AS IMF Argentina Decision Looms, Bitcoin Demand Increases in Third-Largest Latin American Country
The International Monetary Fund must choose to either make more than $5 billion in funds under Argentina’s loan deal available to the government facing default or not. The IMF had agreed to a $57 billion line of credit with the South American nation last year, and funds were meant to be paid this month.
But pro-business President Mauricio Macri took a defeat in a primary election last month, resulting in a crash of the peso and capital controls. Populist candidate Alberto Fernandez is considered the front-runner to win the Oct. 27 election. And now there is doubt about whether or not the IMF will disburse the cash until after the election.
“The Fund will not disburse more money until the presidential election in October,” said Gabriel Monzon, head of local consultancy Grupo Latina. “This will be an unexpected blow for the economy.”
The IMF won’t make a decision until Washington meetings with Argentine officials in late September.
Since his primary defeat in early August, Macri has increased welfare payments, cut personal income, and implemented food taxes. He extended maturities on about $100 billion in debt to stave off default. Stabilizing the domestic markets and addressing the looming financial crisis, however, remains an ongoing struggle.
“Given the fragile debt situation… the Fund could be forgiven for not wanting to throw (more) good money after bad,” developing markets advisory Tellimer said in a note.
“The point is that with the re-profiling of the debt and the capital controls, there is no immediate need for these funds,” a Treasury Ministry spokesman told Reuters. Capital controls limit Argentines to a maximum of $10,000 worth of withdrawals in foreign currency per month.
With inflation spiking in August (during which the peso lost a quarter of its value against the dollar), bond prices have hit record lows. They recovered a bit after Macri’s currency control measures.
Inflation expectations in Latin America’s third-largest economy have increased by 55%. The economy is predicted to shrink 2.5% in 2019, according to economists polled by the central bank.
Gustavo Neffa, an Argentine economic analyst at Research for Traders, said the IMF would disburse payments after the election – perhaps with new terms.
“I think they will wait to make the disbursement. The government outperformed its fiscal and monetary goals for the second quarter, but that’s not enough,” he said.
In order to prop up the struggling economy, the government has begun imposing currency controls. Foreign currency purchases were restricted after the Argentine peso dropped in value. To avoid more money from flowing out of the local economy, these restrictions will remain in place until further notice.
For domestic corporations, this new measure may pose a few roadblocks. They will need permission from the government to sell Argentina pesos to buy foreign currencies. They are not allowed, moreover, to make international money transfers without approval first. Companies working with foreign workers or freelancers around the world will have their work cut out for them.
Such extraordinary measures are not entirely surprising. Argentina has been on the brink of a financial crisis for more than a year, at least. The value of its domestic currency started slipping significantly since mid-2018. Where one needed 15 peso to buy $1 in 2017, that value has now spiked to 60 peso. Combined with the high inflation rate plaguing the economy, something needs to change sooner rather than later.
A devaluing peso and hyperinflation result in a contracting economy. Instead of noting growth, the Argentina economy shrunk by 5.8% in the first half of 2019. This latest decrease comes on the heels of another 2.5% contraction noted throughout 2018.
It is not the first time the Argentina government has to impose drastic measures. In 2001, consumers were unable to withdraw US Dollars from banks throughout the country for a full year. Given how Argentines often convert their pesos to foreign currency as quickly as possible, that particular measure triggered a significant backlash.
On top of all this, the country is on the verge of defaulting on its national debt once again. That would mark the fifth debt default in the past three decades. In June of 2018, Argentina owed IMF $50bn in outstanding loans.
According to S&P, the total debt surpassed $100bn. The current plan is to restructure the debt to gain more time to repay the funds. As a result of this plan, the country’s credit ratings have been downgraded.
Investors are seeking safehaven. The gold price last month hit a record high value in Argentine Peso – before the new financial restrictions were made public.
Argentina has a black market for foreign currencies and other forms of money. Buyers on this market will pay a premium of 20% or more to obtain the currency or asset they want.
Argentina has seen an increase in Bitcoin demand. Peer-to-peer trading have been on the rise – premiums for the digital currency as high as 10% per transaction.
LocalBitcoins remains one of the largest trading platforms in the country. Demand for bitcoin on the platform in Argentina increased as Argentina’s economic uncertainty came to the fore.