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Analyst Views Following BCRA Hikes

ARGENTINA
  • **JPMorgan
  • Expect technical negotiations to stalemate in the next weeks, with the government aiming to convince the Staff on the merits of maximizing inflation tax as a genuine financing source amid capital controls. Yet, under the assumption of the government avoiding falling into arrears to the IMF, JPM still expect a deal by the end of March.
  • Of note, in 1Q22 the country has to pay US$3.9bn to the IMF (US$0.7bn in January, US$0.3bn in February and US$2.8bn in March), in addition to market debt maturities of US$0.5bn. With a thin stock of net reserves (estimated at US$2.2bn as of the end of last year, with liquid reserves now negative at US$-1.4bn), an agreement with the IMF before the end of March seems a necessary condition to avoid more disruptive scenarios, which would inflict more pain to the economic recovery desired by the government than the marginal additional fiscal effort likely demanded by the Board to sign off to a new program.
  • **Goldman Sachs
  • The IMF authorities have been vocal on the need to normalize monetary, FX, and overall financial conditions, which includes shifting to a positive real rate environment. This is expected to be a key plank of an eventual IMF agreement; alongside a credible and not excessively back-loaded fiscal adjustment plan.
  • Given the large amount of outstanding central bank liabilities (ARS$4.4 trillion or a high 112% of the monetary base), positive real rates do require a meaningful fiscal adjustment, for otherwise the recurrent monetization of fiscal deficits will lead to either even higher inflation and/or surging central bank liabilities and swelling quasi-fiscal sterilization costs which would even more seriously undermine already impaired economic and financial stability.
  • On all counts the current monetary-fiscal policy mix and extensive set of capital and financial controls is unsustainable and inconsistent with medium-term socially inclusive growth.
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