Argentina, in search of another economic fix, as recovery tools limited
Argentina ended 2018 in a recession, and it’s facing a challenging recovery. It has now gone through five technical recessions (defined as two consecutive quarters of contraction) in the past decade, and this one is shaping up to be one of the worst. Even with a substantial loan from the International Monetary Fund, recovery is a ways off; Argentina doesn’t have the same fiscal tools in place it had ahead of its worst recession in the past decade, in 2008-09. The government will need to lean on external markets to dig its way out. But just as Argentina is searching for alternative sources of investment and consumption, the global economy is approaching a downturn. Argentina may be forced to navigate this downturn with fewer tools than it had before.
Unmet Expectations
2018 did not turn out the way Argentina thought it would. The government anticipated 2% growth in gross domestic product, inflation around 15% and an exchange rate of 20 pesos to the U.S. dollar. The IMF was similarly optimistic, estimating 2% growth and 22.7% inflation. But these numbers were way off. The government revised its expectations for the economy to 2.4% contraction; the IMF similarly anticipated a contraction of 2.8%. Accumulated inflation for 2018 reached 48.5%, according to Argentina’s central bank. The country’s currency fell from 18.6 pesos to the dollar at the start of the year to 38.4 by the end – despite the central bank, in the hopes of curbing interest rates and inflation, raising interest rates from 28% to a peak of 73% in October (though rates are now down to 60%). According to a study by Argentina’s Catholic University, urban poverty reached 33.6% in the third quarter of 2018, up more than 5% over the previous year. Unemployment hit 9%, up 0.7% from 2017. And public debt jumped from 59% of GDP in January to 78% at the close of the year.
The current economic crisis has largely been a domestic affair, driven by the implementation of structural reforms, including subsidy cuts on consumer items, and a severe drought that wreaked havoc on soy crops. Years of high spending on state subsidies by populist governments grossly distorted the cost of basic goods, and the public became acclimated to artificially low prices. In 2018, the government took its most significant steps yet to correct these distortions, removing subsidies and allowing prices to rise toward market value. Over the past year, this led to average price increases of 24% for electricity, 70% for gas and 116% for public transportation. The drought-stricken soy crop produced 36 million tons, well below the anticipated 54 million tons and 37% less than the previous season. Argentina sustained an estimated $3.4 bln in economic losses in 2018, and the government was forced to reinstate a controversial export tax on grain, hoping to generate additional revenue in U.S. dollars, but it still saw an internal decline of 9.9% in tax collection in November.
In 2008, Argentina was more financially isolated from the international system. It was coming off annual growth averaging 8.8% between 2003 and 2007, driven by domestic consumption and investment. Leading up to the current crisis, however, it has already endured three short technical recessions.
After a lackluster recovery, consumers have less to spend,