Argentina’s troubled peso currency inched higher and the risk of its bonds defaulting declined yesterday after the government unveiled its budget plan and the IMF said “important progress” had been made on revamping the country’s standby loan agreement. 
The peso rose 0.68 % to 39.60 to the US dollar and country risk tightened by 10 basis points after the government released its 2019 budget proposal, which pledges to erase the primary fiscal deficit next year.
The bill projects an average exchange rate of 40.1 pesos to the dollar next year.
It forecasts an economic contraction of 2.4% this year and 0.5% in 2019.
The currency has lost more than half its value against the dollar this year as confidence collapsed in Argentina’s ability to make its 2019 debt payments.
But market sentiment has improved in recent days.
President Mauricio Macri’s budget bill aims to use export tax increases as well as spending cuts to bring about fiscal equilibrium, a formula that some analysts say could get the country through next year without major disruptions.
The budget goals are being worked out with the International Monetary Fund, which is revamping Argentina’s standby financing deal by strengthening its fiscal targets.
The JPMorgan Emerging Markets Bond Index Plus (EMBI+), which measures the perceived likelihood of default against safe-haven US Treasury bonds, pegged Argentina at 651 basis points yesterday, five points tighter than on Friday, and 122 tighter than 773, where the country started the month.
A lower spread over Treasuries indicates an increase in market confidence in Argentina’s ability to pay its debt obligations.
Argentines have taken to the streets in recent days to protest proposed budget cuts.
Macri’s plan will also include export tax hikes that the business community is expected to reluctantly accept as the price of keeping Macri, a free-market advocate, in power.
In June, the government signed a $50bn standby deal with the IMF that included a projected fiscal shortfall of 1.3% of gross domestic product, which was not enough to halt a run on the peso.
“Important progress is being made toward strengthening Argentina’s economic policy plan, supported by a stand-by arrangement with the IMF. We are working hard to conclude these staff-level talks in short order and present a proposal to the IMF executive board,” the IMF said in a statement.
Fiscal belt-tightening items included in the budget bill will not be easy for Macri to implement ahead of his expected 2019 re-election bid.
Achieving a zero deficit will not come from spending cuts alone. “A big component of the proposal will be tax increases concentrated on the export sector,” economist Gustavo Ber said.
“This can be advantageous from the point of view of generating a financial calm that is the tip of generating a greater expectation of economic recovery, which is where social pressures come from,” Ber said.
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