WASHINGTON/BUENOS AIRES (Reuters) - The International Monetary Fund on Friday increased the size of a standby financing agreement for Argentina to $56.3 billion in a deal that toughens previously agreed fiscal measures.
Argentina’s President Mauricio Macri agreed to a $50 billion IMF deal in June, hoping it would stop a run on the country’s peso currency. But the peso kept falling, forcing him to renegotiate the agreement.
The new deal will require the government to make deeper spending cuts and increase taxes to bring the South American nation’s primary fiscal deficit, projected at 2.7 percent of gross domestic product in 2018, to zero next year. Macri is preparing to run for a second term in late 2019.
Argentina’s economy, which has been racked by high inflation, slid into recession after a drought in early 2018 sapped grain exports.
In a letter to the IMF, Argentina said it expected inflation to peak at more than 40 percent in January then fall quickly in 2019.
The letter also said Argentina expects an economic contraction of between 2 and 3 percent of gross domestic product in 2018. The government had previously expected a 2.4 percent contraction this year.
“We expect the recession to continue for the rest of 2018 and into the first quarter of 2019, with a recovery to begin in the second quarter of next year,” an IMF official said.
IMF Director Christine Lagarde said a 2019 federal budget proposal approved by Argentina’s lower house of congress would help the government meet its targets.
“Its passage into law will be key to restoring confidence,” she said in a statement.
Foreign exchange and global macro strategist for Standard Chartered bank Ilya Gofshteyn said Argentina’s September trade surplus was key in raising hopes over an economic rebound in 2019.
“Argentine policymakers have reason to feel a bit more optimistic about the adjustment process after the trade balance posted a surplus for the first time in close to two years,” Gofshteyn said.
Cutting the deficit during a presidential election year is almost unheard of in Argentina. Wide swaths of the population have come to rely on welfare programs and subsidies that helped the country recover from a 2002 economic crisis that tossed millions of middle-class Argentines into poverty.
Macri’s popularity has fallen as he has cut pension benefits and public utility subsidies. Riot police fired rubber bullets at anti-austerity protesters in front of Congress on Wednesday as lower house lawmakers debated and then approved the government’s 2019 budget bill, which codifies fiscal targets agreed with the IMF.
The peso sell-off started in April, driven by doubts about the central bank’s ability to roll over its burgeoning stock of short-term debt. The run on the currency was sparked by jittery foreign investors who dumped Argentine paper in favor of safe-haven U.S. dollar assets. The Argentine economy has since slipped into recession, with inflation at more than 40 percent.
The peso, which remained steady following the announcement of the deal, has strengthened this month, but remains about 50 percent weaker than where it started the year.
Reporting by Jason Lange in Washington and Hugh Bronstein, Scott Squires and Cassandra Garrison in Buenos Aires; editing by James Dalgleish and Tom Brown