The International Monetary Fund and Argentina’s President Macri have agreed new, stricter terms for a large bailout fund from the IMF, to combat Argentina’s sky-high inflation and subsequent interest rate.
Inflation as of the end of August stands at 34.4%, with the interest rate a staggering 60% to try and bring inflation levels down. The strong US Dollar has undermined the Argentine Peso this year, but this week – following news of the deal – the Peso gained 0.76% against the USD.
In a statement from the IMF: “Important progress is being made toward strengthening Argentina’s economic policy plan, supported by a stand-by arrangement with the IMF. We are working hard to conclude these staff-level talks in short order and present a proposal to the IMF executive board”.
In conjunction with the IMF agreement, the Argentine government put forward budget plans for 2019, which proposes tax hikes on exports, as well as spending cuts on services. According to preliminary figures from the country’s central bank on Monday, Argentina’s reserves are approximately $49.6 billion dollars. In comparison, their reserves were at $63.9 billion last January.
Protests against the deal and President Macri have already begun, with the Argentine public feeling the pinch from such a devalued Peso. Consumer prices are expected to have increased by 42% by the end of the year, with a slight reduction in 2019. This could be a problem for President Macri, who contests the next general election in October 2019, and the IMF – if Macri is removed then a new leader and governing party may wish to change the bailout agreement.
What caused Argentina’s crash?
Argentina’s economy fell into crisis as the government desperately tried to stop runaway inflation caused by previous governments and their money-printing approach to budget deficits. President Macri’s government has moved away from such an approach but pushed up utility prices in order to reduce the subsidies they needed from central government. This kept inflation up, and as the US Dollar’s strength overwhelmed the Argentine Peso, inflation began to run away.
Interest rates were raised at the end of August from 45% to 60% as the Central Bank tried to curtail the rife inflation. Argentina has the highest level of inflation and highest interest rates of any country in the G20, and only Venezuela outside of the G20 has higher.
The Argentine Peso lost 12% versus the US Dollar in one day at one point, as investors raced to pull their support from the currency. The Peso has lost over 40% against the USD in 2018 so far. Despite President Macri receiving assurance from the International Money Fund (IMF) that $50 billion (£37.2 billion) would be provided sooner than originally planned, many investors saw his plea for help – which was aired live on television and YouTube – as an act of desperation and a sign that Argentina was likely to default on its debts after years of heavy government borrowing.
Who’s next to bail out?
Argentina isn’t alone in being a fragile economy punished by the Dollar’s strength. The Turkish Lira has lost 45% value versus the Dollar, while the Brazilian Real, Russian Rouble, Indian Rupee and South African Rand are all nearing record lows against USD.
Many countries have used the global economic growth to borrow cheaply, and usually in Dollars. They are now in precarious positions; if the Dollar stays high, or climbs higher, then debts will be too expensive to repay, and nations will default. This could leave the IMF with bailout demands extending into trillions of Dollars.