NEW YORK — Analysts of Bank of America expect Argentina and the International Monetary Fund will reach at least a staff-level agreement by late March, warning nevertheless that a risk of entering into arrears with the multilateral lender “has grown.”
In a report to investors published January 20, four analysts covering Argentina said that their “base case remains that Argentina at least reaches a staff-level agreement (SLA) with the IMF by late March, but chances of delays grew substantially,” adding that “we take recent rhetoric with caution as the parties are negotiating.”
Earlier this week Argentina’s Foreign Minister, Santiago Cafiero, met with his U.S. counterpart, Antony Blinken, for more than an hour at the State Department headquarters in Washington, seeking support to ease the IMF demands that eventually will lead to a multimillion-dollar financial assistance program. With sizable repayments to the IMF scheduled for the first quarter of the year, the negotiations are trying to avert a scenario of a new default or entering into arrears with the multilateral lender. The meeting was largely political and it’s unclear if Argentina will get the needed support for its position.
“Argentina’s incentives to reach a deal remain strong, because failing to do so would very negatively affect capital flows and FX reserves (we quantify it) and would put significant pressure on the FX rate and inflation,” analysts Jane Brauer, Sebastian Rondeau, Lucas Martin, Claudio Irigoyen said in the report titled “Walk the Line. Argentina-IMF negotiation scenarios.”
Despite the stakes for the South American nation, BofA warns that the “risk that Argentina enters arrears with IMF has grown. We now see a low probability that Argentina finishes a fully-approved deal by late March (by Congress and IMF Board) given the tight schedule,” the analysts said in the 20-page report. In early December the same analysts were more optimistic on the outlook for a deal, predicting at that time a staff-level agreement by January and a finalized deal by March.
Speaking in a press conference at Casa Rosada, Gabriela Cerruti, the President’s spokesperson, said today that “at this time we are carrying out negotiations, and we do not know when the agreement with the IMF will move forward.” Asked if the country will be able to make the USD731m due to the IMF next week, Cerruti said that “this will be defined by the Ministry of Economy” but “Argentina has decided to pay until an agreement is reached.” She then added that is something which “is measured day by day.”
Cerutti also said that during the meeting Cafiero-Blinken, the U.S. “did not ask for an adjustment or an economic plan.” She defended the decision to travel to Washington as “a trip to talk, where a number of positions were agreed with the United States, which recognizes the year-on-year growth of Argentina, which has not been seen for a long time in Argentina.”
Arrears Risk
“We believe the risk of arrears to the IMF has grown to more than 1/3 overall, given large scheduled payments and low FX reserves. The risk of arrears depends on how much progress has been made in finalizing the IMF agreement by late March, important to secure bridge financing. But not all arrears are created equal. The context matters greatly for the risk of triggering a confidence crisis and for the bond market reaction.”
The Charlotte, North Carolina-based bank says there are “some positive signals” towards reaching an agreement with the IMF, such as smaller-than-expected deficit in 2021, fiscal agreement with governors and the increased of wealth taxes. At the same time it highlights that Argentina’s central bank raised rates and stopped intervening in the parallel FX market; while a potential stimulus to exporters, and scheduled easing of labor market frictions are also seeing as valuable steps.
“Nevertheless, post-election policy changes have been slower than we expected in important areas for an IMF program: exchange rate and energy price distortions actually grew,” they said in the report.
Argentina and the IMF remains at odds over the speed of the fiscal consolidation. “To reach a staff-level agreement, we think at least two conditions are necessary: adjustments to the FX crawl rate and adjustments to energy subsidies. These policies
can be changed without Congressional approval, leaving the door open for a staff-level agreement by March,” the analysts said.
Argentina faces repayments to the IMF for USD1.1 billion this month and February, Morgan Stanley said in a note to investors published January 12, and another USD2.8 billion on March 21 and 22. At the same time, the nation’s the international reserves stood at USD650 million in December.
“Argentina’s bonds look attractive in our view after trading at new all-time lows (12% YTD drop),” the report said, and reaching at least a staff-level agreement (SLA) by late March should provide upside to bonds from current levels.
BofA alerts that if the March deadline is missed, “massive FX pressure would be a strong catalyst for Argentina to remain at the negotiating table and make progress. If Argentina enters into arrears with the IMF, then the market impact could be attenuated by progress in finalizing the deal.”
* NOTE: Story updated at 5:37pm EST to add two paragraphs with comments from presidential spokeswoman, Gabriela Cerruti.
* Horacio Aizpeolea contributed to this story from Buenos Aires, Argentina.
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