Signs are mounting that Argentina is headed toward recession in the next few months, less than two years after emerging from the latest one.
A severe drought and currency crisis shook Latin America’s third-largest economy just as President Mauricio Macri sought to consolidate its incipient recovery. Economic activity fell 2.7% in April, the largest monthly decline since Macri took office in December 2015. Growth also declined on an annual basis for the first time in 14 months, the nation’s statistics agency said Tuesday, Bloomberg reported.
The drought hamstrung production of soy, Argentina’s chief export that supports many industries and is a key source of government revenue. Agricultural economic activity plunged 30.8% in April, according to official data published Tuesday. And the currency crisis forced the central bank to raise rates to 40%, further weighing on economic activity.
“It’s almost certain that Argentina will fall into recession,” said Fausto Spotorno, chief economist at consultancy Orlando J. Ferreres & Asociados. “We won’t see the recovery until the end of the year.”
A recession would complicate Macri’s plans to further cut government expenditures as agreed with the International Monetary Fund in exchange for a $50 billion credit line. Macri won the 2015 election promising to spark growth with a pro-business agenda, but stubbornly-high inflation and his initial spending cuts have hampered the economy.
More Cracks
Signs of economic trouble are increasingly apparent. Argentina’s leading private construction index declined 5% in May, and it’s been down four of the last six months. Chances of a recession in 2018 rose to 68.1% in May from 24.4% in April, according to a leading index published by Torcuato Di Tella University.
And at least three consumer brands are running into trouble. Longvie, a kitchenware retailer, had its debt rating cut last week by Fix SCR, an Argentine subsidiary of Fitch Ratings, which cited a decline in consumer demand for its decision. Carsa and Santiago Saenz, two large retailers, both requested in the last few months a court procedure against bankruptcy similar to the US Chapter 11.
To be sure, most economists forecast a brief recession, with gross domestic product shrinking for two or three consecutive quarters at most. Argentina’s central bank also predicts only a “temporary deceleration” in growth this year. The bank’s monthly poll of independent economists shows contractions for the second and third quarters. The previous poll showed both quarters flat or in positive territory.
“It will be a mild recession,” said Daniel Artana, chief economist at the Latin American Economic Research Foundation. But he warned it could get worse if Brazil and the US raise rates faster than expected and emerging markets as whole continue to sell off. “It depends on what happens in the rest of the world in the months ahead, not just in Argentina.”
Delicate Financial Situation
Argentina's financial situation is by far the most delicate one in South America. Buenos Aires has been running trade and current account deficits, and its international reserves are not large enough to tame the peso's depreciation. Its international reserves are more than $60 billion, and its current account deficit reached 4.8% of the gross domestic product last year.
Additionally, Argentina has been issuing public debt in foreign currency to cover its fiscal deficit, which is expected to be about 2.8% of GDP this year.
Its inability to bring down inflation makes its case riskier than other emerging markets, and the weakening of the peso will put even more pressure on inflation. The government already has revised its inflation target for the year, raising it from 15% to 26%. Private consulting firms are more pessimistic; they say inflation could go as high as 32%.
Because of the weaknesses of the economy, Macri decided to turn to the International Monetary Fund for help. On June 7, Argentina signed an agreement with the IMF to receive a $50 billion standby loan. The loan will provide Argentina some relief against the rising US dollar.
The IMF set some ambitious fiscal and inflation targets, however. The government lowered its fiscal deficit target from 3.2% to 2.8% of GDP. Next year's target will be 1.3%, while the inflation goal for 2019 will be 17%. To meet the IMF's conditions, the government will have to cut public spending.
