Argentina's controversial recourse to the IMF amid mixed indicators

The decision by the Argentine government in May 2018 to seek financial support from the IMF was a stark reminder of the early 2000s, from which the country had appeared to have been successfully recovering in recent years. The recourse to the IMF, which granted the country a loan of $50bn the following month, was sparked by a run on the Argentine peso that reduced the value of the currency by about one-fifth.

Between 1998 and 2002 Argentina suffered a major economic crisis, and large sections of the population criticised the then-government’s decision to seek an IMF loan. With memories of that crisis still fresh in the minds of many of its citizens, protests were held in May 2018 against the decision to resort to IMF support. The following month, however, the government announced that a $50bn loan to be released over a three-year period had been concluded ahead of schedule. The loan means that among other things the central bank will no longer have to print money on behalf of the government, but the request for financial assistance has raised concerns both within the country and abroad of more economic instability ahead.

Argentina’s negotiating chief with the IMF was Treasury minister Nicolás Dujovne, who President Macri has bestowed with veto power to oversee economic policy. The Treasury minister’s strategies have been met with some criticism, however, including unpegging the Argentinian peso from the US dollar, lowering the central bank’s interest rate from its current rate of 40%, reducing the fiscal deficit and lowering inflation.

Reform

To tackle the current crisis the government presented a reform programme, approved by the IMF in May 2018. Christine Lagarde, the IMF’s managing director, said it would be Argentina’s economic programme, fully owned by President Macri and his team, which will perhaps allay fears that the package would imply the IMF imposing strict conditions on the country.

However, the IMF’s recommendations will have a social impact, as they include austerity measures such as a freeze on the hiring of public sector employees; the elimination of special retirement plans; a restriction on old-age pensions to include only the poorest 30% of the population; an increase of the female retirement age from 60 to 65 years, bringing it in line with the upper age limit for men; a reduction in the purchase of goods and services by provincial governments; and a widening of the income tax base.

The IMF also proposed labour reforms to expedite and lower the cost of layoffs, foster part-time and temporary employment, and limit the negotiation of collective contracts. In addition, it has called for further reduction in protectionist measures – with the aim of increasing foreign investment – and improvement in the stress tests of domestic banks.

Despite the challenges it faces, Argentina came 56th out of 63 countries in the 2018 IMD World Competitiveness Ranking – up two places from the previous year. Compared to other Latin American countries, Argentina finished behind Chile, which placed 35th, and Mexico in 51st, but ahead of Colombia (58th), Brazil (60th) and Venezuela (63rd).

Economic Crises

Argentina first turned to the IMF for help in 1957, when the country was under military rule, while in the 1990s, during the government of President Carlos Menem, the IMF backed the convertibility plan that pegged the Argentinian peso to the US dollar. Menem’s successor, President Fernando de la Rúa, brokered a $38bn loan from the IMF to prop up the peso-dollar parity plan before the country defaulted on its loan payments. The ensuing crisis led to a run on the banks and the imposition of restrictions on withdrawals, trapping the savings of many citizens and prompting mass protests. President de la Rúa resigned as a result of the December 2001 riots and Congress appointed Adolfo Rodríguez Saá as president, who until then had been governor of San Luis province.

With the economy still suffering, the protests continued; however, Rodríguez’s tenure was short-lived. In January 2002 Eduardo Duhalde, a member of the Justicialist Party, whose policies were based on those implemented by former President Juan Domingó Perón and his wife Eva Perón, was appointed president by Congress. Duhalde had been Menem’s vice-president and had run for office against de la Rúa in the 1999 presidential elections. Duhalde twice called on the IMF for economic assistance during his 17-month tenure, though their assistance was conditioned on the imposition of additional austerity measures. Duhalde repealed the convertibility plan, which pegged the Argentine peso to the dollar, and as a result oversaw a 200% currency devaluation leading to a moderate recovery of the country’s economy. In elections held in 2003 Duhalde backed presidential candidate Néstor Kirchner, rather than Menem, who was once again running for re-election. Kirchner’s victory ushered in a period of economic stability during his 2003-07 tenure, with the economy in the hands of Roberto Lavagna, who had served as Duhalde’s economy minister and was credited with steering the recovery. During this term the country restructured its economy and repaid its debts to the IMF, and Kirchner, a social democrat, repealed presidential pardons and amnesty laws relating to crimes committed during the so-called “dirty war”, allowing for a fresh round of trials of military figures implicated in the murder and forced disappearance of political opponents to the 1976-83 military dictatorship.

