Argentina is trying to fend off a currency crisis and maintain access to international financing in order to remain on track to continue reforming its financial, economic and governance practices.
President Mauricio Macri turned to the International Monetary Fund (IMF) for help last week. This is a politically risky move for Macri at home and a test for the IMF’s ability to help a reformer in trouble.
{mosads}Argentina’s request merits a quick, credible and workable response from the IMF. The U.S. and other IMF board-member countries should work for a solid, feasible IMF adjustment program. The World Bank and the Inter-American Development Bank (IDB) can reinforce an IMF agreement with their own efforts.
Macri has worked hard to reinsert Argentina into the world and to move away from the statist and populist policies of his Peronist predecessors since coming to office in December 2015.
Macri inherited an economy with high public spending and subsidies, lingering international debt disputes, falsified statistics, market-distorting currency controls, export taxes and import restrictions.
Macri quickly resolved defaulted debt issues, lifted currency controls, cut export taxes and began slowly to reduce the deficit. He launched a vigorous effort to spur private sector-led growth and foreign investment. The Macri team endeavored to keep the economy growing. Until recently, forecasts were still looking at 2-3-percent growth. Now those expectations seem high.
In addition to its economic reforms, Argentina is playing a positive role on the international scene, exemplified by its presidency of the Group of 20 (the world’s largest economies). With the U.S., Macri courted more trade and investment, while reviving serious cooperation regarding drug trafficking, crime, terrorism and non-proliferation.
The U.S. and other G20 members have a strong interest in steps that stabilize Argentina’s situation and provide a sustainable way ahead.
A constructive IMF package will not only help the Argentine government manage its short-term crisis and achieve further reforms, however. It can improve the IMF’s image by concretely supporting a reformist government and help to prevent spillover to other emerging markets that could be adversely affected by rising U.S. interest rates.
Argentina was able to roll over short-term debt this week, but new statistics put its inflation at 26 percent, and Macri announced the need to speed up deficit reduction and improve government coordination.
The IMF board will get an update Friday on IMF-Argentina talks to establish a “high access Stand-by Agreement” in support of Argentina’s economic program. International markets and Argentines will be watching closely the size of the monetary package that would be available to Argentina if needed and the conditions of the IMF program.
To restore market confidence, the package should credibly signal that the IMF has Argentina’s back. The press talks about numbers ranging from $20 to $50 billion, with market players saying they hope for a big, convincing package.
The conditions of an agreement will be carefully scrutinized. They need to reinforce the Macri reform program in Argentina with politically feasible targets, including reduction of the fiscal deficit. There will be severe political backlash in Argentina if the conditions are seen as too arduous.
Argentines hold very negative views of the IMF because of its role in the crushing economic crisis in the early 2000s that pushed many into unemployment and poverty.
I experienced that distain and fear during my service as U.S. ambassador to Argentina. Current polls show Argentines as very critical of Macri’s decision to go to the IMF and his popularity hitting new lows.
As Macri came to office without a majority in Congress, he has chosen a gradualist path to reducing government spending, the deficit and subsidies and to introducing further reforms. He needed alliances with other parties to pass legislation.
Macri sought to maintain popular support for the difficult transition to a more market-friendly economy and sustainable government model, while still fighting poverty. The transition has high costs for daily lives of Argentines as subsidies on public services and utilities are reduced.
Macri is leading cultural change in a country with a long tradition of populism and crony capitalism. Until recently, Argentines gave Macri space to proceed. He and his allies won significant victories in the October 2017 congressional elections.
To finance the government fiscal deficit, however, Macri and his team relied on low international borrowing costs. International lenders were happy to participate until recently. Last year, for example, the government easily sold $2.75 billion in 100-year bonds.
In 2018, the government foresaw $30 billion in financing needs, 40 percent of which would be issued in foreign currencies. Almost 64 percent of Argentina’s government and corporate debt is denominated in dollars and other foreign monies, the Economist reports.
As the dollar strengthened and U.S. interest rates rose this year, it became harder for Argentina to attract financing. Pressure on the value of the peso grew, as markets considered it overvalued.
Worries grew that Argentina’s inflation remains stubbornly high. Argentine unions and others increased cries for relief from inflation and rising costs. Macri’s coalition showed divisions about how to proceed.
When market pressure mounted in recent weeks, the government first used reserves to support the peso. It then raised interest rates up to 40 percent. Finally, Macri asked the IMF for help. Macri’s Peronist opposition is ready to pounce, with Argentina’s 2019 Presidential elections in mind.
In December 2017, the IMF agreed that President Macri’s government had made significant progress in the systemic transformation of the Argentine economy.
The IMF should now help keep that process on track with a program that reassures markets and helps build Argentine consensus for feasible, beneficial mid-term economic targets. The U.S. and other board members should work to this end. Argentina merits this help from its friends.
Earl Anthony Wayne was U.S. ambassador to Argentina and assistant secretary of State for Economic and Business Affairs, among other positions in his 40-year diplomatic career. Currently, Wayne is a public policy fellow at the Wilson Center.