Argentina clears 1st IMF review, but analysts skeptical on 2022 targets

Argentina just cleared its first review with the International Monetary Fund since its most recent agreement, but analysts are already skeptical that the country will meet the main goals stipulated in the deal for 2022.

In January, the two parties announced an extended fund facilities arrangement that would allow Argentina to refinance $44.5 billion in debt with the IMF over more than a decade, along with a mandate to implement a program to contain further deterioration of the country's embattled public finances.

Just a few months later, local and international analysts are expecting several of the goals that were agreed upon — a buildup of foreign reserves, fiscal adjustment and a decrease of monetary financing to the Treasury — to be missed within the first year.

Several U.S. investment banks, as well as Argentine economists, are already forecasting the primary deficit to be significantly higher than the 2.5% of GDP committed to with the IMF. Instead, current estimates suggest that the deficit might increase to 4.3% this year, up from 3.6% in 2021.

On June 8, the parties announced a staff-level agreement on the initial review, which oversees the performance of the debtor in the first quarter of 2022. Once the IMF board approves the review, it will disburse $4 billion for Argentina to repay installments of its previous stand-by loan.

"All quantitative targets in the first quarter of 2022 were met," the fund said in a release. "Looking forward, determined policy implementation will be critical to ensure that program objectives will be met during the remainder of 2022 and beyond."

The fund conceded that quarterly goals might be recalibrated given the impact of external shocks, but stated that 2022 full-year targets would remain untouched. Rising inflation and the effects of the war in Ukraine on global commodity prices had already put the program at risk even before it was fleshed out.

A core component of the deal was a commitment by the Argentine government to lower energy subsidies that have kept electricity prices in check for consumers. But utility bills have ticked up only slightly since then, and the decision to go ahead with the cuts is facing fierce opposition within the ruling Peronist coalition. To make matters worse, the spike in commodity prices means the country will foot a larger bill this year as a net energy importer.

"The fiscal goal is the heart of the IMF program […] and we still have not seen much adjustment," Fernando Diaz, a New York City-based director and economist at Citi, said in an interview. The bank expects a 3.1% GDP deficit in 2022.

"Getting there will require corrective measures," he said "The risk is on the upside."

Invecq, a local consulting firm, argued that there is a "growing imbalance" in public accounts, with expenditures rising faster than income.

The government has recently sent a bill to Congress to tax windfall gains by large companies in Argentina as a result of rising commodity prices, although political analysts claim it has a low chance of passing.

In an interview with Bloomberg, managing director with Goldman Sachs Alberto Ramos said it was "incredibly difficult" for Argentina to meet the IMF goals. A press officer at the finance minister did not timely reply to a request to comment on the negotiations.

The lack of optimism regarding substantial improvements in the economy is reflected in asset prices. Five-year credit default swaps that track the cost of insuring against default have already reached new year-highs. At close to 3,825 basis points as of June 7, CDS prices are even higher than before the deal was announced.

"I don't think the IMF program is consistent with the idea of a credible disinflation path ahead, and some targets will eventually need to be reconsidered," Diego Pereira, chief economist for the South Cone and Peru with J.P. Morgan, said. "Inflation is the most pressuring point, and the war and the increase in commodity prices only aggravated this."

Consumer prices have accelerated substantially over the past few months, putting additional pressure on a fragile economy. The country reported a 6.0% monthly increase in April, and a year-over-year rate close to 60%.

Ultimately, J.P. Morgan's Pereira thinks the deal will hold firm, and that the country could negotiate waivers as it navigates a perilous inflationary path and a fragile global context. The bank forecasts a milder deficit of 3% of GDP this year, closer to the IMF goals.

"I don't see any political incentive for the IMF's board to have Argentina in arrears in an election year," Pereira said, in reference to 2023. "If there are minor deviations, I think there might be waivers from the IMF."

Others do not share the same view.

"That the IMF has given rise to a light agreement does not mean that they will not get tough when it comes to revisions," Citi's Diaz warned.