The Dirty War

The 1976 military coup d’état ushered in a dictatorship led by army commander Jorge Rafael Videla, who ran the country as de facto president until 1981. Videla admitted in 2012 that the dictatorship killed “between 7000 and 8000 people”, with the number of forced disappearances estimated at around 30,000. In 2016 the US declassified thousands of documents relating to the dictatorship at the request of Argentina’s government. The Grandmothers of the Plaza de Mayo, a protest movement seeking redress and information about what happened to their loved ones during those years, has been nominated for the 2018 Nobel Peace Prize.

Kirchnerism

Rather than seek re-election at the end of his term in 2007, Kirchner stepped aside in favour of his wife, Cristina Fernández de Kirchner. Both Rodríguez and Lavagna participated as candidates in the election, as well as Elisa Carrió, founder of the Civic Coalition ARI party, who came in second place behind Kirchner, with the latter winning 45.2% of the vote. Her election was the first time in the country’s history that a living president’s spouse had succeeded them.

Upon taking office, Cristina Fernández de Kirchner renationalised state oil firm YPF and established currency controls to prevent capital flight. Following her husbands’ death in 2010, she was re-elected in 2011 and continued with her late spouse’s human rights policies, with more trials of alleged perpetrators of atrocities during the military dictatorship taking place.

More than 500 sentences were passed down, including a new life sentence for Videla, whose sentence in 1985 for murder, torture and kidnapping – among other crimes – had been overturned by President Menem in 1990, with Videla dying in prison in 2013. Unable to stand for a third term due to constitutional restrictions, de Kirchner stepped down in 2015 and was replaced by President Macri.

Kirchnerism, the term used to describe the political ideology of the era, was defined by a liberal, left-leaning populism, with human rights a central thrust of domestic policies, and, while pursuing better relations with fellow Latin American countries, rejected free market capitalism: in particular, free trade agreements with the US. The era was not without its scandals, with the former president having her assets seized in 2016 and indicted in 2017 for her alleged role in the so-called “K Money” case, in which an employee of the Kirchners was accused of diverting funds intended for public infrastructure projects into tax havens.

Now a senator, and enjoying legislative immunity, Cristina Fernández de Kirchner has, however, been recommended to be remanded in custody for the alleged cover-up of Iranian suspects who stand accused of carrying out a car-bomb attack on a Jewish centre in Buenos Aires in 1994 that killed 85 people and injured hundreds. In 2006 the special prosecutor in charge of the case, Alberto Nisman, formally accused the Iranian government of masterminding the attack, and the Islamic group Hezbollah of carrying it out, with a list of Iranian suspects added to Interpol’s wanted list in 2007. In 2013 Kirchner’s government signed a memorandum of understanding with Iran for investigation into the case, which Nisman rejected and, in 2015, accused Kirchner of covering up the suspects. After publishing a report on the case, and one day before he was due to explain his allegations before Congress, Nisman was found dead. Investigations looking to establish whether his death was a suicide or murder are ongoing.

Current Presidency

The latest recourse to IMF aid brings to an abrupt end an era of optimism that followed the election of President Macri, which had appeared to reawaken investor interest in the country. However, domestic policies were proving unpopular, particularly the average 32% increase in the price of gas for household consumption announced in April 2018, severely impacting consumers.

The government claimed the increase was designed to cover the rising cost of gas production, and Juan José Aranguren, the minister of energy, also blamed what he called “irresponsible” gas subsidies between 2003 and 2015 that distorted prices, discouraged investment in the sector and led to the country becoming dependent on gas imports. Energy subsidies fell by 35.5% during the first 11 months of 2017, according to the Argentine Energy Institute. The dependency on gas imports has been caused by an increase in consumption and a fall in production, with the country’s energy deficit having increased by 14% in 2017 against the previous year, to $3.27bn. Prior to this Argentina had enjoyed an energy surplus from the end of the 1990s up to 2010. Oil production, meanwhile, was down 6.4% in 2017 from the previous year, but has fallen by 37% in relation to GDP over the last 10 years, according to local consultancy Invenómica.

With regard to the decision to call in the IMF, President Macri himself said at a press conference in May 2018 that he had been overly optimistic and set goals for the country that were too ambitious, while blaming the country’s fiscal deficit for the current crisis. He assured the populace that the austerity measures to be imposed in a bid to lower the deficit would be designed by the government, and not by the IMF.

