Daily Management Review

Argentina is seeking help from the IMF


The currency crisis forced Argentina to ask the International Monetary Fund (IMF) for a flexible credit line.

Bloomberg reports that Argentina has requested a loan in the amount of $ 30 billion from the IMF.

"This step will allow us to strengthen the growth and development program. It will enable us to meet the new global scenario face to face and avoid the crises that we have faced before," President Mauricio Macri said in a TV address to the country's population.

Some time ago, Argentina, like no other among the developing countries, felt the strong pressure that arose from the rising global fears and unexpected growth of the dollar. The country's central bank seems to have misjudged the situation and tried to confront the powerful external forces with a large-scale intervention in the foreign exchange market, while burning a valuable hard currency. It is not surprising that these measures led to nothing.

After more than 10% of international reserves were spent, and foreign and domestic investors continued to leave the Argentine market at relatively high prices, the central bank had to reverse.

The national currency collapsed to record lows against the dollar, when domestic and foreign investors accelerated the flight. With a massive outflow of capital, which further exacerbated the financial turmoil, the central bank had no choice but to raise the rate even more aggressively.

Just the day before, on May 3, the regulator raised the rate by 300 basis points to 33.25%. On April 27, the rate was raised from 27.25% to 30.25%.

On Friday, the government also said it was reducing its main target of the budget deficit for 2018 from 3.2% to 2.7%.

After these measures were adopted, the peso finished trading on Friday with an increase of 5.12% to 21.88 per dollar. Nevertheless, the Argentine currency remained 6% weaker than a week ago.

Even under the most favorable scenario, Argentina will not be able to promptly recover from the economic, financial and political damage it has suffered in recent weeks.

The potential impact of the shock is beyond Argentina, especially as low global financial volatility and a weak dollar in 2017 attracted a lot of "tourist investors" to emerging markets through direct open currency positions or a local bond market.

Recently, due to a sharp slowdown in the inflow of investments into emerging markets, other vulnerable countries, such as Turkey, have already experienced a negative side effect (increased pressure on their currency market and local bond market).

A recent series of mistakes in managing the economy forced Argentina to enter an unenviable race between the urgent need to restore confidence in financial policy and the destabilizing impact of ultra-high interest rates on the economy, the financial system and debtors.

The more time it will take to win this race, the bigger are risks for Macri’s economic reform program and the higher the probability of recession, self-sustaining vicious debt dynamics and additional financial shocks with adverse consequences for other emerging economies.

source: bloomberg.com