Argentina: Tightrope walking

2 min

Last week, poor activity data releases (the activity index contracted -3.9% q/q in Q2) following the harsh¬est drought in decades, contagion from the Turkey crisis (the TRY sold off heavily in the first half of August) and communication errors of the government (asking for faster IMF disbursements without presenting a new fiscal plan) precipitated a massive sell-off of the ARS: its value against the USD has halved year-to-date. The subsequent interest rate shock (+15pp to 60% for the policy rate), a bad har¬vest, tight fiscal consolidation (from a -3.9% of GDP primary deficit in 2017 to 0% in 2019), runaway inflation (projected to end 2018 at 40%), less favorable global financial conditions and heightened politi¬cal uncertainty should sink the country into recession. Restoring confidence requires: (i) detailing new austerity measures, (ii) the IMF to frontload funds over 2018 and 2019 or increase the overall envelope, (iii) strengthening communication with a unified economics and finance team in the government. So far, emergency austerity measures unveiled on Monday failed to convince markets, while the IMF has in principle agreed to speed up disbursements but negotiations are still ongoing. Finally, President Macri has halved the number of ministers but has not created an emergency economic task force yet.