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Argentina—Austere budget should bring forward IMF support 

The large depreciation in the peso, down 55% against the USD in 2018, prompted the central bank to aggressively hike interest rates to 60% to defend the currency and quell annual inflation, which hit 34% in August. This is in addition to an IMF emergency loan of US$50b secured in June. Still capital markets remain wary of Argentina’s ability and willingness to service public external financing needs—equivalent to US$52b to December 2019—particularly given a patchy track record. Further negotiation on the timing of IMF funding is expected in order to restore market confidence. But IMF funds are generally conditional on fiscal belt-tightening. The Macri-administration’s 2019 budget obliged. Markets reacted positively—the peso gained 0.8%, while credit risk premiums (a proxy for country risk) narrowed.

But fiscal austerity will further weigh on an economy already in recession—industrial production fell 5.7% y/y in June. Further economic hardship will test public appetite for hard, but necessary, reforms. Recent protests and the government’s declining popularity (Chart) do not bode well for the reform minded President in 2019 elections. As in the past, the public could vote for a government that promises to undo austerity and renege on reform. But this would not be in Argentina’s best economic interests.   

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