RaboResearch - Economic Research

Argentina: winds of change

Country Report


Argentina is heading for change as the October 2015 elections are approaching. However, the economic tide will take longer to change as macroeconomic imbalances are large and increasing.

Strengths (+) and weaknesses (-)

(+)      Competitive agricultural sector 

Argentina has a well-developed and dynamic agricultural sector. The sector benefits from the good quality of the Argentine soil, a favourable climate and good access to sea transport.

(-)       Macroeconomic imbalances

Ultra-loose monetary and fiscal policies have caused huge macroeconomic distortions. Double digit inflation has led to a deterioration of the current account balance, which has eroded FX reserves.

(-)       Unpredictable economic policy

To contain the growing macroeconomic imbalances, the government has implemented tight import and currency controls and has implemented various interventionist measures, thereby hurting investor confidence and exacerbating economic woes.

(-)       Lack of access to external financing

Following the still disputed default in 2001, Argentina lacks good access to external financing. The ongoing technical default of the sovereign makes it difficult for a new administration to return to international markets in 2016. 

Key developments

1. October elections will be a tight race, but are likely to result in change anyway

Primary election results predict  a tight race between Daniel Scioli and Mauricio Macri during the general elections this autumn. Irrespective of the winner, policy is expected to become more business friendly. On 9 August, Argentina held mandatory primary elections and the candidate of the ruling FPV, Scioli, received the most votes (38.4%). Macri came in second with 24.3% of the votes. None of the candidates reached the threshold of 45% of the votes or 40% and a 10ppts margin needed to win in the first round elections on 25 October, so a run-off between Scioli and Macri in November is highly likely. The results place the FPV and its candidate in a favourite position. But support for the party in its stronghold of Buenos Aires was weaker than in the past. Furthermore, a forced depreciation (see key development 3) could hurt the FPV significantly. Therefore the race is likely to be tight. Both candidates are expected to adopt more business-friendly policies, such as resolving the current technical default to regain access to international capital markets.

2. Macroeconomic imbalances remain huge, despite lower GDP contraction and lower inflation

The contraction of the economy is expected to moderate in 2015 and inflation to fall, but imbalances remain huge. GDP growth is estimated to improve from -2.5% in 2014 to -0.5% in 2015. However, as this seems to be mainly driven by government consumption it will only add up to already high inflationary pressures. An expansionary fiscal stance and falling revenues pushed the budget deficit in the first 4 months of 2015 up by 321% yoy. In 2015 as a whole, the budget deficit is expected to increase by 60% to 4.1% of GDP. Inflation is expected to fall from 38% in 2014 to 28% in 2015, as the government managed to increase the issuance of domestic debt by linking it to the exchange rate and stepped up inflation repressing interventions like the expansion of the price controls programme Precios Cuidados. Still, a fast increase of the monetary base in recent months suggests the central bank remains the main source of financing. Therefore, though repressed, inflationary pressures remain high and add up to the already large macroeconomic imbalances the new administration needs to tackle to bring the Argentinian economy on a sustainable path. Such an adjustment will be difficult, as the extensive social benefits system currently in place will be hard to reform without causing a social backlash, especially as the labour market is expected to deteriorate. Candidate Scioli is expected to take a more gradual approach, which carries the risk that the adjustment will not be fast enough to avoid a crisis. An increase of private investments should provide some relief to the economy, as companies have been postponing investment decisions until after elections. Nevertheless, Argentina will need to choose for short term pains in order to get to long term gains.   

Figure 1: Budget deficit soars
Figure 1: Budget deficit soarsSource: EIU
Figure 2: Inflation still high and underreported
Figure 2: Inflation still high and underreportedSource: INDEC, EIU

3. Risk of a forced depreciation is picking up ahead of elections

Downward pressures on the exchange rate are picking up as elections come closer and are increasing the risks of a forced depreciation of the peso and even a balance of payments crisis as FX reserves are critically low. The peso has depreciated by 23% on the black market since 1 June. Lower commodity prices, USD strength and weakness in main export market Brazil are weighing on the trade surplus and hurting USD revenues. The current account deficit remains relatively low at 1.4% in 2015, but this is problematic nevertheless, given Argentina’s limited access to external financing. But downward pressure on the peso increased in recent months as the depreciation of the Chinese yuan hurt the terms of trade and expectations of peso depreciation after elections pushed Argentinians to increase the dollarization of their portfolios and postpone export sales. Yuan depreciation also hurt the value (in USD terms) of the FX reserves, as 25% of the total reserves are held in  yuan. A USD 6.5bn payment on Boden 15 bonds due in October will add up to these pressures. The government has recently tightened FX controls, but it remains to be seen whether that will be enough to stave off a forced depreciation and even a balance of payments crisis until after elections, as net FX reserves could be depleted soon. 

Figure 3: Trade surplus shrinks
Figure 3: Trade surplus shrinksSource: EIU
Figure 4: Depreciation pressures pick up
Figure 4: Depreciation pressures pick up Source: Macrobond, IMF IFS
Factsheet of Argentina
Factsheet of ArgentinaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank. 

Background information

Argentina has experienced many political and macroeconomic crises. From the mid-1970s to the early 1980s, the country was under military rule, which ended when Argentina lost the Falklands war. In the 1980s, high inflation turned into hyperinflation. With a tight dollar peg introduced in 1991, the Menem government managed to bring inflation under control. However, in the late 1990s this peg left Argentina unable to deal with the combined impact of low commodity prices, an appreciating USD, substantial dollarization and pro-cyclical fiscal policies; the country was heading for a big economic, political and social crisis. In 2001/2002, Argentina had to abandon the peg and at the same time declared the biggest sovereign default in history. Argentina has been largely excluded from international financial markets ever since. Afterwards, the country managed to recover quickly and benefitted from the commodity boom. However, Argentina’s economic policies have become increasingly interventionist, ad-hoc and unsustainable. Inflation has been high and severely underreported for many years, resulting in balance of payments pressures, which the government is trying to fight with tight import, currency and capital controls. Argentina’s institutions have remained weak and its politics are centred on persons, with party loyalty and, in particular, ideology playing a much smaller role. The country has a very dynamic and advanced agricultural sector, which accounts for 55% of total exports. Soybeans and soybean products are the most important agricultural export commodity and account for roughly one-third of Argentina’s exports. Manufacturing, largely accounted for by the automotive sector, is another important pillar of the economy. The most important export market for Argentina’s products is Brazil. With a nominal GDP of USD 12,805 per capita in 2014, Argentina remains one of the richest countries of Latin America.

Economic indicators of Argentina
Economic indicators of ArgentinaSource: EIU, M&S Consultores (*), IMF(**); Some data is based on unreliable official data
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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