The New Argentine/ IMF Agreement: Will This Work Out as Badly as What Happened in Greece?

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Remember the BRICS? Brazil, Russia, India, China and South Africa? The members formed the group to be a spokesman for developing countries. But where are they now? Uncontrolled corruption in Brazil and South Africa are causing significant problems. Russia has been slowed by US sanctions. India has a high growth GDP growth rate. But as I have noted, the country faces serious problems going forward. China is the only member of the BRICS where the future looks bright.

While this article focuses on Argentina, it is useful to set it in the context of Latin American progress overall. Remember how a few years back, Latin America, rich in natural resources, was seen as the next region to “take off?” As Table 1 suggests, Latin American countries turn out to be a mixed bag. And overall, they do not perform well with a projected 2018 regional growth rate of only 1.8%. While some of the smaller countries and Mexico appear to be prospering, Argentina, along with Brazil and Venezuela, are not.

Table 1. – GDP Growth Rates, Latin American Countries

Source: FocusEconomics

What Is Wrong in Argentina?

Argentine numbers are extreme: inflation of 30% plus with an accompanying borrowing rate in the same magnitude. In the tradition of Latin American leaders, the Kirchners talked of helping the poor while they made themselves rich by moving money from government coffers into theirs’. There are many countries with high levels of corruption that are doing well economically – China comes to mind. But past leaders of Argentina just did not care. So Macri comes to power promising a cleanup but is overwhelmed by the well-ensconced power structure and a population that accepts a fiscally irresponsible government as inevitable.

Table 2 provides the “economic vitals” on the country. Slow growth is expected to slow further in 2018 because of a severe drought reducing agricultural production. The unemployment has remained above 8% for some time. The inflation rate is expected to top 40% in the coming months. The interest rate remains extremely high, showing a lack of confidence in the government to bring it under control. The fiscal deficit is very high and the exchange rate has weakened significantly in 2018. In fact, it touched ARS 38 to the dollar last week. The trade and consequent current account balances cannot be sustained.

Table 2. Argentina: Economic Data

Source: FocusEconomics

The IMF Agreement

Before being elected, Macri pledged to turn the economy around. But he has not been able to do it alone. So he reached out to the International Monetary Fund (IMF) for assistance. And just recently the government entered into a standby agreement with the IMF. The government is now negotiating with the IMF to accelerate disbursements.

The highlights include:

  • A three-year Stand-By Arrangement (SBA) for Argentina amounting to US$50 billion.
  • US$7.5 billion, or 27% of the budget deficit will be used for budget support.
  • US$35 billion will be made available over the duration of the arrangement, subject to quarterly reviews by the IMF’s Executive Board.
  • The authorities’ intended policies seek to address longstanding vulnerabilities, ensure that debt remains sustainable, reduce inflation, and foster growth and job creation, while reducing poverty.
  • The authorities are committed to a floating, market-determined exchange rate. They intend to limit foreign exchange intervention to periods of significant volatility and market dysfunction, and to rebuild reserve buffers.
  • Given the large fiscal deficits over the past several years, the Government’s economic program is anchored on the goal of achieving federal government primary balance by 2020.


How Are Things Today in Argentina?

To address this question, I have asked Hendrik Jordaan to comment. Hendrik is the founder of Laurik International, a company that he started to promote business relations and interactions between Argentina and South Africa. My questions are preceded by “EM” and his answers buy “HJ”.

EM: In BA, have things gotten better, worse, or stayed the same since Macri came to power? I would like what you think but also what Argentineans think.

HJ: The previous government through populist policies made people used to short-term feel good but unsustainable living costs including very inexpensive utilities. As a consequence the average Argentine feels that things got worse especially if measured in terms of the cost of energy, transport, travelling vs. the real purchasing power of their salaries.

This said, most Argentines involved in any part of the productive economy was and is well-aware that the previously-mentioned public policies of blanket subsidies was unsustainable although it was definitely easier to pay less for utilities and “every day” expenses. And as time goes by the memory of what was seems to become much more attractive than the reality of paying “market price” for energy and living expenses in general.

The former “populist democracy” remains a continuing threat to the ability of the government to enact real long-term, structural reforms however necessary it may be. Unfortunately in Argentina, the election cycle is not long enough for a government to be able make needed reforms, let the system digest them and see the benefits before the next election day.

Macri decided upon a policy of moderation rather than shock-therapy to reset the economy after the Kirchner government to show that progress was possible through other means than mega-devaluations, mass unemployment and general economic misery. Unfortunately, we have not seen any real positive news in three years of his government and it rather feels as if we have had a non-stop stream of general unsatisfactory to plain bad news. The inexperience of the Macri-administration in government has lead it to incur in quite a few PR gaffes and false promises regarding the long-overdue economic growth, the slowing of inflation and the arrival of “billions of Dollars” in new foreign investment. The Argentine Peso is now worth about only half of what is was a year ago relative to the US dollar. There are now signs of “general economic misery” in the streets and in media reports. There is a sense of yet another economic crisis underway.

EM: Has Macri been able to accomplish anything of significance?

HJ: There have been quite a few accomplishments in terms of ending the loathed export taxes on agricultural produce, reduction of taxes on small and medium sized firms, amnesty for previously undeclared assets thereby increasing the taxable base, opening of new markets, easing the bureaucracy on imports and similar policies. Unfortunately, these useful reforms have not yet significantly changed the lives of the average wage-earning person. And inflation has remained stubbornly high and with the constant threat of a free-floating Peso devaluing out of control. And there is a general feeling that we are again at a crossroads where the “tyrannical” IMF will force people out of house and home only to favor those who already own and control the economy.

