Argentina: Risk Assessment
Country Risk Rating
Business Climate Rating
- Major agricultural player (notably soya, wheat, and corn)
- Large shale oil and gas reserves
- Education level higher than the regional average
- GDP per capita above the region´s average
- Weak fiscal accounts
- Capital controls, due to the lack of confidence in the Argentinian Peso and limited foreign exchange reserves
- Dependence on agricultural commodity prices and weather conditions
- Sticky and skyrocketing inflation
- Bottlenecks in infrastructure
Economy set to emerge from a three-year recession
In the first quarter of 2021, GDP grew by 2.5% year-on-year and 2.6% quarter-on-quarter (QoQ). In the quarterly comparison, the increase was mainly driven by the recovery of investments (6.1% QoQ) and the vigor shown by exports (19.2%) favored by the high prices of agricultural commodities. However, the recovery trajectory suffered a temporary setback in the second quarter, as mobility restriction measures were reinforced in the interval. Looking ahead, activity is expected to resume from Q3 2021 onwards. Growth should mainly follow the COVID-19 vaccination progress, favoring sectors highly affected by physical distancing requirements (such as services related to accommodation and leisure). As of 28 July 2021, the country had 14% of its population fully immunized and 54 % with at least one shot. The sensitive fiscal situation limits the space for an increase in public expenditure. Moreover, private investments should register a shy improvement, as strong capital controls, and the lack of a clear economic policy are relevant hindrances. Furthermore, household consumption is likely to perform quite similarly, since the still mediocre conditions on the job market and the sticky high inflation will continue to erode purchasing power. Aiming to curb inflationary pressures, the central bank has kept the pace of currency depreciation below inflation this year. In addition, the government banned meat export for 30 days in May 2021 (later replaced by export quota), in a failed attempt to move its domestic prices down. Furthermore, downside risks remain mainly related to new COVID-19 strains in the country and the limited net foreign currency reserves that may lead to increased capital controls.
Current account to remain in surplus; fiscal deficit still high
The current account surplus in four rolling quarters increased marginally in Q1 2021 to 0.9% of GDP, majorly driven by the narrowing of the primary income deficit (drop in interest payments due to the Q3 2020 external debt restructuring) but also by a lower services deficit (drop-in abroad travels). Conversely, the trade balance surplus shrunk in the period, as the domestic activity improvement (favoring imports) offset the tailwinds from higher commodity export prices. On the financing side, foreign direct investments at the same time stood stable from the previous quarter at 1% of GDP. The higher USD inflows related to the strong commodity export revenues this year have allowed the center to buy the greenback (USD 7.7 billion in the year until mid-July 2021), to comfort its weak foreign currency reserves and limit the peso depreciation. As a result, these reserves stood at USD 43 billion, with net currency reserves at a much lower level (roughly USD 8.6 billion in June). Nonetheless, agro-export revenues being historically lower in the second half of the year, alongside possible higher pressure on the exchange rate due to the midterm elections, the use of the central bank´s reserves could be required. It is also important to note that the country should receive USD 3.45 billion this year from the IMF Special Drawing Rights global allocation. This will likely help the government to serve the USD 4.5 billion debt payments to this organization this year. In addition, in June 2021, an agreement with the Paris Club of bilateral creditors was reached, avoiding a USD 2.4 billion default. The Club gave the country until March 2022 to restructure its USD 44 billion debt with IMF. Within this period, Argentina will pay USD 430 million to the forum. Recently the IMF and Argentina have announced progress, but negotiations are only expected to be concluded after the November 2021 midterm elections. On the fiscal side, the budget deficit will narrow this year, driven by higher tax collection, lower real wages, and pensions, despite recently announced measures to protect the most vulnerable sectors along with H2 2021. The budget deficit is expected to be financed mostly by the central bank.
The president's falling popularity could affect the outcome of the November 2021 midterm election
President Alberto Fernandez’s prompt decision to impose a lockdown proved beneficial to his popularity in the early months of the COVID-19 crisis. However, the prolongation of the pandemic, the setbacks in the reopening process, and their economic consequences reverted the positive tendency. In July 2021, Fernández registered the worst image indicator since he took office as president in 2019, according to a compilation by Directorio Legislativo. His positive image dropped from 43% to 34%, and from 80% in March 2020. With the economic and social side effects of the crisis, the initially moderate stance of the government has given way to the hardliner and interventionist orientation linked to Vice-President Cristina Kirchner. This could have spillover effects in the legislative elections that will take place in November 2021. On this occasion, half of the Lower House (127 seats) will be renewed, as well as a third of the Senate (24 seats). Still, it is important to note that Congress will have to approve a debt agreement with IMF. This can be challenging if the Kirchnerist wing comes out stronger from midterm elections. The latter has a historically frictional relationship with this organization.