In a statement on 18 March, the International Monetary Fund (IMF) allowed Argentina to allocate additional funds to social programs in the framework of the USD57 billion stand-by arrangement (SBA), with the next tranche (USD10.87 billion) to be disbursed over the coming weeks.

Under the SBA, Argentina committed to implementing deep austerity measures to reduce the primary fiscal deficit to 0% of GDP in 2019. The deal, however, includes a social assistance adjustor that allows a deficit of 0.2% of GDP should additional funding be required for welfare programs if lower classes are severely undermined, including by reduced utility and transport subsidies.

In the same statement, the IMF praised Argentina's on-target 2018 primary fiscal deficit (2.7% of GDP), but warned that deeper restraint in social spending will be needed to meet the 2019 target. As this will affect middle and lower classes, the IMF raised the social assistance adjustor to a deficit of 0.3% of GDP. Earlier in March, President Mauricio Macri announced an extra ARS15 billion (USD370 million) for child benefits and payment facilities for a new gas tariff increase to be implemented in April.

Significance

The deep austerity measures have severely undermined the government's popularity ahead of the 27 October presidential elections, significantly affecting Macri's chances of re-election.

The government is likely to use the additional IMF funding allowance at its disposal (approximately USD500 million) in the run-up to the election to quell concerns over rising poverty (at 33%) and loss of purchasing power. This is likely to help contain anti-government protests, often led by social organisations, but it is unlikely to be effective in enhancing the government's chances of re-election.

The whole population will still be confronted by high-inflation (forecast at 35.2% in 2019 by IHS Markit), rising unemployment (estimated at 13.2% in 2019), and economic recession (GDP is expected to contract by 1.7% in 2019). An indicator of increased chances for Macri ahead of the election will be a downward inflation trend - the population's main concern, according to polls. An indicator of a weaker government will be labour unions organising a general strike in the coming months.

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Posted 19 March 2019 by Carla Selman, Principal Research Analyst, Country Risk, S&P Global Market Intelligence