Argentina's IMF deal limits the downside, but fails to trigger upside

This Friday, the IMF board looks likely to rubber stamp an agreement with Argentina on a program to restructure the country's USD 45bn of outstanding debt with the fund which has already been approved by the Argentina’s Congress.

Let’s start with the good news: As a result of the deal, Argentina won’t fall into arrears with the IMF, and won’t become an international economic and financial pariah. Thanks to the nearly USD 10bn of fresh funds coming Argentina’s way courtesy of the IMF and other multilateral institutions, the country is unlikely to default on its external debt in the near future, and net international reserves will inch up from their current close to zero level. The deal therefore cuts the left tail of the distributions of possible outcomes for Argentina’s economy and financial assets.

Yet there’s ample bad news. The agreement fails to encourage the reforms needed to improve Argentina’s growth-inflation outlook. It will therefore very unlikely trigger the positive confidence shock, increase in private investment, and access to international capital markets that the country badly needs.

The easing of draconian capital controls currently in place, the flexibilization of the country’s hyperregulated labor market, and changes to a pension system that is asphyxiating fiscal accounts are all largely missing, for instance. The agreed-upon path of fiscal consolidation and easing of price controls were already insufficient to achieve the desired macroeconomic outcomes by the time the agreement was drafted and made public a few weeks back. The Russian war in Ukraine, through its commodities price shock, that affecting global energy prices in particular, is already exacerbating the program’s shortcomings.

In addition, the deal exposed a growing political fracture within the governing coalition. The vice-president Cristina Kirchner and her son Máximo have taken a very critical stance towards the deal sponsored by president Alberto Fernández and economy minister Martín Guzmán. This casts serious doubts on the government’s willingness and ability to push through on the program’s commitments.

All in, we believe Argentina and the IMF agreed to disagree, and designed a program that essentially kicks the can down the road. A restructuring of Argentina’s debt restructurings – both with respect to the IMF and with bondholders – looks quite likely to be needed in the future, as IMF and external bond payments become more onerous after the 2023 presidential elections.

From an investment standpoint, the program luckily limits the downside on the price of Argentine assets as a result of the modest guardrails on the country’s macroeconomic policies it has instituted. At the same time, we fail to see how it will unlock upside on the back of its utter lack of ambition and the less favorable global environment the country looks likely to face in coming quarters.

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