Argentina: Pre-election Stimulus
Bottom line: The IMF has approved their review with Argentina, despite the country failing to meet most of the quantitative targets. Presidential candidate and Minister of the Economy Sergio Massa has approved a fiscal package benefiting workers and retirees which is likely to make it difficult to fulfil 1.9% public deficit in 2023.
Figure 1: Argentina Public Deficit (12-months sum, % of the GDP)
Source: INDEC, Mecon and Continuum Economics
The IMF has conducted a comprehensive review of its agreement with Argentina and granted approval for a disbursement of $7.5 billion, encompassing both the fifth and sixth instalments. This decision has emerged against the backdrop of Argentina's inability to fulfil the three quantitative targets stipulated for the quarter. As anticipated, the IMF has demonstrated a willingness to maintain flexibility, particularly in light of the significant impact of ongoing severe droughts. These adverse weather conditions have caused a staggering $20 billion blow to agricultural production, inducing a contraction in economic activity and constraining the nation's capacity to accumulate foreign currency reserves. Consequently, this situation has led to upward pressure on inflation and a decline in government revenues.
Complicating matters further, unexpected outcomes have arisen, notably Javier Milei's triumph in the primary elections and a concerted, impactful devaluation of the Argentine Peso. These developments carry the potential for inflationary consequences, thereby exerting pressure on the government to enact stimulus measures benefiting Argentine households. Despite the established commitment to control the fiscal deficit through the IMF Agreement, Minister of the Economy and Presidential candidate Sergio Massa has introduced a fresh fiscal package aimed at enhancing the conditions of both workers and retirees in Argentina.
According to the government's announcement, employees within the private sector earning less than ARS 400,000 per month (roughly USD 700) will receive ARS 60,000 (about USD 100), disbursed in two instalments: one in September and the other in October, just prior to the elections. This financial support will be covered by employers and will subsequently be factored into upcoming wage negotiations. To aid employers in meeting this obligation, the government has pledged to fully finance the instalment costs for micro-enterprises and cover 50% for small enterprises, with repayment facilitated through tax exemptions. Public employees will also receive the same sum, but the government will assume full responsibility for this payment. Moreover, pensioners can anticipate a reduction in their tax burdens, aimed at enhancing their purchasing power.
The origin of this latest fiscal adjustment remains unclear, whether it had been prearranged with the IMF or not. It is our belief that this initiative will likely challenge the government's ability to adhere to the IMF's 2023 Fiscal Deficit target of 1.9% of the GDP. The probable method of financing is monetary emission, a measure that inherently carries inflationary implications. The next IMF review is scheduled for November 1st, a mere few days subsequent to the initial round of Argentina's general elections. Our assessment is that while the agreement is poised to persist, mounting uncertainties loom, primarily revolving around the specific government the IMF will engage in negotiations with.