BUENOS AIRES (Reuters) - The International Monetary Fund has a tough choice to make in Argentina: Unlock over $5 billion in funds under the country’s loan deal as the government strains to stave off default, or hold the money back and risk sparking more market panic.

FILE PHOTO: Argentine unions, small firms and activists march near Argentina's Congress to demand changes in President Mauricio Macri's economic policies, in Buenos Aires, Argentina April 4, 2019. The banner reads "Macri out and no to the IMF." REUTERS/Agustin Marcarian/File Photo

The IMF, which agreed a $57 billion line of credit with the South American nation last year, needs to make a decision on releasing the latest tranche of those funds. The disbursement was originally set to be made this month.

But that has been thrown into disarray after a huge primary election defeat for business-friendly President Mauricio Macri last month sparked a crash in the peso, leading his government to impose capital controls to stem the rout.

Populist-leaning challenger Alberto Fernandez is now the front-runner to win the Oct. 27 election.

“The Fund will not disburse more money until the presidential election in October,” opined Gabriel Monzon, head of local consultancy Grupo Latina. “This will be an unexpected blow for the economy.”

An IMF spokesman declined to comment for this story. When asked about risks to the program on Thursday, a spokesman said the IMF would not make a decision until Washington meetings with Argentine officials, planned for late September.

Since the Aug. 11 primary defeat, Macri has blown out his IMF-agreed fiscal targets by upping welfare payments and cutting personal income and food taxes. He has staved off default for now, by extending the maturities on about $100 billion in debt.

“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.

It added the IMF was in a tough spot where it would not want to “rock the boat” in a sensitive election period even though it should probably “walk away” from its program with Argentina.

A Treasury Ministry spokesman told Reuters it was “conjecture” for analysts to say the IMF would not make the disbursement on time. “The point is that with the re-profiling of the debt and the capital controls, there is no immediate need for these funds,” the spokesman said.

The IMF and debt defaults are a touchy subject in a country where many blame the Fund’s austerity policies for setting the stage for a massive 2001 bond default and financial crisis that threw millions of middle-class Argentines into poverty.

ECONOMIC OUTLOOK DARKENS

IMF staff are doing a review of Argentina’s economic performance in the second-quarter of the year. Disbursements are usually linked to the successful completion of such reviews.

The tranche of funds - which follows $44 billion of the IMF program released so far - is linked in part to the evaluation by the Fund of the country’s economy in the April-June period, in which Macri’s government can argue their goals were well met.

Much has changed since then, however.

Inflation spiked in August when the peso lost a quarter of its value against the dollar. Bond prices hit record lows before recovering slightly after currency controls were imposed.

The tumult has darkened the outlook for Latin America’s third biggest economy. Inflation expectations for this year have jumped to 55%, with the economy now seen shrinking 2.5% in 2019, according to economists polled by the central bank.

Gustavo Neffa, an Argentine economic analyst at Research for Traders, also said he believed the release of the tranche would be delayed until after the election and the deal may be altered.

“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.