Argentina: New Prospects and Old Risks

Quick Overview

Argentina is one of the largest economies of South America, with a Gross Domestic Product (GDP) of more than USD 540bn. It enjoys good relations with most of the countries in the region, particularly Brazil and Venezuela. The country also plays a leading role in regional policymaking as a representative of Latin America in the G-20, jointly with Mexico and Brazil. Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Thanks to its large-scale agricultural and livestock industry, the country is a major food producer. It is among the world’s largest beef exporters and the leading producer of sunflowers, yerba mate, lemons and soybean oil. The opening of the Chinese market has helped boost the country’s export potential.

The “Victorious Decade”

Although it was one of the world’s wealthiest countries 100 years ago, Argentina suffered recurring economic crises during the 20^th century. A severe depression, growing public and external indebtedness, and an unprecedented bank run culminated in 2001 in the most serious economic, social, and political crisis in the country’s turbulent history. Interim President Rodriguez declared a default on the government’s foreign debt in December of that year, and abruptly resigned only a few days after taking office. His successor, Eduardo Duhalde, announced an end to the peso’s decade-long 1-to-1 peg to the USD in early 2002. The economy bottomed out that year, with real GDP 18% smaller than in 1998 and almost 60% of Argentines under the poverty line. Real GDP rebounded to grow by an average 8.5% annually over the subsequent six years, taking advantage of previously idled industrial capacity and labor, an audacious debt restructuring and reduced debt burden, excellent international financial conditions, and expansionary monetary and fiscal policies. In late 2007, the rapid economic growth of previous years began to slow sharply the following year as government policies held back exports and the world economy fell into recession. The economy rebounded strongly from the 2009 recession in 2010, but has slowed since late 2011 even if the government continued to rely on expansionary fiscal and monetary policies, which have kept inflation in the double digits. During this year, the country’s fiscal situation has deteriorated due to growing outside pressures, particularly the worsening economic situation in Brazil and China. Growth for 2015 is estimated at about 0.5%.

The “victorious decade” is largely thanks to a sovereign debt default, which remains unresolved with 10% of debts still to be repaid, and a lucky commodity price boom, which has turned to bust. Argentina has invested heavily in health and education, areas which account for 8% and 6% of GDP, respectively. Between 2003 and 2009, the middle class doubled in size, from 9.3 million to 18.6 million (equivalent to 45% of the population).

In recent months the country’s fiscal situation has deteriorated due to growing outside pressures, particularly the worsening economic situation in Brazil and China. Growth for 2015 is estimated at about 0.5%.

Recent Elections and New Prospects

The country held presidential elections on October25^th, but no candidate emerged triumphant, as no one was able to surpass the 45% vote threshold. Despite their different proposed approaches, the two candidates agree that gaining access to international capital markets is key to improving the country’s growth trajectory and fiscal stance. Expectations that the incoming government will devalue the currency soon are weighing on foreign reserves as the Central Bank tries to counteract excess demand for the U.S. dollar.

Mauricio Macri won Argentina’s second-round runoff election on November 22^nd to become the country’s next president. The mayor of the city of Buenos Aires took 51.4% of the vote.

Mr Macri is expected to roll back some of the protectionist economic measures of the departing president the policies of Ms Fernández and her husband Néstor Kirchner. The new president will also improve relations with foreign creditors and with the United States.

On one hand, Mr. Marci said that he would keep the nationalized companies like Aerolíneas Argentinas and YPF, Argentina’s largest oil company, under state control. On the other hand, Macri’s campaign focused on promises of sweeping economic reforms to tackle weak growth, high inflation and a structural fiscal deficit after more than a decade of free-spending policy. He called capital controls a mistake and said his government would restore the Central Bank’s independence and overhaul national statistics. He is also confident in eliminating export taxes and quotas on corn and wheat shipments.

What is next?

Foreign investors are waiting for details on how and when Macri will tackle debt default negotiations with U.S. creditors, remove capital controls, devalue the peso currency and replenish hard currency reserves.

However, the challenges are enormous. From a macroeconomic point of view, currency reserves are running perilously low and the slowdown in China, weak commodity prices and a deepening recession in main trade partner Brazil are all huge risks.

Mr. Macri may need time to transform the economic wasteland he inherits from predecessors who were happy to default on their country’s debt and protect inefficient businesses from competition. However, the effects of his success are likely to be perceived outside Argentina soon.

Concerning the next months, we are positive on the Argentine farming sector. The reforms in this sector will not have any significant fiscal impact and will stimulate private investment. In addition, some of the reforms announced can be adopted relatively easily and quickly and will make Argentina’s farm exports more competitive in international markets.

Other reforms, to be implemented in the medium term, are expected to increase farm productivity and facilitate exports. These include, for instance, a simplification of the taxation system, investment in infrastructure, and the adoption of new policies and laws to develop the agro-industry sector.

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