What is causing Argentina’s latest economic woes?

Devastating drought
Argentina’s crucial agriculture sector—which accounts for over half of exports and around 9% of GDP—is being hammered by unprecedented dry weather. Soybean production is expected to be over 40% below the 5-year average this year, and wheat production is forecast to fall by around a quarter in the 2022/23 marketing year from 2021/22.

Erratic policymaking
But the country’s economic problems run far deeper than circumstantial bad weather. Government interference in the private sector is considerable, in the form of taxes and other restrictions on imports and exports, and multiple exchange rate practices—in March this year the government announced a specific “Malbec dollar” rate for wine and other agriculture products for instance. This interference, coupled with the lack of an overarching, comprehensive structural reform blueprint—in 2020 the president said in an interview “Frankly, I don’t believe in economic plans”—has sapped investors’ confidence.

Spiraling inflation
The combination of weak confidence in government policymaking and lower inflows of foreign currency due to drought have weighed on the peso in recent months; the official FX rate is now over ARS 200 per USD, compared to just over ARS 100 per USD this time last year. The black-market peso is priced at a much higher ARS 460 per USD. As a result, inflation is in triple figures and rising. And the Central Bank has jacked interest rates up to 91% in response, heaping more misery on the economy.

A risk-laden outlook
Our Consensus Forecast is for GDP to contract 2% this year, and for inflation to end the year around 110%. These figures are already bad enough, but risks are still stacked to the downside. The drought could intensify. Social unrest may bubble over as economic conditions worsen. And as the October 2023 general election approaches, the government could enact populist measures in a bid to gain public support, putting the country’s IMF deal in jeopardy. Even if the opposition Together for Change coalition wins the elections as expected, recovery will be slow. Economic instability has been a feature of the Argentinian landscape for a century or more; it is likely to remain so for some time.

On inflation, The EIU said:
“The biggest challenge for the current and next government will be to rein in inflation. Upcoming adjustments to regulated prices and the official exchange rate—at a time of still-high global food and fuel prices—will complicate efforts to anchor inflation expectations. Argentina will remain one of the region’s highest-taxed countries, to the detriment of the investment climate. An exodus of high-income individuals and businesses to more tax-friendly jurisdictions (such as Uruguay) will continue at least until the 2023 election.”

On the fiscal position, analysts at Itaú Unibanco said:
“There is still a risk of a significant monetary expansion to finance the fiscal deficit and service the peso-denominated debt, despite the latest peso-denominated bond exchange. The private sector remains uncomfortable purchasing bonds maturing after the presidential election – which hints that the political forces that are likely to prevail also face credibility issues. As a result, the central bank continues to purchase bonds in the secondary market to provide liquidity for the debt auctions.”