Argentina Gets $10.8 Billion From IMF as Peso Hits Record Low

(Bloomberg) -- The International Monetary Fund’s executive board approved a $10.8 billion disbursement to Argentina on Friday as part of its record credit line to the beleaguered South American nation.

The IMF didn’t specify a date for release of the funds, which were approved on the day that the peso closed at a new record low. Argentina signed the $56 billion expanded credit deal with the IMF in September following a rout in the peso.

The currency is under renewed pressure despite the world’s highest interest rate and Argentine officials struggle to tame inflation that surged to 50.7 percent in February. The government has said it will use the funds to sell $60 million a day in the currency markets starting April 15 to cover budget items and help stabilize the peso, which is down 14 percent this year. The IMF struck an optimistic tone over the economy, while highlighting the failure to control inflation.

“The authorities’ policies that underlie the Fund-supported arrangement are bearing fruit," Managing Director Christine Lagarde said in a statement. "The high fiscal and current account deficits -- two major vulnerabilities that led to the financial crisis last year -- are falling. Inflation, however, remains high with inflation expectations rising and inflation inertia proving difficult to break."

The peso fell for a third day Friday, dropping 1.2 percent to 43.93 to the dollar, the worst performing emerging-market currency on the day.

IMF officials revised their economic outlook for Argentina in their staff report, forecasting a 1.2 percent contraction this year compared with an earlier 1.7 percent projection. However, they see a greater need for additional spending cuts as tax revenues have been weaker than expected in recent months. The IMF staff recommends capital spending cuts, and possibly, a larger reduction in subsidies. The current subsidy cuts have already sparked large protests.

Any decisions on spending cuts will depend on tax revenues in the coming months, according to Argentina’s Economy Ministry press office.

As the peso renewed its slump last month, the central bank tightened monetary policy even further, extending policies intended to bolster the currency and cool inflation by an extra six months to the end of the year. Bank President Guido Sandleris also announced this week he will keep the key interest rate above 62.5 percent until at least May. The rate is currently over 67 percent.

Argentina’s economy has slumped into its second recession since President Mauricio Macri came to office in December 2015. The continued weakness in the currency and rampant inflation has also put pressure on Macri, the market favorite, as he faces presidential elections in October. His approval ratings have declined sharply and if a populist candidate wins the vote, the deal with the IMF may face more uncertainty.

To contact the reporter on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net

To contact the editors responsible for this story: Carolina Millan at cmillanronch@bloomberg.net, Philip Sanders

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