Javier Milei's victory by a much larger margin than anticipated in the polls surprised Wall Street, where he was well received, and will also have an impact on the relationship with the International Monetary Fund: although the organization endorses the "drastic, non-gradualism" adjustments announced by the libertarian, there are doubts about whether he will really be able to implement his proposals while the program soon faces millionaire deadlines.
The program with the IMF was already stumbling and ended up being derailed in recent months with the wave of electoral measures by minister-candidate Sergio Massa, which raised spending to limits that alarmed even the organization's board. There was a review scheduled for November, which was frozen and which is already known to fail to meet any of the fiscal deficit, reserves and issuance targets that had been agreed. For the IMF, it was a nightmare that Massa, holding the spending tap in his hands, was a candidate.
In addition, there are maturities of US$ 2,000 million in January. Reservations are in the red. Will the IMF give the new president a chance? It is estimated that the agency could extend a hand, perhaps by authorizing some arrears or "arrears" while the update of the program is negotiated. "As long as you don't accumulate too many herds, it's not that complicated," say those who know the IMF's dealings.
These would be "amicable delays" so that the executive board can approve them. There is a bad mood from several countries with Argentina's successive non-compliances and they spoke directly of the "mismanagement" of the current government. And while the Biden administration has stood by our country, the Treasury is losing patience.
"The IMF must be willing to withdraw its financing if a country does not take the necessary measures," U.S. Treasury Undersecretary for International Affairs Jay Shambaugh said weeks ago in a message that was understood in Argentine terms.
In this panorama, the IMF does not cease to view with hope the desire for adjustment of the libertarian, who has said that he will do even more than what the Fund asks for. The agency's officials have already been in contact with Milei and his team, but beyond the willingness to make cuts, the IMF still has doubts, for example, about the dollarization proposal.
Claudio Loser, former director of the IMF's Western Hemisphere Department, told Clarín that "the question today is who will take charge of the economy. Surely from Tuesday there will be exchange rate pressure in the blue and in the official market. In addition, it remains to be seen whether strong spending continues in these three weeks, which will continue to increase inflationary pressures."
"I think negotiations with the IMF will be reasonable. They will now sit down for general talks and then see how to put together a new program with explicit goals for 2024. Clearly there will be different and more similar objectives between the new government and the IMF," he added.
For Loser, "conflicts may arise in Argentina if Milei wants to cut spending and lower taxes too quickly. But he is clear that the deficit needs to be reduced strongly." "I think Milei will want to make more structural adjustment, but the big issue is not the IMF but Congress," where reforms must be approved.
Martín Castellano, head of Latam Research at the Institute of International Finance (IIF), said that "the forcefulness of Milei's victory was surprising. The endorsement reflects a strong popular mandate to stabilize the economy after decades of high inflation and mismanagement of economic policy."
"I believe that the victory will reflect an auspicious prospect of urgent changes such as an anti-inflation plan and a deep fiscal reform. However, uncertainty about the transition, implementation risk, and the need for greater political support may temper expectations," he adds.
Castellano points to the need for the new government to negotiate with the IMF soon, taking into account the capital maturities in January of about $2 billion. "The intention of the elected authorities to lower inflation, stabilize the economy through fiscal austerity measures and eliminate the multiple controls that exist will surely help to reach a quick understanding with the IMF."
He added that "the president-elect mentioned in his speech on Sunday that his administration is going to fulfill the commitments made. Therefore, it is likely that a new agreement will be negotiated and mechanisms will be sought to avoid falling into arrears while these negotiations are being carried out."
"I think the president-elect's priority is going to be to put in place a stabilization plan that includes a horizon to eliminate exchange controls, significant fiscal austerity measures on the spending side, and a new program with the IMF. My impression is that dollarization is not going to be among the initial package of measures due to various reasons, including extremely fragile economic conditions and lack of foreign currency at the time of taking office," he said.
Daniel Kerner, managing director for Latin America at Eurasia Group, believes Milei's triumph will be met with a mixed reception on Wall Street. "On the one hand, some relief at the defeat of Kirchnerism, but many doubts about the viability of the plans. A lot will depend on the proposals and the team you announce Milei. I think the market is going to remain very cautious with Argentina until there are results, given the magnitude of the problems."
The transition period also looks complicated: "I imagine little coordination. The main risk is that, if Milei insists on dollarization, the pressures on the exchange rate, inflation, and banks will be very high. And that's going to be hard to handle on Dec. 10."
Regarding the IMF, Kerner points out that the libertarian will try to steer the relationship. "The IMF is not going to oppose fiscal adjustment and reforms. But what happens is going to depend on Milei's ability to make adjustments, which is going to be very difficult politically. Milei is going to promise the fiscal adjustment that the IMF is asking for, but I don't know if he's going to be able to do it."
Regarding the program with the IMF, Kerner says that "they are going to renegotiate it." "The current program is down, and Milei will bring new ideas. The IMF is going to try to make Milei work. But the outlook is very uncertain."
Jorge Piedrahita, CEO of Gear Capital Partners, believes that Milei's triumph "was a Copernican turn that was surprising. The campaign of fear and the unlimited use of state resources had the opposite effect to what was intended." He added that "Wall Street welcomes Milei on a positive note, but with reservations given the difficulties he will face."
"I think Milei and every experienced analyst understands that big changes like dollarization or the elimination of the Central Bank won't be immediate. These are two proposals that will be implemented, but a lot of preliminary work is required. Wall Street is concerned about the implementation of the proposal in a local context with governance difficulties. There will be volatility, especially if the opposition (unions, Peronism, social organizations, etc.) takes an obstructionist position or generates chaos."
Regarding the program with the Fund, the expert pointed out that "the Milei government will have a good relationship with the IMF, although it could have important technical differences in implementation, considering that the proposed changes are radical. Milei proposes deeper adjustments than those requested by the IMF."
Regarding the upcoming maturities with the IMF, Piedrahita is categorical: "They cannot be paid and the agreement must be renegotiated."