Argentina's confidence game

BUENOS AIRES — Argentina’s Peronist government is in turmoil after being humbled in primary elections on September 12. Its candidates for this November’s midterm legislative elections were defeated in 17 of 24 provinces, including the traditional Peronist stronghold of Buenos Aires. The government’s de facto leader, Vice President Cristina Fernández de Kirchner, is now understandably upset with its de jure one, President Alberto Fernández, whom she chose to lead her ticket in the 2019 election.

The electoral results came on the heels of a scandal unleashed by videos showing Fernández partying with friends while Argentinians were locked down and even prevented from bidding farewell to their dying loved ones. Voters also expressed disappointment with an economy that has been stagnant since 2011. In a country of 45 million people, only around seven million have formal jobs in the private sector, which effectively has not created new employment since 2007. Some 20 million people are surviving in the informal economy or living on public handouts.

Taxpayers are exhausted. And although demand is depressed and public utility prices are frozen (the government subsidizes electricity companies, heating-gas providers, and public transport firms), inflation is soaring at 51.4 per cent. In a country that used to be proud of its middle class, per capita incomes have fallen back to 1998 levels, and about 42 per cent of the population is now below the poverty line.

Once again, Argentina is running out of dollars while its government taxes exports and discourages investment by maintaining severe capital controls to keep the official price of US dollars “under control”. Argentina’s liquid reserves are just above $6 billion, but it owes about $45 billion to the International Monetary Fund (IMF), a preferential creditor that is first in line to be paid. Making matters worse, most of the IMF’s claims will come due in 2022 and 2023, with each year’s repayments representing about 25 per cent of Argentina’s export income.

The IMF has a long history of repeated failures in Argentina, which has signed 21 agreements with the Fund since its first in 1958, most of which ended badly. The last one was somehow an exception, because it was derailed despite Argentina’s compliance with the agreed monetary and fiscal targets.

In 2018, then-President Mauricio Macri got too much of a good thing. The IMF showered him with $45 billion, but he failed to persuade investors that he had a credible plan to stabilise the economy and win the next elections. Argentina’s overexposure to the IMF unnerved private “non-preferential” creditors. The price of Argentinian debt plunged and Argentinians, as usual, rushed to the safety of the dollar, draining the central bank’s reserves and paving the road for a Peronist comeback.

Rather than securing IMF refinancing, Fernández (a “light” Peronist) preferred to deal first with Argentina’s private creditors, whom his economy minister, Martín Guzmán, “successfully” arm-twisted into a debt-restructuring. Private bondholders agreed to postpone payments in capital until 2024.

The IMF, meanwhile, watched patiently from the sidelines. Yet because Argentina’s government showed no urgency in reaching an agreement on a new IMF programme, the country’s private “unprivileged” creditors dumped their restructured claims. With Argentina cut off from capital markets, its negotiations with the IMF have now entered crunch time.

Both parties agree that the best solution would be an “extended fund facility”. EFFs are meant to provide front-loaded long-term financing to countries that agree to implement economic reforms geared towards boosting competitiveness and laying the foundations for sustainable growth. The first repayments would fall due after 4.5 years. Long-term financing in such cases is justified because, if well designed and wholeheartedly “owned” by the country, structural reforms (the EFF’s conditionality) tend to trade short-term costs for medium-term benefits.

Argentina’s embattled Peronist government would, of course, love to kick payments down the road. But it has no real interest in committing to unpopular structural reforms “imposed” by the IMF, regardless of how much the economy needs them.

To deal with its secular problems, Argentina needs to support start-ups, buttress the formation of human capital, and encourage job-creation by harnessing severance payments and reducing the tax burden on small- and medium-sized enterprises. Carrying out these reforms while preserving democracy and social stability hinges on the government’s ability to restart the economy and create new formal jobs in the private sector. Yet, the current ruling coalition lacks a common view on whether and how the economy needs to be reformed; only a common interest in retaining power is holding it together.

Hence, while both the government and the IMF formally agree on the need for an EFF, they want it for very different reasons. The Fund has prudently asked the government to seek a political consensus for the reforms that could be included as conditions for EFF financing, and the government has promised to submit a draft program for legislative approval. But if the primary election results are repeated on November 14, the government could lose several lawmakers and up to six senators, forcing it to engage in horse-trading negotiations with Macri’s supporters.

Making matters even more complicated, Kirchner, who chairs the Senate, has repeatedly said that she wants to refinance Argentina’s IMF debt over the next 20 years, double the EFF’s repayment period, and at cheaper interest rates (the IMF uses “surcharges” to encourage early repayment).

The EFF offers an opportunity for Argentina to regain investors’ confidence, which is key to its economic renewal. The IMF must help with this and remain flexible, given that it shares responsibility for the failure of the 2018 programme. But it also should hold its purse tight until Argentina’s political class agrees on a roadmap of reforms that could be continued by the next government in 2023.

IMF money can help, but it cannot buy confidence. Both Argentina and the IMF should already know that.

Hector R. Torres, a former IMF executive director, is a senior fellow at the Centre for International Governance Innovation in Waterloo, Canada, and a professor at Di Tella University in Buenos Aires. Copyright: Project Syndicate, 2021. 

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