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
- Capital controls were tightened, in order to curb dropping foreign exchange reserves
- Dependence on agricultural commodity prices and weather conditions
- Sticky and skyrocketing inflation
- Bottlenecks in infrastructure
Economy set to shyly emerge from a three-year recession
The first COVID-19 case was reported on 3 March 2020, bringing the government to implement a strict nationwide quarantine from 20 March 2020 onwards. Initially, this scheme proved quite efficient, as the
COVID-19 contagion rate was relatively lower than in some other major Latin American economies. Nonetheless, daily new cases started to rise again in end-May 2020, only reaching a peak in end-October 2020. In order to try to mitigate the negative spillover effects on activity, policymakers implemented fiscal stimuli totaling roughly 6% of GDP. In 2021, the economy is likely to register a modest rebound. Growth should be mainly driven by the gains linked to the expected end of the COVID-19 pandemic, favoring sectors highly affected by physical distancing requirements (such as services related to accommodation and leisure). Household consumption is likely to register a weak improvement since the sticky high inflation and weak job market conditions will continue to erode purchasing power. Private investments should also perform quite similarly, as the high idle capacity, strong capital controls, and the lack of a clear economic policy are relevant hindrances. Moreover, the sensitive fiscal situation limits the space for an increase in public expenditure. Downside risks are mainly related to the evolution of the COVID-19 pandemic in the country and the limited net foreign currency reserves that may further increase capital controls.
Current account surplus vs. challenging fiscal situation
The current account deficit switched into a surplus in 2020, mainly driven by a strong narrowing of the income deficit (thanks to lower profits and dividends transferred abroad). Conversely, the rise in the trade surplus observed in the first months of the crisis started to revert later in the year. The lack of confidence in the local currency and the fear of a strong devaluation have led some exporters (notably grain farmers) to hold off sales and some industries to advance purchases of imported commodities. In fact, the country continued to run out of foreign exchange reserves. As of early December 2020, gross reserves stood at USD 38.7 billion, with net currency reserves (deducting the central bank’s foreign borrowing from BIS, China, and dollar reserve requirements) at a much lower level (at roughly USD 4.8 billion). This has increased the stakes that the central bank will either raise controls, which have failed to contain the currency’s decline or allow a large devaluation of the official exchange rate. On the fiscal side, in August 2020, the government reached an agreement with private creditors to restructure USD 66 billion in debt under foreign legislation (equivalent to 26% of debt in foreign currency). Furthermore, it also applied the same changes to USD 42 billion in dollar bonds under Argentine law. Additionally, the government aims to conclude an agreement with the IMF, probably by the end of Q1 2021, to restructure its USD 44 billion debt (part of the USD 57 billion Stand-By Agreement). The IMF will probably request a credible fiscal consolidation program within an Extended Credit Facility, such as lowering the fiscal deficit by cutting into public expenditure and reducing its monetary financing. Indeed, before receiving the IMF envoys in November 2020, policymakers indicated that the government could pursue a primary fiscal deficit for this year below the current 4.5% target. The reduction of stimuli related to COVID-19 and the suspension of the utility tariff freeze would help on this matter.
A credible economic program is still pending
President Alberto Fernandez’s prompt decision to impose a lockdown proved positive for his approval rating, which reached a peak of 64.3% in April 2020 (according to the political and economic consultant Ecolatina). Nonetheless, with the prolongation of the pandemic and its economic consequences, his popularity declined below the pre-pandemic level (at 36.5% as of September 2020). In fact, support could fall further, as the poverty rate has increased because of COVID-19 (at 40.9% in H1 2020). Additionally, in December 2020, Congress approved a wealth tax that stipulates a one-off tax of at least 2% on individuals with assets over USD 2.45 million. The aim is to collect around USD 3.7 billion in order to fund measures taken to face the negative impacts of COVID-19. However, the opposition groups argue that it will discourage foreign investment and that it would not be a one-time tax. Finally, legislative elections will take place in October 2021, when 127 out of the 257 seats in the Chamber of Deputies will be renewed, as well as 24 out of the 72 seats in the Senate. According to polls of November 2020 from Consultant Giacobbe y Asociados, 50.4% of the population wants the incumbent coalition to lose the elections.