Strong IMF Support Boosts Peso and Macri

Argentina’s beleaguered peso bounced back slightly on Friday after the central bank auctioned $250 million in dollar reserves and the International Monetary Fund issued a strong statement of support for President Mauricio Macri’s government.

Macri is caught between voters tired of fiscal belt-tightening measures that have already been implemented, and investor pressure to unveil a package of further spending cuts austere enough to calm the markets and order the mess inherited from the previous governments of the Kirchner couple, Nestor and his wife Cristina Fernandez, MercoPress reported.

But many Argentines blame the IMF for imposing budget cuts that plunged millions into poverty during the 2001-02 economic crisis.

The peso strengthened 3.5% in early Friday trade to 37.80 pesos to the dollar, after the central bank said it would auction $675 million in foreign reserves. The peso strengthened 6.08% at close on Friday at 37 to the dollar.

The bank had offered $500 million a day over recent sessions. Through Thursday the peso had fallen more than 30% against the greenback in August.

Two-thirds of that drop came on Wednesday and Thursday after Macri said he would ask the IMF to advance disbursements under a $50 billion financing deal. The announcement raised alarms among investors that Argentina might be hard pressed to fund its 2019 deficit and other maturing debts.

“Argentina has the full support of the fund and we are confident that the strong commitment and determination of the Argentine authorities will help the country overcome the current difficulties,” IMF spokesman Gerry Rice said in a statement.

The backing expressed by the fund helped the peso stabilize, at least temporarily, following a hectic week.

A policy package containing further government spending cuts is expected to be announced next week. But any more belt tightening will meet strong opposition, as discontent with Macri grows over high inflation, a weak economy and subsidy cuts that have jacked up household heating and water bills.

Several short-term general strikes have been called for September by leading labor groups protesting fiscal cuts.

 More Austerity Measures

With more austerity on the way, and utility prices set to rise again in the fourth quarter, low- and middle-income Argentines are hard-pressed to pay their monthly household costs. Yet fiscal tightening is exactly what the IMF and the markets want to see.

“If the government fails to deliver a convincing austerity package, the peso will probably slide further and another large interest rate hike would be likely,” consultancy Capital Economics said in a research note.

IMF Managing Director Christine Lagarde, fund staff and Finance Minister Nicolas Dujovne are scheduled to meet on Tuesday “to advance the dialogue”, Rice said.

Speaking to reporters Dujovne said the government would announce a set of new economic measures on Monday, and would target a 2019 primary-fiscal deficit below the 1.3% of gross domestic product agreed to with the IMF.

Macri on Friday morning met with his financial team and later held a round of phone consultations with different economists, both from the ruling coalition and others linked to the private sector.

Technical teams will be working overtime during the weekend preparing the raft of measures to be announced on Monday and expected to be presented to the IMF on Tuesday. Following on the strong commitment from the IMF, Macri, according to Argentine media reports, is considering a cabinet reshuffle, cutting the number of ministries (currently 23), implementing further austerity measures and back-tracking on his promise not to tax farm exports.

A crucial issue to be discussed with the IMF is if whether the Argentine central bank should let the US dollar float freely in the forex market or intervene to contain abrupt swings with the IMF standby credit, yet to be disbursed. Anyhow the prevailing consensus among economists and consultants is that the greenback in the range of 38 pesos is a good incentive for exporters and a contention barrier for foreign imports and outgoing tourism.

But the main challenge remains political, having congress (and provinces) support the coming round of austerity measures, which inevitably will lead to a contraction of the economy and trigger strong protests from the powerful Argentine unions.

The situation is anticipated to last well into next year, when Argentina will be holding a presidential election and Macri, and his business friendly policies, was expected to run for reelection.