Underlining the delicate economic balancing act facing Argentina’s government, the International Monetary Fund (IMF) this week reiterated the importance of the country meeting the fiscal and monetary targets outlined in their multi-billion-dollar debt deal.
The warning came as the multilateral lender updated its 2022 and 2023 growth forecasts for the country, estimating that Argentina’s economy grew by 4.6 percent in 2022 and predicting a contraction of two percent of gross domestic product this year.
The projection for last year is higher than the IMF had forecast three months previously but stays the same for this year, due to the fiscal and monetary restrictions applied by the government.
Earlier this week, two high-level IMF officials used events to reiterate the importance of Argentina hitting the targets outlined in the US$44.5-billion extended fund facility deal agreed last year.
IMF chief economist Pierre Olivier Gourinchas, speaking at the launch of the Fund’s latest World Economic Outlook Update report, said that reaching those goals would help to stabilise Argentina’s economy and halt its runaway inflationary spiral.
Argentina recorded inflation of 94.8 percent last year, with President Alberto Fernández’s government anticipating a rate of 60 percent in 2023. However, the lastest Central Bank survey of economists and market analysts forecast an annual rate of 98.4 percent.
Gourinchas said the IMF is forecasting lower growth for this year due to "a combination of two factors: a halt to the world economy which will also reach Argentina and the restrictive policies applied at the fiscal and monetary level to handle high inflation, which last year was close to 100 percent."
"It is very important that the policy objectives of the programme with the IMF be reached, both the fiscal and the monetary, because they will help to anchor inflation for the road ahead and stabilise the country’s economy," he emphasised.
That sentiment was echoed on Wednesday as another top Fund official reacted to the government’s recent announcement that it would buy back overseas bonds to the tune of US$1 billion in order to improve the country’s debt profile.
Nigel Chalk, deputy director of the IMF’s Western Hemisphere Department, warned Buenos Aires that it must meet the accumulation targets drawn up for Central Bank reserves.
"We have reserve targets in the programme. Reserves are tight and we would prefer not to have actions that would undermine the reserve accumulation that we are assuming in the agreement," said Chalk.
The debt bond buyback includes securities maturing between 2029 and 2046 and was announced last month by Economy Minister Sergio Massa.
The aim of the move is to improve the profile of maturities over the next two years. Since the measure was announced on January 18, Argentina’s global bonds have improved by some 20 percent.
Chalk, speaking to the Reuters news agency, admitted that the IMF "has been working with the Argentine authorities on this plan with the debt buyback – first on the scale of the operation, how it is being operated and then how it fits into the programme.”
The official said that the agreement’s next review would determine if the government’s targets up until the end of December had been met. "But obviously, that review has a forward-looking element. And we want to have some reassurance that the reserves target will also be met," he stressed.
Argentina's gross foreign reserves are close to US$42.3 billion, according to the Central Bank. But the rating agency Moody's places them well below that level: "according to our estimates, the stock of net reserves closed January at US$6.1 billion, falling by almost US$2 billion, mainly due to coupon payments of US$1.05 billion," the company said.
Zooming out, the IMF estimates that the global economy will drop from last year’s growth of 3.4 percent to 2.9 percent in 2023, while Latin America will have grown 3.9 percent last year and will advance 1.8 percent this year.
According to the multilateral body, "rising central bank interest rates to fight inflation and [the effects of] Russia’s war in Ukraine continue to fetter economic activity. The rapid spread of Covid-19 in China halted growth last year but the recent re-opening has cleared the way for a faster recovery than anticipated."
"World inflation is forecast to drop from 8.8 percent last year to 6.6 percent this year and 4.3 percent next year, still superior to the pre-pandemic (2017–2019) levels of around 3.5 percent," added the report on global economic projections.
For the IMF, "among the risks making for growth, a stronger impulse to repressed demand in many economies or a faster fall in inflation are both plausible. Among the negative risks are a severe evolution of the health situation in China halting recovery, an intensification of Russia’s war in Ukraine and tougher global financing conditions making tensions over excessive indebtedness more acute."
The report also warned that financial markets "could suddenly reset their prices in response to adverse new trends regarding inflation while geopolitical fragmentation could halt economic progress."
With regard to inflation, the IMF evaluated: "Monetary policy is starting to take effect. There are signs that a tougher monetary policy is beginning to cool demand and inflation but the total impact will probably not materialise before 2024. The general level of global inflation appears to have peaked in the third quarter of 2022."