Macri was even forced to reenact the export taxes he had canceled when he first came to power, although now on all exports and not just on agricultural products. The aforementioned tax of ARS4 per US dollar on non-industrial products and ARS3 for industrial/value added products. The export taxes during the Kirchner government were focused on agroindustrial products and were a fixed percentage such as 35% on soybeans and 24% on corn.

EM: Have politicians blocked him from getting things done?

HJ: There have been quite a few instances of political maneuvering and taking advantage of the sentiment of the masses to make the Macri-administration pay for the abovementioned reforms. The best example of this probably was when Macri was forced to veto a law that called for energy prices provided by state-owned companies to be lowered to what they were back in November 2017 without including a mechanism to pay for the effective rise of subsidies. The effect was more symbolic than real as the government owns only a few smaller companies and it would not have made a real difference to the living costs of most Argentines. But the opposition made it look like Macri would veto any law that was against the ominous “market.”

EM: Are people’s patience running thin or are they prepared to wait longer for improvements?

HJ: We are not yet at breaking point but we have presidential elections in October 2019. Opposition rhetoric and the Peronist electoral maneuvering has started so the government will be more constrained as time goes by to blindly follow the “right” economic path and will have to make concessions to seem to be more friendly towards the finances of the average person on the street including delaying tax cuts that were aimed at streamlining the fiscal policies of the country by lowering or removing provincial taxes just to get the governors to approve a balanced 2019 budget.

During August we saw the start of the Argentine chapter of the Brazilian “Lava Jato” with the arrest of quite a few prominent businessmen implicated in paying bribes to be able to successfully compete for public tenders under the previous government. This coincides with the acceptance by the Argentine judicial system of the Brazilian requirement to accept testimony of persons benefited under the Brazilian system of lenient sentences for cooperating witnesses without them running the risk of being judged again in Argentina. This paves the road for the double effect of the new evidence found in Argentina as well as the testimony of Brazilian businessmen confessing to paying bribes in Argentina.

This is a potential watershed moment in the medium term politics as it might eliminate some candidates and empower others. Some political commentators have already started to wonder if this might not in fact damage Macri’s chances of a successful reelection. Why? Because it could eliminate Cristina Kirchner as a unifying adversary that could have simplified the electoral choice between a proven and known entity with twelve years in government and Macri that has only started. If Kirchner is not a candidate, Peronist candidates such as the centre-right Urtubey, governor of the province of Salta, might actually be able to convince people to give Peronism another run and “get – very unspecific – things done.”

EM: Do people know or care about the IMF agreement?

HJ: Argentines know about the agreement and care about it as far as it affects their daily lives. It is still too early for most Argentines to feel the true effect of the austerity required in the agreement and also with the clause that excludes many social programs from the reduction of spending. Consequently, nobody yet has a clear and crystallized political message of the agreement.

There is enough history in Argentina to fill libraries with stories relating to previous IMF agreements. But at the moment there are other matters that make headlines. The electoral cycle is not active enough for the opposition to want to start and fuss about it immediately. I suspect that they are waiting for the economic numbers to start showing the effect in terms of unemployment, reduction in public infrastructure projects etc. before making Macri pay the rhetorical price.


The Fund has agreed to a $50 billion structural adjustment loan to Argentina. About $15 billion of that will be disbursed immediately with $7.5 billion used for budget support. The remaining amount of IMF financial support ($35 billion) will be made available over the duration of the arrangement, subject to quarterly reviews by the Executive Board.

The Fund’s initial $7.5 billion transfer will reduce the government’s borrowing needs this year. But the future deficit reductions will require the government to increase revenues and/or reduce expenditures. The deficit is currently $26.9 billion. The job losses resulting from reducing the government deficit from 5% of GDP in 2018 to 1.3% in 2019 will be significant. And the announced plans to run a surplus of 0.5% of GDP in 2020 will reduce aggregate demand (and hence increase unemployment further.

This and other IMF mandated reforms will reduce political support for Macri and cause widespread tensions. The IMF’s history with Greece provides a graphic illustration picture of what might happen: in Greece, forced government deficit reductions resulted in the unemployment rate skyrocketing to 27.5% in 2013.

And as Hendrik suggests, it is extremely likely that in Argentina, there is a Peronist waiting in the wings to take full advantage of the situation.

Conclusion and Prediction

One has to worry over what the outcome will be in Argentina. It will take real statesmanship and public appreciation for and support of the reforms for the IMF plan having any chance of succeeding. And most certainly, Argentina’s history with the IMF does not give one hope.

My prediction: Right now, Macri is under pressure and is asking the IMF to accelerate disbursements. He might get some additional funds from the IMF. But 2018 will be the easiest year going forward because of IMF funding. In 2019, the other requirements in the Fund’s agreement will start to bite. As noted above, reducing the government deficit to only 1.3% of GDP in 2019 from 5% in 2018 will cause unemployment to spike. The timing could not be worse. It will open the door to a populist government being elected in 2019 and a standoff with the IMF going forward. Greece has been in a standoff with the IMF since 2010 and is not out of the woods yet.

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