Argentina clinches US$50 billion IMF financing deal, to speed up cuts

Argentine Finance Minister Nicolas Dujovne at a press conference in Buenos Aires on June 7, 2018.
Argentine Finance Minister Nicolas Dujovne at a press conference in Buenos Aires on June 7, 2018. PHOTO: EPA-EFE

BUENOS AIRES (REUTERS) - Argentina and the International Monetary Fund (IMF) said on Thursday (June 7) they reached an agreement for a three-year, US$50 billion standby lending arrangement, which the government said it sought to provide a safety net and avoid the frequent crises of the country's past.

Argentina requested IMF assistance on May 8 after its peso currency weakened sharply in an investor exodus from emerging markets. As part of the deal, which is subject to IMF board approval, the government pledged to speed up plans to reduce the fiscal deficit even as the authorities now foresee lower growth and higher inflation in the coming years.

The deal marks a turning point for Argentina, which for years shunned the IMF after a devastating 2001-2002 economic crisis that many Argentines blamed on IMF-imposed austerity measures. President Mauricio Macri's turn to the lender has led to protests in the country.

"There is no magic, the IMF can help but Argentines need to resolve our own problems," Treasury Minister Nicolas Dujovne said at a news conference.

Dujovne said he expected the IMF board to approve the deal during a June 20 meeting. After that, he said he expects an immediate disbursement of 30 per cent of the funding, or about US$15 billion.

Argentina will seek to reduce its fiscal deficit to 1.3 per cent of gross domestic product in 2019, down from 2.2 per cent previously, Dujovne said. The deal calls for fiscal balance in 2020 and a fiscal surplus of 0.5 per cent of GDP in 2020.

"This measure will ultimately lessen the government financing needs, put public debt on a downward trajectory, and as President Macri has stated, relieve a burden from Argentina's back," IMF managing director Christine Lagarde said in a statement.

HIGHER INFLATION, FOR NOW

Speaking alongside central bank governor Federico Sturzenegger, Dujovne noted that the agreement was well above Argentina's IMF quota. A minimum US$20 billion had been expected based on Argentina's quota.

The interest rate will be from 1.96 per cent-4.96 per cent, depending on how much Argentina uses. The South American country must pay back each disbursement in eight quarterly instalments, with a three-year grace period.

As widely expected, the government will also send a proposal to Congress to reform the central bank's charter and strengthen its autonomy. The central bank will also stop transferring money to the treasury, a practice known locally as the "little machine" that is seen as a major driver of incessant inflation.

"The little machine has been turned off, it has been unplugged," Sturzenegger said.

The IMF's backing was expected to boost Argentine assets, which have sagged in recent months amid a global sell-off in emerging markets. Neighbouring Brazil, Latin America's largest economy, has also seen its currency weaken in recent days to its lowest level in more than two years on fears over the county's fiscal outlook and political future.

"It is convincing and greatly exceeds expectations. Markets should react very positively tomorrow," Miguel Kiguel, a former Argentine finance secretary who runs local consultancy Econviews, said in a Twitter post.

"It is clear the country has capacity to pay."

But the short-term economic picture for Argentina remains more complicated than it appeared several months ago. Dujovne said economic growth was expected at 1.4 per cent for 2018 and between 1.5 per cent and 2.5 per cent for 2019, down from prior expectations above 3 per cent in both years.

The central bank will also abandon its 2018 inflation target of 15 per cent and will not target any particular level this year, Sturzenegger said. Argentina agreed to new, looser inflation targets of 17 per cent for 2019, 13 per cent for 2020 and 9 per cent for 2021, down from 25 per cent currently.

"They are mortgaging the future for our children and grandchildren," Martin Sabbatella, a politician aligned with former populist President Cristina Fernandez, wrote on Twitter.

Both Argentina and the IMF said the deal would protect the most vulnerable.

In a separate statement, the president's office said it had clinched agreements for an additional US$5.65 billion from the Inter-American Development Bank, the World Bank and the CAF development bank over the next 12 months.