Argentina and the IMF reached a preliminary agreement on 7 June for a three-year USD 50 billion stand-by arrangement that will keep the economy afloat as the government pushes through economic reforms. While the final agreement is still subject to approval by the IMF board, the government pledged to now accelerate economic reforms, including reforming the Central Bank charter, reducing currency interventions and achieving a primary fiscal surplus by the year 2021. These measures are intended to make the economy more resilient to economic shocks and capable of achieving faster economic growth in the medium and long term. However, the tough reforms and fiscal consolidation are expected to have a negative impact on economic growth in the short term and weigh on the ongoing economic recovery. GDP is expected to have expanded solidly in the first quarter due to buoyant growth in the domestic economy. Economic growth is expected to slow sharply from 2017’s strong expansion due to fiscal consolidation measures, restrictive credit conditions and the pass-through effect of higher inflation on private consumption. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, growth is expected to reach 2.5%. National inflation inched up from 25.4% in March to 25.5% in April. Inflation is expected to remain above the Central Bank’s inflation targets for 2018 and 2019 as a weaker currency and expected subsidy cuts in public utilities will stoke price pressures going forward. Panelists expect national inflation to end 2018 at 27.4%, which is up 3.7 percentage points from last month’s forecast. For 2019, inflation is seen moderating to 19.2%. At its latest bimonthly meeting held on 22 May, the Central Bank of Argentina left the 7-day repo reference rate unchanged at an all-time-high of 40.00%. Borrowing rates are expected to decline this year and next as the Bank attempts to shield the economy from financial turbulence and stem inflation without undermining economic growth. On average, panelists participating in the LatinFocus Consensus Forecast see the 7-day repo repurchase rate ending 2018 at 31.38% and at 23.24% in 2019. On 8 June, the Argentine peso traded at 25.32 ARS per USD, a weakening of 12.5% month-on-month. The currency weakened considerably after the details of the IMF deal were unveiled and the Central Bank committed to limit forex market intervention and remove all currency support. Panelists participating in the LatinFocus Consensus Forecast foresee the peso weakening to 26.89 ARS per USD in 2018 and 30.78 ARS per USD in 2019.
OUTLOOK | Argentina clinches USD 50 billion loan from IMF Argentina reached a USD 50.0 billion Stand-By Agreement (SBA) deal with the IMF, after weeks of financial turbulence caused the currency to depreciate sharply in early May. The final agreement exceeded estimates of a USD 30.0 billion SBA and should enable the country to comply with its external debt obligations and rebuild economic buffers. Notably, officials plan to treat the bulk of the loan as precautionary, and only draw on the first tranche of the program (USD 15.0 billion). While the full details of the program are outstanding as of 11 June, statements by Argentine policymakers and the IMF have revealed some of the program’s top priorities: reforming the charter of the Central Bank of Argentina (BCRA), reducing monetary financing of the deficit and drastically cutting the primary fiscal deficit. The deal will likely cause the Argentine economy to slow substantially in the short-term, dented by tough fiscal consolidation, but should help restore stability and reduce structural weaknesses in the economy through deep-seated reforms. The Argentine government has committed to enhancing the Central Bank’s autonomy and credibility. The Bank will stop financing the government directly, which should ease upward pressures on the money supply. This measure is intended to make the economy more robust, as unrestrained monetary financing has been a cause of financial instability and higher inflation in the past. The BCRA is also set to have complete independence in setting inflation targets and to start releasing the minutes of the meetings to improve transparency. Together, these measures should lift confidence as they limit government interference and reduce the probability that the institution will tweak targets to achieve faster short-term economic growth. Finally, the Central Bank pledged to keep forex market interventions to a minimum and move towards a more free-floating exchange rate regime. Authorities committed to ambitious fiscal consolidation targets as part of the IMF program, with tougher targets in 2019 and 2020 than set previously. The primary fiscal deficit is now targeted to narrow from 2.7% of GDP in 2018 to reach a balanced primary budget in 2020 (previous target: -1.2% of GDP). This would translate into budget cuts in the order of USD 19.3 billion for 2018– 2021, and most of the cuts are expected to come from reduction of capital expenditure, subsidies in public utilities, and the delaying of infrastructure projects. These policies will dampen the domestic economy and weigh on growth momentum. It is not certain that Argentina will be able to meet the tough targets under the IMF program. The current government has failed to meet its inflation and primary deficit targets set at the start of its mandate in late 2015. Similarly, the fragmented political opposition has coalesced recently and has been able to undermine government efforts to slash public spending in recent weeks. The budgets for the upcoming three