risks
“The risks of the program remain elevated in the context of a less favorable external environment and continued policy implementation risks”.
“A sharper-than-expected slowdown in global growth or a tightening of global financial conditions could negatively affect Argentina, including through negative knock-on effects on commodity prices and the domestic bond market. The intensification of drought in progress could reduce agricultural exports and foreign exchange inflows, stoking inflation and jeopardizing the objectives of the program.”
“The risks of implementing the program remain high given the very complex economic, social and internal political situation. Social discontent could increase further, weakening political support for the program and giving rise to political diversions and interventionist measures, especially before the elections.
“Contingency planning and agile policymaking will continue to be essential to help meet program objectives, and further policy tightening may be necessary in case the risks materialize.
The technical staff assesses that Argentina’s debt remains “sustainable, but not with a high probability.”
external adjustment
“It is projected that the balance in current accountafter deteriorating to a deficit of 0.3% of GDP in 2022, reach a surplus of 1.2% of GDP in 2023. This improvement is consistent with a slowdown in domestic demand induced by policies, import restrictions, improvements in competitiveness and terms of trade, as well as higher interest income from residents’ investments abroad.
“The stronger current account, along with net official support and limited capital outflows, are expected to …support reserve accumulation of US$9.8 billion during 2022-23, with US$5 billion projected by the end of 2022…also supported by the recent adoption of foreign exchange administrative measures.”
IMF estimates calculate that imports of goods and services should fall from 93.704 million dollars in the current year to 85.795 million next year -a reduction of 8.4%- (a reduction in energy imports is expected).
higher growth
“The economy is projected to expand 4.6% in 2022, up from 4% at the second review, due to stronger-than-expected activity and demand through the third quarter of 2022.” It is expected that “real GDP growth moderates to 2% in 2023”.
lower inflation
“It is projected that inflation will decline from around 5% MoM by the end of 2022 (97% YoY) to around 3.5% MoM by the end of 2023 (60% YoY)supported by the continued implementation of restrictive macroeconomic policies and some moderation in world commodity prices”.
“The process is supposed to be gradualeven in the medium term, reflecting the unusual challenges of high inertia and weak demand for money, as well as the need to correct relative price misalignments (for example, energy) and shore up exchange rate competitiveness real.”
Exchange rate adjustment
“After weakening by almost 30 percent between the end of 2017 and the end of 2020, the multilateral real exchange rate has appreciated by approximately 40% since then (until November 2022)”.
With positive real interest rates, the devaluation rate should stay above inflation to strengthen external competitiveness”.
It is considered necessary to “support a reduction in the exchange rate gap and the accumulation of reserves. A restrictive fiscal policy will be needed to moderate domestic demand and mitigate the possible inflationary impact of this strategy.
“Although administrative measures in exchange matters (multiple exchange rates, restriction on imports) can safeguard reserves in the short term, they are not a lasting solution or a substitute for addressing underlying imbalances”.
Specifically, regarding the multiple exchange rate policy, “A plan should be sought for its gradual rationalization and relaxation as soon as conditions permit.”
positive rates
“Based on the strong recent track record, policy interest rates should remain firmly in positive real territory.”
Fiscal consolidation
“Fiscal consolidation must continue in 2023 and contain spending pressures. The recently approved 2023 budget is consistent with a primary fiscal deficit target of 1.9% of GDP, with consolidation supported mainly by: (i) a reduction of subsidies (0.6% of GDP), mainly from the energy sector…, but also in the water and transport sectors; and ii) a rationalization of social assistance (0.8% of GDP)through the reduction of bonuses and improvements in the targeting of benefits”
“In addition, it is necessary to continue striving to contain the public sector wage bill (Through the freezing of contracts in the entire sector), pensions (the increases will continue to be anchored in the indexation formula and avoid moratoriums) Y transfers to provinces, state companies and other government agencies. These high-quality measures are necessary to protect priority infrastructure projects, absorb the costs of the 2023 presidential elections (around 0.2% of GDP), but also to facilitate fiscal consolidation beyond 2023 and ensure sustainability. Of the debt”.
“To help strengthen the credibility of disinflation policies and targets, the primary deficit will be limited to 0.8% of GDP during the first half of next year”.
“A thorough review of tax expenditures (estimated at about 2.5% of GDP) will help identify options to streamline tax incentive schemes…while efforts to strengthen property (personal property) tax collection should continue.
The latter will require i) improvements in the methodology for the valuation of properties; and (ii) improvements in property tax databases, which link provincial cadastres with federal property tax records, beginning first with the Greater Buenos Aires Metropolitan Area.”.
Control of plans
“Efforts are being made to improve the governance of the Potenciar Trabajo plan and exclude ineligible beneficiaries, with a rapid audit of all recipients to be completed by January 2023. More than 20,000 ineligible recipients have already been removed, and further reductions are expected during the course of the next year.
The debt problem in pesos
“The recent reliance on short-term issues and dollar-denominated bonds has come at the cost of a shortening of maturities and exchange riskswith a notable accumulation of repayments due in the third quarter of 2023, before the elections.”
“While capital controls and large domestic debt holdings within the public sector are important mitigating factors, a proactive market-oriented debt strategy will need to be pursued to deal with large repayments and obtain the necessary net financing, while ensuring as long as the intervention of the Central Bank in the stock market is limited to guaranteeing the normal functioning of the market”.
“The strategy contemplates (i) extending the maturities of the debt held by entities of the intra-public sector, which represent close to 60% of the amortizations that expire next year; and ii) a tailored approach to address the remaining liabilities of banks, mutual funds and insurance companies”.
“It is projected that domestic market financing will average around 3% of GDP during the program, in line with the ambitious annual average rates of refinancing around 150% (above the 2020-21 average of 125%).”
“The baseline assumes a gradual strengthening of the domestic debt market supported by a proactive market-oriented funding strategy.”
“In the short term: (i) public debt (60% of total amortizations in 2023) is refinanced with CER-adjusted instruments with maturities beyond the election; ii) new net financing is mobilized through efforts to encourage non-financial companies to hold government debt (around 0.5% of GDP) and efforts to tap liquidity from provinces and other public entities (0.2% of GDP). GDP); and iii) the remaining issuances from the private sector are more focused on instruments at short-term fixed rates”.
BCRA Balance
“It is still fundamental protect the BCRA balance sheet. The stock of Central Bank securities (debt) reached 12% of GDP at the end of November, an all-time high, generating costs that are projected to exceed 4% of GDP in 2022”.
This increase in the Central Bank’s debt “reflects the needs to sterilize the monetary financing of the fiscal deficit, interest payments on Central Bank securities, subsidized foreign currency sales, reserve accumulation, and interventions in the secondary market of government values… Additional purchases on the secondary market in the future should be avoidedunless they are critical to ensuring the smooth functioning of the market, while addressing underlying imbalances and uncertainties.
Source: Ambito
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