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
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