Wall Street warning: Russian invasion oil rise complicates Argentina's agreement with IMF

A Wall Street investment fund considered that the international price shock triggered by the war in Ukraine will have consequences for the economic program agreed between the Government and the IMF and anticipated that it will complicate the viability of the tariff subsidy cut to which the executive branch committed itself to the agency.

This was stated in a report by the Amherst Pierpont fund, signed by analyst Siobhan Morden, which initially stated that “the final approval of the IMF program should alleviate a major risk event and refocus attention on data surveillance and execution risk,” he explained in a note to clients.

In this regard, the report states that “the fiscal objective first needs approval in a revised 2022 budget that also coincides with a structural reference deadline of April 15. The backbone of the revised fiscal target includes adjusting subsidies with a call for a public hearing next month to update energy rates starting in June,” he recalled.

“The energy (price) shock certainly complicates the political feasibility of tariff adjustments and the gradual adjustment strategy. The public hearing should clarify the details with a progressive approach aimed at high-income residential consumers,” specified Armherst Pierpoint.

The objective of reducing subsidies is one of those that generates the most skepticism among private sector analysts. The goal set for this year implies - implementation of the new tariff segmentation in between - a cut equivalent to 0.6% of the Gross Domestic Product. For some local consultants, the new global market securities scenario will even require the public sector to spend more than it did last year.

“There is not much budgetary flexibility for reluctance to reduce investments in capital goods with a commitment to real increase in current spending that avoids countercyclical austerity bias. That's why it's no surprise that current news suggests the risk of increased export taxes by sharing the benefits of unexpected agricultural gains,” the report said, referring to the increase in export duty rates for soy by-products.

“The only objective that matters is the fiscal anchor for a virtuous circle of trust that reduces the monetary issuance of the Central Bank and stabilizes the exchange rate. The short-term fiscal objective is more relevant than the monetary objective on the cushion of the IMF's initial disbursements, as well as additional loans from other multilateral agencies,” said Armherst Pierpoint. He also warned: “The reserve accumulation target may begin to get complicated for the targets of the end of June.”

“Progress on the fiscal objective should complicate or reassure relations with the IMF and overall investor sentiment for gradual adjustment. The IMF's latent threat of default on still-onerous payments requiring loan disbursements should encourage compliance. There is no quick fix to the still severe macroeconomic imbalances that will sustain the still-depressed levels of bond prices,” the investment fund considered.

But he also made an investment recommendation on a provincial bond: “Our investment strategy follows this slow turn with an asymmetric upside potential of low bond prices and a high current yield of quasi-sovereigns and corporations. The Province of Buenos Aires still offers a high current yield of 9%, as well as a lower risk of recurrent default that translates into potentially much higher medium-term returns relative to the sovereign.”

In reference to the main concern of Armherst Pierpoint - the energy outlook for this year - a local report also notes that the international situation may entail a possible danger to economic activity, in addition to a higher than expected expenditure on subsidies: “There is a risk of energy rationing in the course of winter, due to lack of resources to import liquefied gas, the price of which has skyrocketed with the war. Supply interruptions would particularly affect the manufacturing sector, with a significant weight in national accounts”, considered Fundación Mediterránea.

Another report, in this case from Ecolatina, also warns of an impact on economic activity that are not limited to the conflict in Eastern Europe alone. “The overall impact of the Russia-Ukraine conflict clearly exceeds that resulting from the rise in commodities and financial turbulence: it is not just prices, financial-trade disruptions already have an impact on the prospects of activity. In fact, purchase orders and investment projects, together with consumer confidence (three engines of the modern economy) will be affected in the coming months,” he said.

“At the local level, analyses have been mainly limited to the balance of foreign exchange (agro versus energy) involved in the conflict. However, the significance of slower than expected global economic growth is high, and could have impacts on the Argentine economy. In this sense, the best scenario to wait forward is a rapid solution to the war conflict followed by a rapid coordinated reaction to mitigate these impacts”, concluded Ecolatina.

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