Argentina austerity: A bumpy road ahead for Macri

Economists generally agree that the embattled Argentine government's IMF move to secure a multibillion-dollar credit line was a positive one for the country.

But challenges await authorities, who will be required to make cuts in the run up to the presidential elections next year and amid forecast slower growth as high interest rates impact investment and consumption.

Under the terms of a US$50bn credit line agreement with the IMF, the government committed to speed up the pace of belt-tightening and reduce the primary fiscal deficit to zero by 2020 from 3.8% of GDP in 2017.

"It's going to be a very difficult process to make a successful adjustment," S&P analyst Joydeep Mukherji (pictured) told BNamericas.

"There's some grounds for optimism, including the fact the government acted quickly after the [forex] turbulence in the month of May in the markets and the fact they got a sizable package from the IMF and also some other lenders came in as well."

Mukherji said a central focus of authorities this year should be on the area of inflation.

"In the short term, the key thing is to quickly control inflation dynamics. I stress the word 'dynamics' because the rates are going to be high - we're not expecting miracles. By dynamics I mean how it is evolving, going up, down."

Year-end inflation targets are 17% for 2019, 13% for 2020, 9% for 2021 and 5% for 2022.

Research firm Oxford Economics questioned whether the government will be able to achieve its goals, citing the elections and the hefty cuts needed.

The government will be concerned about how austerity measures and slower forecast growth impacts voters.

"Committing to a faster fiscal adjustment is evidently positive, but we are skeptical about the government's ability to reach the new fiscal targets, especially with a general election in October 2019," Oxford Economics said in a report.

The research firm added that the government will not seek to make cuts in the area of pensions, which represents about half of the budget. Pension reform legislation was last year "severely watered down," it noted.

"Given the government's inability to pass an overarching pension reform last year, no expenditure cuts will be attempted in this area, leaving more than a third of the austerity drive relying on lower public investment, which the government plans to reduce by an accumulated 81% in real terms by 2020," Oxford Economics said.

Fitch, meanwhile, said that the IMF deal supports the country but that political risk looms.

The rating agency said: "The government has agreed to pursue faster fiscal consolidation, allow the exchange rate to float freely, and grant the central bank formal autonomy and end its financing of the treasury. These policy adjustments could face considerable political risk. President Macri's popularity has dropped sharply, and social protests have intensified. It is not yet clear if the opposition will support or resist adjustments in the run-up to 2019 elections. Accelerating fiscal consolidation is likely to be most difficult measure."

Many Argentines are wary of the IMF, blaming it for past financial woes.

Fitch also cited the problems facing the government concerning where to swing the cost-cutting axe: "The spending profile is rigid, dominated by social benefits (60% of primary spending) that face upward pressure from demographics and a new indexation formula that references higher past inflation. This puts an even greater consolidation burden on capital spending, transfers to provinces, subsidies, and salaries, which are all politically sensitive. Recent protests and Congress' vote to stall utility rate rises - although vetoed - could portend resistance to further energy and transportation subsidy cuts. Public salary or payroll cuts could face resistance from unions."

Research firm Capital Economics also outlined the challenges ahead: "This fiscal plan is ambitious and will be difficult to implement. The 2019 and 2020 budgets will need to be approved by Congress, where President Macri's Cambiemos coalition holds only 40% of the seats. It's not yet clear what the austerity programme will look like, but the package is likely to include cuts to public sector wages and possibly social security reform. 2019 is an election year, and fiscal policy has never been tightened in an election year except during full-blown balance of payments and sovereign debt crises."