years and the Central Bank reform have to be approved by the Chamber of Deputies and the Senate, which are both controlled by the opposition, suggesting that passing austerity budgets will be very difficult. In addition, President Mauricio Macri’s administration will have to balance complying with the IMF terms and passing budgets that are not too punitive ahead of next year’s presidential election. Achieving fiscal targets will also be conditional on the economy’s growth prospects, which depend on external and domestic factors. Increasing prospects of an international trade war, the impact of monetary policy normalization in the United States on the Argentine economy and a more pronounced impact of austerity measures on the domestic economy could further drag on growth, undermining fiscal consolidation efforts. Nevertheless, senior economist Mario Mesquita from Itaú BBA argues that the country can achieve the fiscal target in 2018 but more effort will be required to achieve the targets in 2019 and 2020: “We think the targets are very challenging but feasible. A weaker currency and higher inflation favors a lower primary deficit in 2018. However, we note that a faster consolidation in 2019 and 2020 would likely need additional, and more structural, measures.” The majority of panelists significantly revised their forecasts and for this month LatinFocus Consensus Forecast report expect the Argentine economy to expand 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, panelists expect the economy to expand 2.5%. REAL SECTOR | Economic activity falters in March The monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) slowed notably in March, registering a 1.4% expansion in annual terms, a sizeable moderation from February’s revised 5.0% increase (previously reported: +5.1% year-on-year). This was the slowest pace of growth since April 2017; it nonetheless marked the thirteenth consecutive month of economic expansion in Argentina. The slowdown was driven by contractions or weaker growth in most of the components of the index. Notably, economic activity in agriculture, livestock, hunting and forestry contracted 5.5% year-on-year in March (February: +3.3% yoy). Meanwhile, growth in the manufacturing industry eased to 0.8% (February: +5.9% yoy). Construction activity also slowed, expanding 5.9% in March (February: +12.7% yoy), and financial intermediation growth moderated to +3.3% (February: +7.6% yoy). A seasonally-adjusted month-on-month comparison showed that economic activity contracted for the second consecutive month, falling 0.1% in March, following a 0.2% contraction in February. Lastly, average economic activity in March remained unchanged at February’s two-year high of 3.6%. REAL SECTOR | Growth in industrial output picks up in April In April, industrial production expanded 3.4% over the same month last year, according to data released by the National Statistical Institute (INDEC) on 1 June. The figure came in above March’s 1.2% year-on-year growth and marked the 12th consecutive expansion in industrial output. April’s upturn reflected faster growth in key components of the index. Output in the automotive industry edged up from a 26.0% increase in March to 27.2% rise in April. Growth in the production of non-metallic mineral products reached 11.0% annually, above March’s 3.9% increase. The food industry swung from a 1.0% output contraction in March to a 2.9% increase in April. Panelists participating in the LatinFocus Consensus Forecast expect that industrial production will expand 1.9% in 2018, which is down 0.5 percentage points from last month’s forecast. For 2019, the panel expects industrial output to rise to 2.3%. OUTLOOK | Consumer sentiment plummets to over four-year low in May The Universidad Torcuato di Tella (UTDT) consumer confidence index dropped from 40.1 points in April to 36.1 points in May. The index, which recorded its worst reading since February 2014, is below the 50-point threshold that separates pessimistic from optimistic sentiment among consumers, where it has been almost uninterruptedly since January 2016. May’s print reflected an across-the-board deterioration in all components of the index and in all four geographical areas surveyed. Willingness to purchase durable goods and big-ticket household items (appliances, cars and houses) was the component that recorded the largest month-on-month drop. It was followed by consumers’ view on their personal financial situation and their view on Argentina’s macroeconomic outlook. Assessments of current and future economic conditions deteriorated as well. Panelists surveyed for the LatinFocus Consensus Forecast see private consumption rising 1.3% in 2018, which is down 1.1 percentage points from last month’s forecast. For 2019, panelists expect private consumption to increase 2.2%. MONETARY SECTOR | Inflation rises in April According to the National Statistics Institute (INDEC), national consumer prices rose 2.7% over the previous month in April, coming in above March’s 2.3% month-on-month increase. The result reflected higher prices in all 12 components of the index. In month-on-month terms, prices for households; water, electricity, gas and other fuels rose 8.0%; prices for transportation rose 4.0%; and prices for clothing and footwear rose 4.0%. The increase in these subcomponents reflected cuts in government subsidies. Inflation reached 25.5% in April, slightly above March’s 25.4% increase. National inflation as measured by INDEC is expected to be 27.4% at the end of the year 2018, which is up 3.7 percentage points