Argentina President Mauricio Macri asked the International Monetary Fund for help this week after a free fall in the country’s currency, reopening old wounds from previous encounters with the fund.
The country is seeking a standby agreement with the IMF, a program that gives financial aid to a member state with the condition that they meet a set of economic targets, including inflation and monetary policy.
“That’s going to be very tricky politically,” said Jorge Mariscal, emerging markets chief investment officer at UBS Global Wealth Management. “The opposition will try to sell it as: ‘Once again we’re selling out our people to meet the IMF’s conditions.'”
The last time Argentina had a standby agreement with the IMF, nearly 20 years ago, the country’s unemployment rate rose to 20 percent, wages shrank and people withdrew large sums of pesos from their bank accounts to exchange them for U.S. dollars.
Macri’s decision to ask for the fund’s help comes after the Argentine peso plunged 20 percent against the dollar this year. On Tuesday it hit a record low against the greenback.
To halt the peso’s decline, Argentina raised the overnight interest rate to the highest in the world and sold some of its foreign currency reserves. On Friday, Argentina’s central bank hiked rates for the third time in eight days to a whopping 40 percent. Still, the peso dropped to 23.1 against the dollar on Tuesday before rebounding slightly.
“The past week’s classic overshooting of the [peso] indicates a clear loss of confidence in the government’s ‘gradualism’ project,” said Simon Quijano-Evans, an emerging markets strategist at Legal & General Investment Management. He was referring to Macri’s strategy of reshaping Argentina’s economy through pro-market reforms.
Macri, who was elected in 2015, is seen as the first market-friendly president in years. He said Tuesday the move would help “avoid a crisis like the ones we have faced before,” adding it “will allow us to strengthen our program of growth and development.”
Still, hundreds of people took to the streets to protest Macri’s plea to the IMF, holding signs that read: “No to the IMF.”
Stuart Culverhouse, the chief economist at Exotix Capital, said Argentina’s decision to ask for a standby agreement is “positive” and has a greater chance of being approved than asking for a flexible credit line. Earlier reports said Argentina would ask for a flexible credit line, a type of loan that does not contain as many conditions as the former.
“But an SBA does come with conditionality and this could be the government’s hardest challenge,” Culverhouse said in a note Thursday. “It may need careful presentation and stage management locally.”