Argentina

Argentina has a long history of political and economic instability. In recent years, the country has experienced strong policy shifts with substantial ramifications for macro stability, which has been marked by strong economic and currency volatility, structurally high inflation, recurring default crises and social tensions. The victory of the left-leaning coalition in the general elections in October 2019 led to a renewed period of economic and political instability. The ensuing depreciation of the peso and exacerbated liquidity tensions led to a renewed default on Argentina’s sovereign bonds, which was not resolved until September 2020.

The advent of the pandemic exacerbated the bleak macroeconomic outlook. Containment measures and lower global demand for Argentina’s main exports led to a contraction of around -10% of real GDP in 2020 as Argentina entered its third year of recession. The economic and social impact of the pandemic led to a rise in the poverty rate, increasing the risk of social unrest, which further limits the room to maneuver to implement reforms. Strong base effects and a recovery in agricultural exports coupled with the gradual re-opening of the economy led to a strong rebound in 2021 (+10.3%). Incentive policies launched after the pandemic have given strong support to the tourism and transport sectors in particular. Household consumption has also remained strong despite inflation, but we expect this momentum to run out once excess savings accumulated during the pandemic are used up, alongside a more restrictive monetary policy. For 2023, we expect growth to slow to +0.5% before the economy returns to moderate levels of around +1.5-2% in the medium term.

The economic and political scene in Argentina has been somewhat more turbulent in the past months. Among the main triggers was the resignation in July of the minister of economy, Martin Guzman, well known to the markets and one of the main negotiators of the debt restructuring. He pointed to the growing disputes with the government over the conduct of economic policy as a factor in his departure, which generated a crisis of confidence. Besides this, the deterioration of key economic variables is also weighing on the economic outlook. This includes the high, growing and disseminated inflation since June, values close to three digits; extremely low international reserves; continued financing of public debt by the Banco Central de Républica Argentina (BCRA) and a high spread between official and parallel exchange rates (e.g. Blue rate). That said, note that the second revision of the USD44 bn Extended Fund Facility (EFF) program was approved by the IMF board in October and the new economy minister, Sergio Massa, has committed to make the necessary reforms/changes, such as reducing the fiscal deficit, to stabilize the economy, which has given some relief.  

The economic picture remains extremely fragile over the medium term. In view of the general elections next year, it is difficult to imagine a significant reduction in spending and subsidies, especially given high inflation, which will make it harder to meet the IMF’s fiscal target. The political framework also does not help, since political disputes within the government coalition are recurrent, increasing instability.

Political and policy risks remain high. The Extended Facility Fund (EFF) established with the IMF in March is politically unpopular and has exacerbated the current government's internal divisions - the Peronist coalition Frente de Todos (FdT) of president Alberto Fernández. Given general elections next year, we expect the current government to implement only strictly necessary reforms. Note that the risks of a new economic crisis are high in case Argentina does not meet the IMF commitments.

The business environment in Argentina is quite poor. Capital controls are quite stringent and extremely sensitive to the country’s external position and the track-record of expropriation, although current risks are lower. Argentina ranks 126 out of 190 in the World Bank Doing Business survey, below the regional average. The country has low rankings in terms of the ease of starting a business, construction permits and paying taxes. While it does have higher scores in access to credit and protecting investors, financial intermediation remains low compared to other countries in the region, pointing to a limited role of banks in financing the economy.