Activity tipped to enter recession
Argentina’s economy is expected to enter recession in 2023. Household consumption (65% of GDP) is likely to shrink, dragged down by skyrocketing inflation, a deteriorating job market and assuming an absence of new relevant income support measures. In fact, no improvement is in sight to damp inflating consumer prices, amid elevated macroeconomic imbalances (including the large gap between the official and parallel exchange rates) and strong import restrictions resulting in shortages of consumer and goods and manufacturing inputs. Meanwhile, gross fixed investments (17% of GDP) should also contract, squeezed by tighter financing costs and investor caution towards the fragile economic outlook and the forthcoming general elections. Moreover, public investments should remain subdued due to fiscal tightening. Last, exports (18% of GDP) are also expected to contract amid cooling global activity (including in their main markets Brazil and the euro area) and dry weather conditions that will curb the 2022-2023 crop yields (wheat, soybean and possibly corn). Durably historically elevated agriculture commodity prices should not offset the potential lower exported volume.
External shortfall to subsist and marginal fiscal consolidation
The current account should remain in deficit during 2023. The trade balance surplus (3.8% of GDP in 2021) is expected to narrow, hampered by a curb in exports, as the country faces its worst drought in 60 years, which is impacting agricultural export volumes. In the absence of tighter import controls, this situation should prevail over the forecast drop in imports amid softer domestic demand, which is also likely to prompt a lower energy trade deficit. Of note on that score is that the government expects the first phase of the Néstor Kirchner gas pipeline to be concluded by June 2023. The pipeline will connect the Vaca Muerta region in Northern Patagonia - well known for its major deposits of shale oil and shale gas - to the province of Buenos Aires. The project is of utmost importance to curb reliance on energy imports (and thereby save dollars) and would represent an upside risk to the trade balance if it is operational prior to the winter season (June to August). Meanwhile, the services deficit (0.7% of GDP) and income deficit (2.0% of GDP) should ease somewhat, respectively on back of lower freight costs and weaker repatriated foreign investment income. On the financing side, FDI will remain low due to economic and political uncertainty. In addition, although foreign currency reserves stood at USD 44.6 billion in December 2022, net reserves (excluding the central bank’s foreign borrowing from the BIS, China and dollar reserve requirements) were estimated at only USD 7.7 billion, thus giving import coverage of little over one month. Under these conditions, and to meet the challenging hard currency accumulation target established by the IMF of USD 5 billion in 2022 and USD 4.8 billion in 2023, the central bank has since March 2022 gradually tightened the rules for accessing the official exchange rate market for import payments. It is worth noting that while the Argentinian peso keeps a crawling peg with the USD, the gap between the official and the parallel exchange market stood at roughly 100% in early February 2023. At September 2022, the public sector total external debt was equivalent to 53.3% of GDP. In addition, in 2023, Argentina’s consolidated public sector faces external debt servicing costs (amortisation + interest) estimated at USD 28.9 billion or 4.8% of the 2022 estimated GDP (including USD 20.6 billion to the IMF) versus USD 16 billion in disbursements from the IMF.
On the fiscal front, Argentina will have a tough time meeting the terms of the consolidation agreement entered into with the IMF for 2023, namely to curb the primary deficit to 1.9% of GDP (excluding interest on debt) from an estimated 2.4% in 2022. Regarding public revenues, the expected slowdown in activity will erode tax revenue. Furthermore, from the spending standpoint, the government will need to improve the effectiveness and the targeting of social assistance and subsidies, while also maintaining critical infrastructure projects such as gas pipeline investments. The financing of the fiscal deficit relies mostly on domestic issuance, while the IMF agreement requires monetisation to slice 0.6% off GDP in 2023 (from 0.7% registered in 2022). One point worth noting is that general elections are due to take place in October 2023, which could heighten government caution and jeopardise its strategy to narrow the fiscal deficit. The principal creditors of Argentina’s gross public debt (64% domestic vs. 36% external) are local public sector agencies (46% of the total) followed by the private sector (local and non-residents taking 35% of the total) and, last, multilateral and bilateral organisations (19%). Local currency debt represents 33% of total public debt, with most of it being indexed to the US dollar or inflation.
Argentina heads to the polls in October 2023
The economic consequences of the Covid-19 pandemic, plus the war in Ukraine, have taken a toll on the popularity of President Alberto Fernández, head of the Peronist Frente de Todos (FDT) coalition. Faced with the economic and social side effects of the crises, divergences have widened between the moderate government stance and the more hardline, populist faction led by Vice-President Cristina Kirchner (including the latter´s disagreement with the conditions attached to the USD 44.5 billion Extended Fund Facility granted by the IMF in March 2022). Regarding foreign policy, the recent rise to power in Brazil by leftist President Luiz Inácio Lula da Silva should strengthen ties between the two countries, while also restoring the focus on the Mercosur trade agreement. In January 2023, the two countries signed a Memorandum of Understanding to begin a feasibility study on creating a common virtual currency to facilitate trade between the two countries. At the same time, Argentina flagged its intention to secure financing from Brazilian state development bank BNDES for the second stage of the Néstor Kirchner natural gas pipeline. Importantly, Argentina will go to the polls on 22 October 2023, when the population will vote for President (with a possible runoff on 19 November, 2023) and members of the Lower House and the Senate. It is not clear, yet, if President Alberto Fernández will bid for a fresh term or if another Peronist leader will run for leader of the incumbent coalition. While Vice-President Cristina Kirchner has not yet indicated if she intends to join the race, the current Minister of Economy Sergio Massa could be a possible candidate. Nonetheless, amid the current major economic challenges facing the country, the centre-right Juntos por el Cambio (JxC) opposition coalition has done well in initial polls. The leading candidates from the latter coalition are the current Buenos Aires mayor Horacio Rodríguez Larreta and one of JxC’s main leaders, Patricia Bullrich. Independent legislator Javier Milei, who espouses libertarian economic views, is also seen as a presidential hopeful.