Argentina's IMF agreement will impose explicit targets on the nominal primary deficit, nominal monetary financing and net international reserve accumulation, according to a TPCG Valores report written by its chief economist Juan Manuel Pazos.
The most likely scenario is a new Extended Fund Facility programme, where the IMF disburses tranches of a new loan before each of the maturities of the old programme, on the condition that Argentina meets a series of performance criteria, according to the report.
TPCG believes the fiscal target should be the easiest of the three targets. "The financing target is likely to prove more restrictive, which could force tighter consolidation," Pazos wrote. "The reserve accumulation target appears to be the most difficult to meet."
The baseline scenario assumes a 2.5 percent primary deficit in 2022, and since the current real effective exchange rate is "inconsistent" with reserve accumulation after the first half of the year, the odds of a one-time devaluation in the second half of the year increase.
The foreign exchange market model finds that offsetting the impact of the exchange rate gap on the current account would require a 30 percent correction to the REER. "Without considerable compression in the 'gap,' rebuilding the NIR position requires the terms of trade to remain near record levels and the financial account deficit to adjust," added Pazos.
by Ignacio Olivera Doll, Bloomberg