What has happened?
In late August 2018, Argentina reached an agreement with the International Monetary Fund (IMF) to review access to a USD 50 billion stand-by arrangement, in order to hasten access to the funds. The move came as confidence in the Argentina economy faltered, amid currency pressures, persistently elevated inflation and concerns over its ability to finance debt.
In the week beginning 27 August 2018, the peso lost 16% of its value against the dollar, resulting in a 50% drop in 2018 to date. The run on the currency came despite interventions from the Central Bank of Argentina which amounted to USD 800 million and interest rates were raised to 60%.
In response to the crisis, President Mauricio Macri's government has announced a range of austerity measures to balance next year's budget, marking a climb-down from its free-market position and ‘gradualist’ approach to economic reform. This includes new export taxes and wide-ranging spending cuts to capital projects.
What should investors be monitoring?
- IMF Support: The IMF is yet to announce whether disbursements will be accelerated, as any amendments to the existing arrangement require board approval, which will take a number of days. It is also unclear how much IMF funding could be made available to Argentina for debt obligations in 2018/19. Failure to reach an agreement will escalate concerns that Argentina will be unable to meet its fiscal and debt targets for 2018.
- Popular Response to Crisis: Austerity measures, a poor economic outlook, higher inflation and interest rates will all negatively impact households. This may drive social unrest. Thousands of government workers have already staged protests after they were laid off under new austerity measures. A sustained mass protest movement could cause significant business interruption or property damage risks for investors.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email Eleanor_smith@jltgroup.com