in a report.
Argentina has also secured $5.65bn in credit from the World Bank, the IDB and the Latin American development bank CAF. But as part of the arrangement with the IMF, the government has pledged to speed up its debt reduction efforts and also set more realistic inflation targets, Alberto Ramos, an analyst at Goldman Sachs, said in a report.
Argentina can run a fiscal deficit of 2.7% of GDP in 2018 and 1.3% in 2019, before breaking even in 2020 and posting a surplus of 0.5% in 2021, Ramos said.
“Market expectation in 2018 was slightly lower (-2.5% of GDP),” Ramos said in the report. “The 2018 target is not very demanding and the government is likely to overachieve it.”
Argentina’s new inflation targets, meanwhile, stand at 17% in 2019, 13% in 2020 and 9% in 2021. “The 2019 to 2021 targets are demanding but not unrealistic,” Ramos said.
The country’s previous inflation targets were unrealistic, the investor said. “We saw mistakes over inflation targets because they were so keen to promote growth,” he said. “Unrealistic targets allowed rate cuts and this was not the right course to take.”
The IMF agreement also obliges Argentina to maintain a flexible and market-determined exchange rate, immediately put an end to the central bank financing the federal deficit and submit a bill to Congress to make the central bank independent.
“This fiscal plan will be difficult to implement,” Capital Economics said. “The 2019 and 2020 budgets will need to be approved by Congress, where President [Mauricio] Macri’s Cambiemos coalition holds 40% of the seats.”
Capital Economics predicts Argentina’s financial markets will rally as they digest news of the agreement. The Merval index on the Buenos Aires stock exchange opened more than 3% higher on Friday, but the peso touched a record low of ARS25.63 against the dollar.
A weaker peso is necessary “to level out Argentina’s lingering macro imbalances,” Gabriel Gersztein, the head of Latin America strategy at BNP Paribas, said in a report.
“Argentina is now armored and has gained a degree of freedom from dependence on the financial markets to honor its public debt in coming quarters,” he said.
Adhering to the IMF’s conditions, however, will not be easy, Gerzstein said. The country will have pick up the pace of budget cuts in a year of slower economic growth and ahead of the next presidential election in 2019. “Off the investors’ radar merely two months ago, electoral risk is now also a factor to be taken into consideration,” he said.