27 Sep 2018 Research Briefing | Argentina New IMF program, new BCRA governor, new policies Economist Argentina and the IMF have agreed on a new, revised stand-by arrangement Carlos de Sousa increasing the size of the program from $50bn to $57.1bn. More importantly, the revised program secures the government’s financing needs through 2019, as Senior Economist $51.2bn of the $57.1bn will be made available by end-2019. Thus, Argentina +44(0)20 3910 8016 should not need to tap global markets until 2020. The inflation targeting framework will be replaced by a target of 0% base money growth until June 2019. The BCRA will have to let the markets set the 7-day Leliq rate as high as necessary to achieve this goal. The new policy stance is much more contractionary than the previous one, which let the monetary base to increase by 5.4% m/m on average in the last three months. The BCRA has also introduced a set of moving bands on its floating exchange rate regime and will only intervene when the peso exceeds a wide 34-44/$1 range. FX interventions will be limited to just $150mn per day, but as monetary aggregates contract in real terms and domestic demand falters due to the ongoing recession, the local demand for FX will eventually decline. An appreciation to the lower band is not implausible. Yesterday, 26 September, Argentina and the IMF announced their much anticipated The revised IMF revised stand-by arrangement. The new program increases the total available funds from program is sufficient $50bn to $57.1bn, slightly larger than the $53-55bn that had been expected. Importantly, to cover the most of the funds will be released by end-2019 (one year earlier than previously agreed), government’s dispelling market concerns about the government’s ability to cover its large short-term financing needs financing needs. At $22.9bn, the disbursements planned for 2019 are almost double the through to end-2019 $11.7bn of IMF support that the government had penciled in for its 2019 budget proposal, which implies that Argentina should not need to tap global markets until 2020. Argentina: Exchage rate Chart 1: the BCRA The BCRA has set moving USDARS bands around its floating Forecast has introduced a set 60 Exchange rate exchange rate. Only when the of moving bands, but 55 peso weakens below 44/$1 will Upper and lower bands it be able to intervene in the FX the currency will 50 markets by selling up to $150 remain floating 45 million per day, which is not 40 much compared to recent history. The bands will 35 increase by 3% monthly until 30 year-end and adjust more 25 gradually as inflation decelerates. 20 15 10 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Source : Oxford Economics/Haver Analytics Contact: Carlos de Sousa | [email protected] The new fiscal targets are in line with those announced by the government on 3 No surprises on the September, i.e. cutting the primary deficit to zero in 2019 and running a primary surplus of fiscal side: primary 1% of GDP in 2020. As we have previously stated, the fiscal targets are very ambitious balance to be cut to and it will be challenging to meet them during a recession and especially in an election zero in 2019, but year. The 0.5% of GDP slice of the adjustment that relies on cutting subsidies will be implementation risks particularly challenging. Furthermore, while the agricultural sector is already showing remain signs of a V-shaped recovery following the worst drought in a decade, it remains to been seen whether additional export taxes will deliver 1.1% of GDP in extra revenues. Much will depend on the weather and on farmers’ compliance with the new tax. Monetary base targeting to replace inflation targeting for a while While there were no surprises on fiscal policy, the plan changes the monetary policy BCRA will switch to framework radically. The central bank will no longer set the interest rate of its Leliq bonds a money growth as the main policy instrument to achieve an inflation target. Instead, it will target zero target, so reserve monetary base growth by issuing Leliqs and increasing the reserve requirement as much requirements, not as necessary to keep the monetary base constant until June 2019. This is a much more interest rates will be contractionary monetary policy approach given that in the last three months, the monetary the key tool base expanded by an average of 5.4% m/m. The new policy implies that the Leliq rate will be out of the BCRA’s control and could rise A commitment not to sharply from the current 60% if demand for Leliqs is low – i.e. if local banks thought the let the Leliq rate fall current rate is not sufficiently high to compensate for currently accelerating inflation. below 60% is a good Moreover, the BCRA committed to maintaining a minimum Leliq rate of 60% until 12- hawkish start for the month inflation expectations fall for at least two consecutive months. We interpret this as a new BCRA governor hawkish sign, which augurs well for Guido Sandleris, the new BCRA governor. The previous central bank governor, Luis Caputo, resigned this week after only three months in the job, presumably because he did not agree with this new monetary policy framework. The other important element of the new monetary policy framework is a commitment by No more wasteful FX the BCRA not to intervene in the FX market as long as the exchange rate remains within interventions: only wide and moving bands. There was speculation last week that the peso might move from $150mn per day if a floating regime to a crawling-like arrangement, i.e. fluctuating between narrow, pre- the peso exceeds defined bands. But this system would require large resources to defend the bands and the the upper band IMF probably did not have the appetite to provide another $15-20bn to support it. The wide, moving bands have been set between 34-44/$1 as of 1 October but will be adjusted daily to hit a monthly rate of 3% until year-end, when they will be recalibrated. We expect this depreciation rate to be gradually reduced as inflation falls in 2019, taking the bands to 44-56/$1 by December 2019 (see Chart 1). If the peso crosses the upper bound, the BCRA will be able to sell up to $150m per day of its FX reserves. Given that the BCRA sold a daily average of $302m during the last week of August when the peso depreciated 16%, this allowance is likely not enough to rigorously defend an upper bound. Although the BCRA’s firepower has been severely constrained this does not mean it will That’s not much but fail to keep the currency within the bands. As inflation continues to accelerate in the zero base money coming months, the additional demand for money (for transactional purposes) will be met growth should mean with zero additional supply. This should force the demand for foreign currency to dry up lower demand for FX among domestic agents, potentially allowing the BCRA to purchase FX reserves and by domestic agents avoid a strengthening of the peso beyond the lower moving bands. Page 2 Contact: Carlos de Sousa | [email protected] .