Despite Martín Guzmán’s harsh rhetoric, the government raised rates and continues to comply with IMF demands

Martin Guzman

The differences expressed by the Minister of Economy, Martin Guzman, with the IMF, they raised more doubts among investors about the possibility of reaching an agreement before March, which would allow avoiding a dangerous default with the organization. But nevertheless, at the same time, measures are defined that are in line with the body’s requirements to reach an understanding. The two-point increase in the monetary policy rate, which went from 38% to 40% annually, is one of the measures publicly demanded by the staff of the organism.

In the statement after the visit of the Argentine delegation to Washington, the Fund’s experts had expressed through the need to recover “positive” interest rates, that is, to be above inflation. The objective is to attract more investments in local currency and reduce the pressures towards the dollarization of portfolios, beyond the restrictions already imposed by the exchange rate.

The Central Bank itself and Guzmán had publicly agreed with the need to raise rates to make the peso more attractive and reduce pressure on the exchange rate.. Furthermore, all the countries in the region are doing the same to soften the increase in inflation that occurred in recent months. In Brazil, for example, the Central Bank doubled rates last year and they already stand at almost 10%, in line with the acceleration of prices that its economy registered last year. But something similar happened both in Chile, Uruguay or Colombia in recent months, although from much lower levels.

The rate hike should also help the BCRA to carry out its policy of absorption of pesos from mid-January, taking into account that it issued for $ 550,000 million only in the last month of 2021 to finance the Treasury. Now the challenge is to go out to absorb those weights but for that it is necessary to make Leliq’s placements and passive passes more attractive.

40% is still below the expected inflation for the year, but in reality the annual effective rate (which arises from reinvesting the pesos charged as interest every month) already comfortably exceeds 46% per year. Furthermore, according to the BCRA, inflation should begin to ease in the coming months, although the market expects that this year it will be above 50 percent again.

Rising interest rates, raising rates and reducing intervention in the foreign exchange market are demands of the IMF to reach an agreement that the Government began to implement as soon as the legislative elections were over.

It is not the first measure taken by the Government in line with the requirement of the Fund. As soon as the legislative elections ended, The Central stopped intervening in the “cash with settlement” market, which cost it more than USD 3,000 million in one year, without achieving the expected results. That decision is also in line with one of the most important requirements requested by the Fund, which is the accumulation of reserves. And for this, the selling intervention of the BCRA in the market must be reduced.

According to Guzmán himself, the idea is to add between USD 3,000 and USD 4,000 million per year, something that does not look easy at all. Not even in 2021, with a record harvest that contributed an additional USD 10 billion compared to the previous year, was it possible to achieve this.

The announcement of the rate hike that arrived at the end of the year, for its application in the first quarter of 2022, goes along the same lines. The objective is to put a cap on the increase in economic subsidies, which at least partly explain the hole of 3% of GDP registered in the public accounts last year. For this reason, the 20% increase that is still well below inflation would be accompanied by a segmented increase for households with the highest incomes in the metropolitan area, which should begin to pay the full price of energy, without subsidies. However, the President took care to deny any possibility of “rates”.

The rate hike should also help the BCRA to carry out its policy of absorption of pesos from mid-January

The pace of fiscal adjustment seems to be the main topic of discussion with the IMF, as expressed by the minister himself. But the deficit in 2021 was substantially lower than in 2020: from 6.5% in 2020 to just 3% of GDP, that is, less than half of the year in which the pandemic broke out..

It is a fact that Guzmán seeks to “hide”, since Cristina Kirchner He had criticized him in the campaign for containing increased spending and over-meeting fiscal targets. Now the Government would be considering reaching a fiscal balance only in 2027, while the Fund would demand that it be reached several years before. This will be the discussion for the next 60 days that will define whether or not there will finally be an agreement.


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