Argentina: Risk Assessment
Country Risk Rating
Business Climate Rating
- Major agricultural player (notably soy, 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 and concerns over debt sustainability
- Capital controls were tightened, in order to curb dropping foreign exchange reserves
- Dependency on agricultural commodity prices and weather conditions
- Sticky and skyrocketing inflation and prohibitive interest rates level
- Bottlenecks in infrastructure
Economy in a third recession year
GDP dropped a second year in a row in 2019, as high inflation and prohibitive interest rates linked to the monetary crisis triggered in April 2018 were still present, prevailing over the robust rebound in agriculture (following the 2018 drought). Indeed, the crisis gained further momentum after the presidential election primary of August 2019, when the strong showing by the now President Fernandez unleashed a new round of Peso (ARS) selloff. The economy seems destined to remain in recession in 2020. The uncertainty regarding the economic policies of the newly arrived government, and to how it will handle the unsustainable public debt, should imply a still low level of private investments (notably for the moribund construction). Moreover, the fiscal deficit will limit policymakers’ capacity to implement a desirable expansionary policy. Besides that, the skyrocketing inflation is not likely to ease significantly and, thus, will continue to erode real income (causing knock-on effects on household consumption). Finally, net foreign trade is likely to contribute positively to GDP, as imports should continue to drop and exports to benefit from a relatively higher economic activity in Brazil. The risks to the economic scenario are various, with the sensitive fiscal situation and the possible failure in renegotiating public debt possibly triggering new pressures on the exchange rate which would affect the economy through higher inflation and possibly a tightening of capital controls.
Recovering current account contrasts with the sensitive fiscal situation
The current account deficit registered a strong narrowing in 2019. It was mainly driven by a rebound in trade balance, from a large deficit of 2.3% of GDP to a surplus estimated at 2.9% of GDP (thanks to collapsing imports and recovering agro exports). Moreover, the services deficit (of roughly 2.1% of GDP) also registered an improvement (mainly driven by a narrowing of the travel imbalance). Alongside, the lower deficit also started to be fully covered again by foreign direct investments (estimated at 1.3% of GDP in 2019). Overall, the current account is likely to become slightly positive in 2020, as the economy is to remain in recession (thus implying low import level) and export is likely to continue climbing as a result of expected good crops this year and higher economic momentum in Brazil.
However, the fiscal scenario is much more challenging. Although the previous government was able to somewhat reduce the budget deficit in the last two years (a condition of the IMF loan deal), a lot still needs to be done. As the public debt is majorly in foreign currency (roughly 81%), it is highly sensitive to strong exchange rate movements. Its amortization will be very high in the upcoming years (estimated at 16% of GDP in 2020 only). In December 2019, the new government of president Fernandez unilaterally postponed until August 2020 the payment of USD 9.1 billion of short term treasury bills issued under local legislation. He also announced his intention to restructure long bonds term issued under local and foreign law in early 2020. Alongside, the more interventionist and fiscal expansionary approach that is expected could make the negotiations with the IMF difficult. Finally yet importantly, taking into account the hard debt payment schedule ahead, capital controls which came into force since September 1, 2019, and were tightened after the presidential elections, are not likely to be eased in the short term and could even be strengthened. That is because of the strong slump in foreign exchange reserves in 2019 (net reserves give import coverage of roughly three months of imports), which was a consequence of the bank run alongside the primary election and of the reserves that were burnt by the central bank with the aim to control the ARS sell-off. Two weeks in power the new government got congressional approval for his emergency plan, which includes measures to increase tax revenue, a 30% tax on hard currency purchases and higher taxes on agricultural exports. It also gives the government increased regulatory powers in areas such as service rates public and pensions.
Peronists return to power
The harsh economic challenges prevented President Macri (2015/2019), from the center-right “Together for Change” coalition, from achieving re-election. The left-wing “Everyone’s Front” coalition candidate Alberto Fernandez and his running partner, the former President Cristina Fernandez de Kirchner (2007/2015), won the presidential elections held on October 27, 2019. Mr. Fernandez, a lawyer, and politician, was the Chief of the Cabinet of Ministers during Néstor Kirchner’s presidency (2003/2007) and the early months of Cristina Fernández de Kirchner’s mandate (he left after falling out with her). He took office on December 10, 2019 for a four-year term. The government will count with a simple majority in the Senate (with 39 seats out of 72), while the coalition “Juntos por el cambio”, will hold 29 seats (enough to block constitutional reforms). In addition, in the Lower House, the latter will hold 116 seats out of 257, while the coalition of Fernandez will count on its 120 seats.