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Will an IMF Bailout Save Argentina’s Macri, or Sink Him?

MAY 24, 2018.

Last Friday, the International Monetary Fund formally opened negotiations with Argentina for a
financial bailout, after a run on the Argentine peso drove its value down by roughly 20 percent
against the dollar between January and the beginning of May. The financial crisis comes against the
backdrop of Argentine President Mauricio Macri’s unpopular economic reforms, which have so far
struggled to deliver promised results. In an email interview, Bruno Binetti, a Buenos Aires-based
nonresident fellow at the Inter-American Dialogue, discusses the causes of the financial crisis, and
the economic and political implications of an IMF bailout for Argentina and Macri.
World Politics Review: What’s driving the Argentine peso’s decline, and how has it affected
Mauricio Macri’s fiscal and economic policy priorities?
Bruno Binetti: The run against the peso was triggered by the rise in U.S. interest rates, which led to
the devaluation of many emerging economies’ currencies against the dollar. Argentina was
particularly vulnerable to this external shock for three reasons. First, the peso was overvalued, as
the exchange rate had not kept up with inflation. Second, the country needs to borrow abroad to
cover a large fiscal deficit—over 5 percent of GDP—and a large current account deficit, which is
the result of weak exports, high imports and a net outflow of capital. Finally, financial markets
penalized the peso due to a perceived lack of coordination in Argentina’s economic policy.
In previous months, the Central Bank, under pressure from the administration, had relaxed
monetary policy to boost growth, even if it came at the expense of containing inflation. That sent
worrying signals about the independence of the Central Bank and the priorities of the
administration, a fact that Macri himself admitted recently. After a timid initial reaction, which saw
it lose almost 10 percent of its total hard currency reserves, the Central Bank contained the run by
raising interest rates to 40 percent and intervening strongly in the currency market.
The government had hoped to have more time to adjust the economy gradually, while turning to
external markets for much-needed financing. But the currency crisis showed that the era of “easy
money” is over. From now on, Macri will need to accelerate economic reforms and bring
government spending down as fast as possible in a much less favorable external environment.
WPR: What are the likely economic implications of an IMF bailout for Argentina, and how will
that impact both Macri’s policy plans and the lives of everyday Argentineans?
Binetti: The government turned to the IMF preventively, in order to secure the financing it needs
until 2019—the end of Macri’s term—at moderate interest rates, thereby avoiding the current
volatility of financial markets. Further, the government wants a deal with the IMF to signal its
commitment to economic reforms and fiscal consolidation. Unlike previous turns to the IMF, this
time Argentina’s economy is growing, albeit moderately; the Central Bank has strong hard currency
reserves; and the peso is not pegged to the dollar. Given this generally favorable context, the
economic impact of the deal will be relatively limited, at least compared to previous agreements.
The IMF will surely ask for policy changes as part of a stand-by agreement, but these are likely to
strengthen Macri’s already existing priorities, instead of imposing new ones. During the run on the
peso, the government announced a further cut in its primary deficit target for this year from 3.2
percent to 2.7 percent. That goal is likely to become even stricter in the next few months. With that
objective in mind, Macri gave new powers to Treasury Minister Nicolas Dujovne, who will be in
charge of coordinating all economic and spending policy within the Cabinet.
The government and the IMF want to keep the social impact of spending cuts to a minimum, but it
will not be easy. The reduction of state subsidies on utility bills—water, electricity, gas and
transportation—will continue despite criticism from the opposition, and some infrastructure projects
are likely to be delayed or canceled. The combination of a reduction of public spending,
skyrocketing interest rates of 40 percent and a severe drought are likely to reduce GDP growth in
2018 to 2 percent or less, much lower than previously expected. Further, the sharp devaluation of
the peso will fuel inflation, since most prices are informally tied to the dollar. Prices are expected to
rise by more than 20 percent this year, much higher than any government projection.
WPR: What are the political implications of a bailout for Macri, given the IMF’s historical
resonance for Argentines?
Binetti: For many Argentines, the IMF was the main culprit of the political, social and economic
meltdown of the early 2000s. They link the fund with the “neoliberal policies” of structural reform
that slashed public services, plunged the economy into a recession and increased the foreign debt
dramatically. Rightly or wrongly, that perception means that turning to the IMF will be politically
costly for Macri, whose popularity stands at about 40 percent, the lowest since he came into office
in 2015.
That said, the true impact of the deal will depend on how extensive the spending cuts are and how
the economy responds. While the fund has made it clear that it will not impose conditions but
merely support the government’s own priorities of reform and fiscal consolidation, the Peronist
opposition and other social actors are likely to blame the deal with the IMF for any painful policies
from now on. The government will not cut social spending such as pensions, basic income and other
benefits, which means that most of the adjustment will fall on public works and government
administration.
This austerity drive might complicate relations with provincial governors, who, despite many of
them being of Peronist extraction, have so far been willing to reach agreements with the Macri
government in Congress. A return of Macri’s predecessor, Cristina Fernandez de Kirchner, to the
presidency in 2019 is highly unlikely, but even the more moderate opposition will try to take
advantage of the government’s woes and its turn to the IMF to boost its chances in next year’s
elections. But the Peronists remain divided and lack a clear alternative to the government’s current
policies. If Macri’s gamble works and the deal with the IMF provides the time he needs to put the
economy back on track, he has a good chance of winning another term.