“They are not going to tell us what to reduce, the responsibility is with the leaders, to sit down at the table and decide how we are going to reduce this deficit that is a burden for Argentines,” he said, while pointing out that resorting to IMF assistance is a clear indication that the country “has nothing to hide”, and that his government is transparent.

Energy Sector

Argentina’s energy sector has made important advances since President Macri took office, with an increase in investment in the oil and gas sector raising expectations that output will rise, while the government’s RenovAr programme, designed to ramp up the country’s renewable energy generation capacity, has also resulted in investment pledges for projects awarded at auction. Several foreign companies active in the country, such as Italy’s Enel, Spain’s Naturgy and Dutch oil major Shell, as well as local electricity distribution company Edenor, announced major investments in 2018, with a view to ramping up oil and gas production, electricity generation capacity, as well as transmission and distribution infrastructure.

This followed an announcement from YPF in October 2017 of a $30bn investment plan up to 2022, much of which will be channelled towards developing non-conventional oil and gas, such as at the Vaca Muerta shale play. The plan aims to increase non-conventional hydrocarbons production by 150%, meaning half of the country’s output will come from non-conventional fields by 2022, with the objective of ramping up total oil and gas production by 5% annually in order to achieve a target of 700,000 barrels per day, which would increase production to 26% above current levels.

Pipeline

Meanwhile, YPF has earmarked the development of more than 29 projects and the drilling of some 1600 wells up to 2022. It also has additional plans to become one of the country’s largest electricity generators, with a $2bn investment to double its installed generation capacity of 1300 MW through thermoelectric and renewable energy projects.

In addition, YPF plans to increase its fuel retail base through the opening of some 200 service stations across the country, with 70% of fuel sold to be low in sulphur. The company will also lower its costs by 20% by 2022 as part of the plan, in order to reduce existing debt of approximately $8bn.

In a bid to boost the country’s gas output, in March 2017 the government introduced an incentive scheme for natural gas production by offering different prices to concessionaires, which included German company Wintershall, US firms ExxonMobil and Chevron, France’s Total, Malaysia’s Petronas and Royal Dutch Shell, with the latter two establishing partnerships with YPF. The scheme was extended in November of that year to cover the Neuquén Basin, where the Vaca Muerta shale play is located, to include non-conventional resources. Said companies were granted concessions of up to 35 years duration, and are expected to invest up to $10bn in developing as many as 30 wells in the area.

In renewable energy expansion, since its 2016 launch Argentina’s RenovAr programme has so far resulted in three auctions to award projects for energy generation, which awarded a total of 147 projects totalling 5 GW of generation capacity, with the next auction set to be launched in October 2018 and finalised by the end of the year. Argentina’s national director for renewable energy, Esteban Pérez Andrich, told local media in May 2018 that of the 5 GW awarded so far, 660 MW will be added to the national capacity during 2018, with a further 3.6 MW added in 2019 and the remainder in 2020. Prices for the electricity to be generated by the projects have dropped at each auction, from $59.70 per MWh in the first round to $40.40 per MWh in the third, broadly in line with regional prices, while auctions in Chile and Mexico have also set record low prices.

Outlook

While the World Bank forecasts GDP growth to increase from the 2.3% reported in 2017 to 3.1% in 2020, this prediction was made before the government’s request for assistance from the IMF, and it remains to be seen how the current financial issues will impact the economy’s growth.

However, the recent investments announced by YPF, and the projected increase in oil and gas production, coupled with the rising price of oil, could provide a boost to government revenues and increase the energy sector’s contribution to GDP.

Meanwhile, the development of renewable energy projects, if they successfully procure financing, could bring down electricity costs to consumers, businesses and industry, which would make the country more productive and competitive.

In October 2019 Argentines will elect a new president, and the outcome of those elections will depend on how the performance of the economy plays out over the coming year and the success of the latest IMF bailout. The re-election of President Macri hinges on these factors, but he has time on his side and could implement a recovery before the polling stations open. A return to Kirchnerism looks less likely, however, with Senator Cristina Fernández de Kirchner’s bid to return to power clouded by her ongoing legal battles. Not participating, however, and relinquishing her senate seat would result in her losing her legislative immunity and facing a possibly lengthy prison sentence, and it is though that she may therefore run for election in order to extend her legacy and maintain her freedom.