Alberto ramos, head of the US investment bank’s Latin American macroeconomic research team Goldman Sachs, warned that “a light agreement between Argentina and the International Monetary Fund (IMF) would be doomed to failure” and he was pessimistic that the country could enter a path of sustainable fiscal and monetary policies, whether or not there is an agreement.
In interview with BloombergLínea, the economic analyst stated that “the IMF is not going to solve Argentina’s problems.”
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“Only Argentines and the Argentine government can solve their own problems, taking charge of the necessary adjustment”, raised Ramos, something that Alberto Fernández and the Minister of Economy, Martín Guzmán, “are not willing” to carry out.
Days ago, in the midst of a critical economic situation, the President sent a clear message to the IMF, stating that Argentina is not willing to agree on the current terms proposed by the organization regarding the reformulation of the debt by $44 billion.
Regarding the monetary issue in this context, Ramos analyzed that “over the years there has been a large and recurring monetization of important fiscal deficits, with very low political credibility, which is behind the very important acceleration of inflation”.
“Core inflation is above 55% year-on-year and has been quite high for an extended period. Argentina does not have deep local markets in which it can finance its fiscal needs, so it depends on the kindness of third parties,” he added.
Inflation and price controls
“The demand for money is not increasing at the same rate as the very important increase in the money supply. Political credibility and confidence in the currency are very low. So either the Central Bank sterilizes that issue by issuing its own liabilities, which are already more than 100% of the monetary base, which can undermine financial stability in the future, or if they don’t monetize, that excess liquidity will end up putting pressure on the prices. We have currency controls, price controls, trade controls, financial controls, everything. So, despite all those controls, despite inflation that is quite suppressed through the control of public rates and other prices, we still have inflation above 50%”.
Debt in pesos
“Is a reality. And yes, it has important negative macroeconomic consequences. The 100 basis point rise in the 28-day Leliq took the benchmark rate to 40%, which seems high in every way, but remains very negative in real terms both ex post, when looking at realized inflation, and ex ante, when looking at inflation expectations. It is a very small and timid step on a very long road towards political and financial normalization, which will require progress in fiscal consolidation, because if you move real interest rates into positive territory and continue to finance large fiscal deficits, you can imagine that the Central Bank’s liabilities are going to increase very rapidly, with very dire consequences. The Central Bank should be concerned about the rapid increase in its own liabilities, including repos and Leliqs.”
Adjustment
“I think the IMF is demanding a couple of things, including a credible fiscal consolidation path, which is not excessively long. I understand that the authorities are not willing to validate that. They want to continue running large fiscal deficits for a very long period of time, to finally achieve fiscal balance only in 2027. That is too long for an adjustment period, and the economy will not tolerate it. That will definitely end in a major macro and financial crisis. Of course, the IMF also wants monetary and financial normalization, and bringing interest rates into positive territory is part of that agenda. But there has to be consistency. Then we have the question of repressed tariffs, of inflation, of the misaligned exchange rate. Allowing the market to determine those prices is also an important element of a possible IMF program. So this could be seen as a pre-action for the negotiation to move forward.”
Disagreements with the IMF
“I think there are big disagreements in the direction of the policy because of what one understands from the public statements. Economy Minister Martín Guzmán believes that an accelerated adjustment of fiscal policy will put an end to growth. I think otherwise, and I think the IMF does too. Not making the fiscal adjustment is the fast track to not growing. The current situation is unsustainable. The authorities should not take credit for growth in 2021. That was just a rebound from the severe contraction caused by Covid-19 in 2021. What we know is that current policies lead to economic stagnation and indeed contraction, and a very high inflation. They don’t work, end of story. Insisting on them would be a big mistake.”
The future of the Argentine economy
“The IMF is not going to solve Argentina’s problems. Only Argentines and the Argentine government can solve their own problems, taking charge of the necessary adjustment. The IMF does not impose policies, but rather provides financial assistance and supports a certain set of policies. We have to get away from the idea that the IMF is the magic bullet that will solve Argentina’s problems. I would say that I am quite pessimistic about whether or not we have a program with the IMF.”
“Argentina faces serious macroeconomic imbalances and is isolated from international capital markets. If there is no agreement, it will be more of the same. Argentina will go into default with the IMF, policies will not change, fiscal adjustment will not be made, and things will continue to deteriorate. If an agreement is reached, one of the options is a light program, in which the IMF provides some financial assistance with a very light matrix of policy conditionality. I think that would be a terrible mistake, because it would not move the policy needle in Argentina. If policies do not improve, macroeconomic performance will not improve. That type of program does not benefit Argentines and is doomed to failure.”
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“I am afraid that the authorities are not yet ready to accept a traditional IMF program that forces policy improvements, because they do not believe in fiscal adjustment. I am also convinced that if there is a serious program, it will go off the rails very quickly. They may sign the papers, but after the first reviews, you will see that the execution will be very erratic., and the IMF will suspend disbursements, and you will end up in the same place. With or without an IMF program, I think we continue to have problems, so it is possible that it will not allow Argentina to regain access to the market.”
“The problem is not the IMF. are the authorities. Even the previous agreement with Argentina, under the government of (Mauricio) Macri, which has been highly criticized. The program failed, but I think we should ask ourselves exactly why it failed. I don’t think it was poorly designed. Until the program started to go off the rails, inflation was going down, rates were going down, and the fiscal deficit was approaching zero. The show shock was a political and confidence shock, where the results of the primary elections surprised everyone. The market and the Argentines were scared, and what made them very reluctant was not the IMF program, but precisely that after the primaries there was going to be a transition to a new government that was not going to adhere to the IMF program. It is not that it was not generating the expected macroeconomic results. What is the alternative to an IMF program? Continue to live with significant financial repression and inflation above 50%.”
