Argentina turns to IMF in last-ditch bid to stave off devaluation

Argentina’s increasingly desperate government is trying to stave off a currency crisis by going cap in hand to China and the IMF, presenting the Washington-based lender with a dilemma over how to support its largest debtor.

Inflation in the South American nation is expected to reach 145 per cent this year, a recession is looming and the central bank’s net reserves of hard currency are negligible. The peso has fallen almost 40 per cent against the US dollar on the black market this year.

The Peronist government is striving to avoid a big devaluation or a lapse into hyperinflation during the politically turbulent season before presidential and congressional elections in October — and economy minister and would-be presidential candidate Sergio Massa has emerged as a central figure.

Massa has announced a welter of emergency measures to keep the economy afloat, including special exchange rates to encourage soy exporters to ship their crops and swaps of domestic debt for longer maturities. He will travel to Washington later this month to seek extra IMF funds, but his task has been complicated by a severe drought, which has hit farm production and agricultural exports.

A trip by Massa to China earlier this month yielded Beijing’s agreement for Argentina to access an additional $5bn from an existing renminbi currency swap agreement. Massa is also trying to persuade the New Development Bank, the Shanghai-based lender for the Brics nations, to allow Argentina to join.

Argentina has been cut off from international markets since its 2020 default and needs to fund a budget deficit estimated by JPMorgan at 3 per cent of its gross domestic product this year. With net international reserves estimated at close to minus $1.5bn, according to Buenos Aires-based analysts Ecolatina, Massa’s hopes for dollars rest on the IMF.

“Massa’s [plan], which is to do the impossible to keep the economic situation from spiralling out of control before the elections, has become really tough to achieve because of the drought’s impact on soy exports,” said Salvador Vitelli of business consultancy Romano Group. “But the macroeconomic instability we are facing isn’t because of the drought, it’s about a chain of failures and mismanagement.”

Federico Sturzenegger, a central bank head under the previous conservative government of Mauricio Macri, was blunt: Massa’s “strategy is to get more in debt to sustain a very large fiscal deficit that the government hasn’t corrected. It’s not a lot more complicated than that”. 

Massa’s labours also serve another purpose: the minister has made no secret of his desire to be the Peronist movement’s presidential candidate, and a decision is imminent. Nominations for nationwide primaries close on June 24 and both President Alberto Fernández and Cristina Fernández de Kirchner, his powerful deputy and a former president, have said they will not run.

The push for a greater cash injection from the IMF comes despite Argentina’s failure to meet many of the targets set out in a $44bn loan programme agreed with the fund last year, including on reducing the fiscal deficit, raising revenue and accumulating reserves, according to a May report by economists at the University of Buenos Aires.

Yet IMF-watchers expect the fund to approve more money in its next review, due by early July, to avoid a bigger crisis and allow Argentina to repay money to the Washington-based lender.

“The fund does not want to be responsible for Argentina going down the drain,” said Alejandro Werner, a former head of the IMF’s western hemisphere department. “It also does not want Argentina in arrears for a long period . . . so there are a lot of incentives for the fund to conclude the review.”

The IMF said fund staff had been engaging “very closely” with Argentina on the latest review of the programme. “The focus has been on policies to strengthen the programme to safeguard stability, by enhancing reserves and fiscal sustainability, while recognising the impact of the drought,” the IMF said.

An economy ministry source in Buenos Aires said Argentina wanted funds to compensate for the loss of export income triggered by the drought, with the amount still under discussion. Controversially, it also wants to use part of the IMF money to intervene in markets to prop up the peso. “What’s being discussed is how much will be available to use to intervene,” the source said. “At the moment, that discussion is looking good.”

Hector Torres, a senior fellow at the Center for International Governance Innovation and former IMF executive director, was sceptical. “Argentina’s central bank has run out of dollars and the official exchange rate is clearly unsustainable,” he said. “The fund wants to avoid pushing the country into default . . . but I cannot see the fund’s executive board allowing the use of IMF resources to buy pesos on the foreign exchange market.”

A source familiar with the IMF talks said there was considerable frustration over Argentina. “There’s very little support for more muddling through,” the source said. “Massa should have made a big adjustment when he took office.”

Sturzenegger said the fund might lend Argentina enough to meet upcoming repayments to the IMF itself, but not larger sums. “I think what the fund will do, instead of disbursing [all] of the rest of the funds from the program, will just give money in line with what Argentina has to return to them . . . So I think the fund will defer the issue of Argentina’s [broader] package to talk about it with the next government.”

The risks are political as well as economic. Hard-right candidate Javier Milei is polling strongly and may top the primary elections in August, which are held simultaneously for all political parties. Milei has advocated dollarising the economy, so a strong result for him could destabilise the situation further by increasing expectations of a big devaluation.

“If this guy would dollarise the economy and has a third of the vote in polls, why would you hold domestic debt?” asked a person familiar with the IMF talks.

Long viewed as the villain by many Argentines for its past role in austerity programmes, the IMF has few good options.

“The fund will probably be criticised for doing something awful on top of an awful programme,” said Werner, who oversaw a previous 2018 IMF bailout. “But at the end of the day they wouldn’t have been repaid anyway. Either you lend to Argentina so they repay or they won’t repay. Both sides will extend and pretend.”