Argentina: Massa presents first policies to restore fiscal order and boost reserves
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
New Economy Minister Sergio Massa unveiled late Wed. the first set of policy measures that look to restore fiscal order, strengthen FX reserves, sustain an external goods trade surplus, and achieve socially inclusive development, according to comments made in a?press conference?and partially summarized in a?press release. Massa made a total of 18 commitments, announcements, or policies that fall under one of the four pillars mentioned above. As for the most relevant points of the conference, Massa committed to keeping the primary deficit at 2.5% of GDP as budgeted, said there will be no more monetary financing of the deficit, dismissed the possibility of a shock devaluation, said there is an agreement for exporters to finalize USD 5.0bn in sales that can boost FX reserves, and mentioned that the government evaluates four offers for repo transactions that would be used to boost reserves or financing a bond buyback. Massa said these are the first policies of a broader plan and that more is to come soon.
Fiscal Order
Massa said he intends to fulfill the primary deficit target of 2.5% of GDP that is included in the government's budget, cut off monetary financing of the deficit for good, freeze hirings at the federal level, reduce energy subsidies even more than it was previously planned, and offer a voluntary debt swap to holders of Treasury notes maturing over the next 90 days.
The announcement about cutting off monetary financing is very positive, but it doesn't seem consistent with the idea of keeping the primary deficit at 2.5% of GDP given how much the government has been struggling to get market financing. Some of Massa's wording during the conference suggest the federal government may try to take money out of the funds of other public sector organizations, which would be a positive development if this reduces the effective financing needs of the consolidated national public sector. If Massa's team intends to rely exclusively on market financing to cover all of the federal government's financing needs remaining this year, it is extremely unlikely they will succeed without going for a deficit lower than 2.5% of GDP.
On energy subsidies, Massa said he will carry out the tariff segmentation plan put into motion by his predecessors and that 4mn out of some 13mn households did not ask for the government to keep their subsidies, so they will be removed starting in September. When former Economy Minister Martin Guzman announced the plan a few months ago, he said the idea was to eliminate the subsidies of the households in the top income decile alone. Aside from eliminating the subsidies of a larger number of households, Massa announced that those with subsidies will have a consumption cap and will be billed full price for consumption over the cap. Massa refused to provide an estimate of the savings, though the scheme of consumption caps is unlikely to be operative before the end of this year.
Massa said the voluntary debt swap will be offered to holders of Treasury notes maturing in the next 90 days with the goal of reducing the uncertainty generated by the need to be rolling over a lot of debt every month. The government would offer a dual bond that pays the maximum between inflation-linked or US dollar-linked capital indexation at maturity. Even though the swap offer has not been officially launched, the minister said that over 60% of bondholders are committed to the exchange. Those 60% of bondholders are surely all public institutions, led by the BCRA.
FX Reserves Strengthening
Massa said there is an agreement for a scheme in which exporters will advance USD 5.0bn in sales that will be passed through the FX market and will be acquired by the BCRA to boost its reserves, that the government is in negotiations to unlock almost USD 2.0bn in loans from IFIs, that the government received four offers for repo operations, and that the government intends to continue with the IMF disbursements.
Massa hinted that the scheme for export advances is?the regime implemented by the BCRA last week, which basically lets exporters buy US dollars at the official exchange rate plus a 75% tax for up to 30% of their income, and lets them keep the other 70% in special deposits where the capital in Argentine pesos is adjusted daily to track the evolution of the official exchange rate. He said USD 5.0bn will enter the FX market and will boost the BCRA's reserves, but it seems unlikely that reserves will actually rise by USD 5.0bn as a result of these transactions. We assume that Massa received commitments from large exporters that they will sell some stocks on top of their normal sales, but we don't see why or how exporters would suddenly sell USD 5.0bn for the BCRA to purchase.
On the repos, Massa said the government received offers from three foreign banks and one sovereign fund that are under study. He did not discuss the sums involved, but said the money would be used to boost reserves and perhaps a debt buyback operation. Sovereign bonds trade at bargain bin prices because the market believes the probability of repayment is extremely low, so it is hard for us to see why someone would finance a bond buyback operation that would presumably increase the short-term FX financing needs of a government going through an acute FX crisis.
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About the IMF, Massa said the government intends to continue with the implementation of the current program, an Extended Fund Facility (EFF), to have future disbursements available. Both sides confirmed that there was a productive introductory work meeting and said nothing else.
External Trade Surplus
Massa said there will be special regimes to reward export growth in the agribusiness, mining, hydrocarbons, and services industries, cheap financing for exporters, closer tracking of import processes, and penalties for some 722 companies that the government believes are guilty of underwriting exports and inflating imports.
Massa did not give any details about the regimes to reward export growth, but we assume these are the regimes designed by former Economy Minister Martin Guzman that offered exporters the ability to keep a small share of their incremental exports in US dollars. There was expectation about the announcement of a temporary window during which exporters would be offered a weaker exchange rate and that may still happen, but we believe Massa would have said something about it if that was the plan.
On the exchange rate, Massa avoided the topic during his presentation but was asked about his views by the press. He dismissed the possibility of a "shock devaluation", arguing that those are only good to increase poverty and produce undesired wealth transfers. He admitted that there are problems with the exchange rates that need to be corrected, but said that will happen on the basis of the macroeconomic programming of his cabinet.
Socially Inclusive Development
The policies that fall under this pillar are a one-off bonus for retirees, the implementation of a benefit to encourage the hiring of people under state job training programs, and the scheduling of a meeting between business and labor union representatives to discuss ways to support wages, especially for low-income workers.
The bonus for retirees would be decided arbitrarily as partial compensation for the way high inflation reduces pensions. In the scheme to encourage the hiring of people under job training programs, the government would keep paying the monthly job training stipend for one year after the hiring.
Overall, the policy plan announced by Massa so far could bring some modest changes in the right direction for fiscal and monetary policy that would increase the government's chances to survive until the 2023 general elections. However, there are inconsistencies in the announcements, many of the proposed changes are inflationary in the short term, not enough effort will be made to reduce the fiscal deficit, and there is nothing concrete that would help solve external imbalances over the medium term, only mentions of loans to keep buying time while avoiding the urgent exchange rate policy reforms. A lot of the announcements are meant to ensure that the government isn't forced into a devaluation over the next couple of months. The only two concrete policy changes worth highlighting when it comes to evaluating the country's medium-term prospects are the plan to reduce energy subsidies and the intent to cut off the monetary financing of the deficit, but the promise of no monetary financing isn't credible without a more serious fiscal consolidation plan. Massa talked a lot about growing exports and running a trade surplus as avenues to bolstering growth and FX reserves, but that will not happen if he is going to sustain an exchange rate regime of continuous real appreciation that has already pushed the trade balance into deficit despite historically favorable trade terms.
On balance, we believe Massa's policy set is a disappointment because he isn't addressing the root of the fiscal and balance of payments problems nor setting up a roadmap toward the elimination of the highly inefficient exchange rate scheme. That said, it is possible that we will see a positive market reaction to the announcement of possible FX liquidity injections given that the threat of forced devaluation would be reduced. There is a possibility that Massa's team is avoiding mention of exchange rate policy changes on purpose, leaving talk of a prospective correction for when the BCRA's reserves are stronger, but it will be hard for the government to strengthen FX reserves if it hides this part of its plan.
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2 年Talk is cheap since no Government past and present has been able to take the economic pain of restructuring the economy. Usual smoke and mirrors followed by kicking the can down the road.