Will Argentina suffer Venezuela’s fate?


05/15/2018

Argentina has found itself in a difficult situation. Currency crisis in the country is currently fueled by huge national debt and high inflation. The Argentine authorities have already requested assistance from the IMF, hoping to receive approval of the loan in the near future.



Franco Folini via flickr
The International Monetary Fund (IMF) is about to announce its decision regarding allocation of the loan to Argentina. This week in Washington, the Minister of Economy of Argentina Nicholas Nicolás Dujovne and the head of the IMF Christine Lagarde will hold negotiation. According to a press release posted on the website of the Argentine Ministry, the agreement can be reached "starting next week".

"In recent days, we have taken the first steps towards an agreement that will strengthen liquidity of the Argentine economy. As part of the meeting with the head of the IMF, Christine Lagarde, we reached an agreement that we will continue the initiated dialogue and exchange of necessary information in order to discuss in detail what kind of agreement this will be," the ministry said in an official statement. 

As the Prime Minister of the country Marcos Peña said, Argentina asked to consider a "stand-by" agreement for Argentina. "This tool has the necessary flexibility to achieve the goal that we are striving for," he noted.

Earlier, informed sources told Bloomberg that it could be a loan of $ 30 billion. It is expected that financing for Argentina will be provided in the framework of the standard procedure of the IMF, which involves provision of financial assistance for three years.

Initial stages of the crisis went unnoticed to Argentina. Now, however, it is quite visible.

The country - chairman of the G20 in 2018 - has long had the highest after Venezuela inflation in Latin America. Judging only by official data (experts have long questioned statistical data in Latin America), in 2016, after the government stopped subsidizing prices, Argentina's inflation was above 40%, and last year it dropped to 25%. According to data for March 2018, inflation in the country amounted to 25.4%. It is already obvious that it will not be possible to reach the Argentine Central Bank's goal of inflation this year at 15% and a target of 5% in three years.

Prices in Argentina are growing. Street cafes in the capital of the country Buenos Aires are throwing out old menus and hanging out new prices.

For example, a business lunch can easily go up by 10-15 pesos in a week. Prices in stores are steadily increasing once or twice a month, and cost of public utilities is rising several times a year. Weekly protests about the high inflation, unemployment and the policy of President Mauricio Macri in general around the building of the local parliament in Buenos Aires have already become a habit there.

At the same time, in recent times, the currency crisis has added to the high inflation, huge national debt and budget deficit (the level of the national debt to GDP - 54.2%, the budget deficit - 3.9%). Against the backdrop of the general withdrawal of capital from developing countries, the rapidly rising US government bonds in Argentina recorded an outflow of investors' funds. As a result, since the end of April, the country’s national currency slipped to devaluation.

On April 25, the dollar was worth 20.25 pesos, then on May 11 it traded above 23 pesos. In general, since the beginning of the year, the peso has lost more than 20% of its value against the dollar.

Recently, the regulator has been forced to raise the rate three times to prevent overheating of the economy and acceleration of inflation and stabilize the exchange rate.

So, since late April, the Central Bank of Argentina has raised interest rates from 27.25 to 40%. Nicolás Dujovne said that such actions of the Central Bank will reduce economic activity in the country and will help avoid a crisis.

Since the end of April, reserves of the country have decreased by $ 8 billion to $ 55 billion, while an adequate level of coverage of reserves is the amount of $ 64 billion.

At the same time, the Argentine Central Bank has already saved the peso from a collapse even before the currency crisis. According to Reuters, in general, in March and April, the Argentine Central Bank spent more than $ 7 billion or more than 10% of Argentina's foreign exchange reserves, on attempts to contain the weakening of peso quotes.

Against the backdrop of the economic crisis that has begun in the country, Mauricio Macri canceled the planned trip to Russia for the World Cup. This was reported by the Argentine press with reference to informed sources.

However, we should not consider the current situation in the country as something surprising. So, in 2001-2002, at a national debt level of $ 132 billion, the country was unable to pay its debts and was forced to default. Then Argentina also had to apply for IMF support.

source: bloomberg.com, marketwatch.com