Argentina: IMF Quarterly Review Concluded, Inflation Surpasses the Triple Digits.

IMF has concluded the fourth quarterly review of the USD 50Bln deal with Argentina and concluded that all Q4-2022 targets were achieved, which would allow a further disbursement of around USD 4Bln to occur. Indeed, Argentina was able to comply with the 2.5% fiscal deficit, and the accumulation of net international reserves which was greatly helped by the “Soybean Dollars” (here). Additionally, monetary financing of the debt was achieved as since Massa arrived as Ministry of Economy (here), net emissions ceased.

The problem appears when we look forward. Severe droughts on Argentina rural areas are indicating that the harvest of crops, which are mainly exported and its dollars thus absorbed by the BCRA will not be as good as last year, and thus, exports numbers are going to be lower. A review of the net reserve accumulations target was asked by the Argentine authorities and it is currently being reviewed by the IMF board.

The fiscal target for Argentina deficit in 2023 is to reduce it from -2.5% of the GDP to -1.9% of the GDP. The key to watch is whether Argentine authorities are willing to take on expenditures cuts or rising public taxes on an electoral year. The current plan of the government is to continue to rise public energy tariffs, and thus, reducing the implicit subsidies to households. Whether this will be enough is yet to be seen. The current ruling coalition is fragmented and the candidate for the election is unclear. We still believe that fiscal adjustment plans are not going to be the main focus as we approach the election in October. However, our baseline is that the IMF will be flexible and will allow the deal to go on even though targets are not fully met.

Inflation Surpasses Triple Digits

Inflation kept registering high numbers during February and it increased 6.6% (m/m), the y/y index surpassed the triple digits’ mark, reaching 102.5 %, the highest mark since its hyperinflation years on the beginning of the 1990’s. Food and beverage rose 9.8% (m/m) during the month and the 7.7% (m/m) rise on core prices indicates that inflation is widespread among several items.

Figure 1: CPI Inflation (y/y, %)

Source: INDEC

We are expecting inflation to continue to run around the 100% mark during 2023. First, inertia will be high during this year will tend to influence salaries and contracts agreement. Second, the BCRA will not raise the policy rates to contractionary levels, and might keep real interest rates in negative territory, as raising the rates increases federal government debt costs. Third, droughts will bring problems to the BCRA to manage its low reserves which will probably leads to new devaluations and as pass-through are pretty high in Argentina this will be translated on higher inflationary pressures. We forecast inflation to end 2023 at 99% (y/y average).