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- The International Monetary Fund revised a standby agreement with Argentina.
- Buenos Aires will now receive a $57 billion credit line, expanding the largest in IMF history.
- But things may get worse before they get better — economists see the economy falling into a recession this year.
Expanding what was already the largest bailout in its history, the International Monetary Fund said it will raise Argentina’s $50 billion credit line to $57 billion in an attempt to stem a crisis that has roiled Latin America’s third-largest economy.
The revised standby agreement, which still needs approval from the executive board, is “aimed at bolstering confidence and stabilizing the economy,” IMF Managing Director Christine Lagarde said Wednesday in a joint statement with Argentine Economy Minister Nicolas Dujovne.
Officials had been renegotiating terms since last month, when President Mauricio Macri asked to speed up payments in the original agreement that was reached in June. Argentina will be required to fulfill certain stipulations under the agreement, which would need congressional approval by way of the 2019 budget.
The Fund will cover a significant portion of Argentina’s financing through next year, Moody’s ratings agency said in a statement, and reduce the need to tap international capital markets before the country holds presidential elections in October 2019.
The government has been hammering away at efforts to reduce its debt, which economists predict will reach 70% of gross domestic product next year. Macri and his finance minister, Nicolas Dujovne, rolled out economic reforms earlier this month, including stiff spending cuts and export tax increases.
But balancing the budget may prove difficult for Macri as elections near. With an approval rating that his dipped below 40% this year, there’s a possibility the conservative, whose campaign focused on free-market reforms, may not be re-elected.
Economists are expecting the country to fall into a recession this year. Gross domestic product fell sharply between April and June, marking the first economic contraction in more than a year, and is expected to continue to slide in coming quarters.
“We’ve pencilled in a fall in GDP of 4% over this year as a whole,” Edward Glossop, an economist at Capital Economics, said in an email. “It’s probably too soon to say how far GDP will fall in Q3.”
On Tuesday, Argentina’s labor unions called a nationwide strike to protest austerity measures and economic conditions. Many citizens also spoke out against involvement with the Fund, the Associated Press reports, which was criticized for its involvement in Argentina’s 2001 crisis.
The Fund announcement failed to calm rattled investors, with the peso shedding more than 1%. Even after Argentina’s central bank raised its benchmark interest rate to 60% last month, the peso remains the worst-performing currency of 2018.
While the Fund expects the economy to stabilize by the end of the year and begin a recovery as soon as 2019, some analysts are remaining cautious.
“The worsening of the situation in Argentina despite the rate hikes and government efforts to restore market confidence confirms our view that the situation is far from being solved,” Craig Chan of Nomura wrote in a recent research note.
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