from last month’s forecast. Inflation is expected to reach 19.2% at the end of 2019. The current LatinFocus projections vastly exceed the Central Bank’s target of inflation for the end of 2018 (15.0%) and for the end of 2019 (17.0%). Data compiled by the Statistical Institute of the city of Buenos Aires showed that consumer prices in the city of Buenos Aires rose from a 2.1% month-onmonth increase in March to a 3.0% rise in April. Inflation jumped from 25.4% in March to 26.5% in April. MONETARY SECTOR | Central Bank maintains rate unchanged at record high of 40.00 At its latest bimonthly meeting held on 22 May, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to leave the 7-day repo reference rate unchanged at an all-time high of 40.00%. The decision was widely expected by market analysts, as the Bank tried to settle markets by restoring confidence following weeks of financial volatility and a sell-off of the currency in the past few weeks. The Argentine peso came under severe pressure due to growing expectations of faster-than-expected monetary policy normalization in the United States. The latest rate decision also came against a backdrop of double-digit inflation. According to the National Statistics Institute (INDEC), national consumer prices rose 2.7% over the previous month in April (March: +2.3% month-onmonth) on the back of cuts in government subsidies. National inflation ticked up from 25.4% in March to 25.5% in April. According to the Bank, the sharp depreciation of the Argentine peso observed in the first two weeks of May will contribute in fanning price pressures going forward and consequently warrant tight monetary conditions. The Bank saw the current monetary stance as appropriate to impede a further sell-off of the peso and prevent a further depreciation, which would translate into higher inflation. The Central Bank reiterated its commitment to conducive monetary policy, with the objective of achieving the 15.0% inflation target by the end of the year. A timeframe, however, was not provided, and future rate decisions will depend on developments in financial markets. The BCRA also stressed its willingness to normalize monetary policy as financial turbulence and uncertainty dissipates. On average, Panelists participating in the LatinFocus Consensus Forecast see the 7-day repo repurchase rate ending 2018 at 31.38%. They see the 7-day repo repurchase rate easing further in 2019, closing the year at 23.24%. MONETARY SECTOR | Argentine peso tumbles to new record low after IMF deal is reached The Argentine peso depreciated sharply on 7 June, after the details of the IMF Stand-By Arrangement deal were unveiled by the government. On 8 June, the currency traded at a record-low 25.32 ARS per USD. The result represented a steep 12.5% weakening over the same day of the previous month. The peso was 58.9% weaker compared to the same day last year and 36.1% weaker than at the beginning of the year. The currency’s most recent slide came after the Central Bank governor, Federico Sturzenegger, decided to remove the USD 5.0 billion international reserves floor in place since 14 May 2018. The decision followed the IMF recommendation to remove all forms of currency support and let the currency be determined by the market. The floor had succeeded in stabilizing the peso after it depreciated sharply in the first half of May. Looking forward, the peso is expected to appreciate marginally, as IMF financial assistance should shield it from financial turbulence and enable Argentina to comply with its external debt obligations for the next three years. Nevertheless, the currency will remain weak, in part as it will not have the same support from the Central Bank as it did in the past. Panelists participating in the LatinFocus Consensus Forecast are still taking into account the latest developments in the Argentine forex markets. Panelists surveyed for this month’s LatinFocus report expect the ARS to end 2018 at 26.89 ARS per USD. They project the Argentine peso will trade at 30.78 ARS per USD at the end of 2019. EXTERNAL SECTOR | Trade deficit widens in April Growth in exports moderated from a revised 17.4% year-on-year increase in March (previously reported: +17.2% year-on-year) to a softer 6.2% increase in April. The sharp slowdown was driven by a 13.3% contraction in exports of primary products and a notable slowdown in exports of primary products and of manufactured products. The contraction in primary products exports largely reflected the impact of a devastating drought in the agricultural sector throughout the first quarter. Growth in imports jumped from 8.8% year-on-year in March to 22.7% in April. The increase was driven by a 34.6% expansion in imports of automotive vehicles and a 27.9% increase in imports of intermediate goods mostly used for industrial production in the country. As exports expanded at a sharper pace than imports, the trade deficit widened from USD 598 million in March to USD 938 million in April (April 2017: USD 112 million deficit). The 12-month moving average of the trade deficit came in at USD 10.6 billion, slightly above March’s USD 9. 8 billion deficit (April 2017: USD 0.8 billion surplus). Panelists participating in the LatinFocus Consensus Forecast expect exports to expand 6.9% in 2018 and imports to increase 7.0%, pushing the trade balance to a USD 9.1 billion deficit. For 2019, the panel expects exports to increase 8.4% and imports to expand 6.4%, with a trade shortfall of USD 8.4 billion.
Por Focus Economics https://www.focus-economics.com/ - Desde Barcelona España