ACTIVITY TO SHARPLY LOSE MOMENTUM IN 2022

In 2022, activity will strongly decelerate, despite being underpinned by the positive statistical carry-over of the solid economic performance in Q4 2021. Household consumption (68% of GDP) is likely to register a shy rise, driven by a relatively lower unemployment rate and social transfers designed to smoothen the negative impact of skyrocketing consumer prices. The sticky high inflation (historically fuelled by monetary financing of the fiscal deficit) was aggravated by the war in Ukraine and related sanctions (increasing global food and energy prices) and rising import restrictions (prompting goods shortage risks). Meanwhile, private investments (20% of GDP) should contract. This outlook is propelled by investors' growing caution towards the fragile economic outlook (amid increasing capital controls and the escalating gap between the official and parallel exchange rate markets). The difference between the two markets widened to 147% in July 2022 (from roughly 100% in January 2022). Moreover, public investments should remain subdued due to fiscal constraints. Finally, exports (21% of GDP) will be supported by the tailwinds of still-high agricultural and mineral commodity prices that favor Argentina's foreign sales. Nonetheless, the drought and the intense shock in the global agricultural input markets (fertilizers, seeds, etc.) should reduce producer margins.

EXTERNAL ACCOUNT SURPLUS TO NARROW AND FISCAL CONSOLIDATION UNLIKELY TO GAIN MOMENTUM

The current account surplus will shrink in 2022, notably hampered by a lower trade surplus (3.8% of GDP in 2021) and by the widening of the services deficit (0.7% of GDP in 2021), while the primary income (i.e., investment revenues) deficit (2% of GDP) should not vary meaningfully. Regarding the former, while exports should increase, favored by still high agricultural commodity prices, some exporters may hoard production, fearing a possible exchange rate devaluation. To discourage such actions, the central bank implemented new measures in July 2022, intending to stimulate farmers to sell their soybean abroad. Meanwhile, imports growth is set to outpace foreign sales. This is due, in particular, to some anticipation by importers (fearing a possible more substantial currency depreciation) and by the rising energy deficit. In fact, with the rise in energy commodity prices since the beginning of the war in Ukraine, the sector's trade imbalance reached USD 3.1 billion in the 12 months to June, up 417% compared with December 2021. Regarding services, the wider deficit is mainly explained by higher freight costs and net travel outflows, with Argentines resuming overseas trips. On the financing side, FDI will remain low due to economic and political uncertainties. In addition, although foreign currency reserves stood at USD 39.8 billion in July 2022, net reserves (deducting the central bank's foreign borrowing from BIS, China, and dollar reserve requirements) were estimated at only USD 3.5 billion (ensuring an import coverage of less than one month). Under these conditions, and to meet the challenging hard currency accumulation goal established by the IMF, the central bank has gradually tightened the rules for accessing the exchange rate market for import payments since March 2022.

On the fiscal front, the consolidation agreed upon with the IMF for 2022 seems complicated. In H1 2022, public expenditure increased twice as fast as revenues, pulled by higher social transfers and subsidies (taking the 12-month cumulative primary deficit - i.e., excluding interests on debt - to an estimated 3.3% of GDP at the end of Q2 2022). Overall, the weak fiscal framework and the distrust in economic policies have cast doubt on the sustainability of the local currency debt (increasing the rollover risk; local currency debt represents 31% of total public debt). Inflation-linked debt makes up most of the local obligations and is becoming a growing burden as the index accelerates.

THE POLITICAL ENVIRONMENT WAS WEAKENED BY A LACK OF CONSENSUS WITHIN THE RULING COALITION

The economic consequences of the COVID-19 pandemic and then the war in Ukraine have taken a toll on the popularity of President Alberto Fernández' - of the Peronist Frente de Todos (FDT) coalition. In front of the economic and social side effects of the crises, the divergences between the moderate stance of the government and the more hardliner and interventionist wing linked to Vice-President Cristina Kirchner have gained momentum. The latter group did not agree with the conditions attached to the USD 44.5 billion Extended Fund Facility reached with IMF in March 2022. The new arrangement overlapped and restructured the debt contracted under the 2018 USD 57 billion Stand-By Agreement (with USD 44 billion disbursed) signed during the mandate of former right-wing president Mauricio Macri. Generally, it requires policymakers to curb the primary fiscal deficit (from 3% of GDP in 2021 to 2.5% in 2022, 1.9% in 2023, and 0.9% in 2024) and reduce the monetization of the fiscal deficit (to 1% of GDP in 2022, 0.6% in 2023 and 0% in 2024, from 4.7% in 2021).

Moreover, it also requires the gradual phase-out of energy subsidies (estimated at 2.4% of GDP in 2021), favorable accurate interest rates, and an increase in reserves of USD 5.8 billion for this year and a cumulative increase of USD 15 billion by the end of 2024. Nonetheless, the government is struggling to meet the targets, as the economic outlook has become bleaker. Furthermore, in early July 2022, the architect of the current deal with IMF, the Minister of Economy Martín Guzmán, resigned due to divergences in the ruling coalition. He was replaced by Silvina Batakis, who is seen as a technocrat. However, after less than a month in the role, she was also replaced by Sergio Massa. He will head a super-ministry with more powers in the economic area, which will incorporate Mass Production and Agriculture. Massa was a former chief of staff of the government of Cristina Kirchner between 2008 and 2009.