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OPINION AND ANALYSIS | 07-07-2022 23:34

New minister Batakis takes office in an Argentina full of uncertainty

Silvina Batakis faces a number of key challenges and decisions; Issues like inflation, the IMF deal, the fiscal deficit and subsidies top her in-tray.

Silvina Batakis assumed office on Monday as Argentina's new economy minister in an Argentina full of uncertainties: with one of the world's highest inflation rates and tough targets to meet from the US$44.5-billion restructuring deal with the International Monetary Fund are at the top of her in-tray.

"We are convinced that Argentina's course has to do with the fiscal management of our accounts, with following the economic programme that the president [Alberto Fernández] has laid out and with ensuring that Argentina has more exports and revaluing our currency," she said in brief comments to the press, delivered minutes after she was sworn-in.

"I believe in fiscal balance and I think we have to move in that direction," she emphasised, delivering a brief message that aimed at reassuring the markets.

The statement failed to deliver calm, however. The peso suffered a sharp depreciation in the informal or parallel exchange market, jumping from 239 pesos per greenback at the close last Friday to 280, before slowing to around 260. Meanwhile, Argentina’s country risk rate, measured by JP Morgan, soared.

"The market is made up of real people. I appeal to them to get to know me a little better," Batakis said in an interview with C5N channel a few hours after she began work.

A career civil servant and a militant in the sector most critical of the IMF agreement, Batakis must now define the instruments she will use to tackle the fiscal deficit, the shortage of foreign currency and rising prices.

The challenges are plentiful.

 

The IMF agreement

The government renegotiated this year – with former minister Martín Guzmán at the helm – a new refinancing package with the IMF, which Congress ratified. Under the deal, Argentina’s fiscal deficit must be reduced from three percent of GDP in 2021 to 2.5 percent in 2022, 1.9 percent in 2023 and 0.9 percent in 2024.

"The first question the new minister will have to answer is whether the agreement with the International Monetary Fund is still in force," said Víctor Beker, director of the Centre for the Study of the New Economy at the University of Belgrano.

"The question is whether there will be a restatement of goals or whether Argentina is heading towards a break with the IMF," Beker said.

 

Tackling inflation

Argentina has one of the highest inflation rates in the world, running at 60.7 percent over the last 12 months and there are fears that price rises could accelerate further, with opposition lawmakers warning of the potential for hyperinflation.

Batakis will have to determine what kind of measures to prioritise: whether it be a tightening of the Precios Cuidados price-controls scheme, a voluntary price control mechanism in which the private sector participates, or greater restrictions on monetary issuance.

"Argentina has had high and sustained inflation for many years. We cannot attack it with a single instrument," Batakis said.

 

Fiscal deficits and subsidies

To ease the pressure on public finances, Guzmán devised a segmentation plan for electricity and gas bill subsidies so that only the most disadvantaged sectors would benefit.

The scheme had not yet been implemented and he suffered pushback from the Kirchnerite wing of the ruling coalition. Batakis said she would maintain the principle of segmentation.

In 2021, energy subsidies accounted for US$11 billion – equivalent to 2.3 per cent of GDP.

 

International reserves

Batakis intends to strengthen Argentina's international reserves and also "plan their use for the good of Argentines – it is not just a question of the market.”

Gross reserves stand at around US$42.5 billion. But analysts point out that liquid reserves are much lower and also insufficient for the country's requirements.

"Argentina is not achieving the goal of accumulating international reserves agreed with the IMF and this generates expectations of further devaluation or depreciation of the peso," economist Andrés Wainer told the AFP news agency.

The outlook for the second half of the year does not look good either, as the agricultural harvest has already passed and therefore no more foreign currency is coming in; the increase in interest rates in the United States – which tends to strengthen the dollar – is also a factor, added Wainer.

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