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Eco Emerging

Argentina: Make or break

07/15/2024 • By François FAURE

The Ley Bases (a set of measures designed to liberalise the economy and, more generally, society) presented by Javier Milei after his inauguration last December was finally adopted at the end of June. As the President's party has no majority in either the Chamber of Deputies or the Senate, the final version was watered down. However, it is a victory for Milei, who is racing against time between an economy sinking into deep recession and the first signs of disinflation. For the government, the fight against inflation justifies the drastic cuts in public spending and the maintenance of a strategy of real exchange rate appreciation

EcoTV

Monetary Sovereignty: beyond the mantra
04/25/2024 • By François FAURE

The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.

Eco Emerging

Argentina: Shock therapy

02/13/2024 • By François FAURE

Following his clear victory in the presidential election, the new president, Javier Milei, intends to push ahead with the liberalisation and deregulation of the economy. A decree and an omnibus bill containing just over 1,000 measures, including some very radical ones, are already being scrutinised in the National Congress of Argentina. These measures have been received rather favourably by the markets and the IMF. However, against a very tense political and social backdrop, the economy is plunging into stagflation and thecountry’s financial situation is still very precarious. The government has already discussed a reprofiling of domestic public debt repayments with the banks. A default on external debt could still be avoided with support from the IMF

Eco Emerging

Argentina: Here we go again
04/14/2023 • By François FAURE

Argentina’s economy is in turmoil. Since Q4 2022, it has been mired in a recession that is bound to extend at least through H1 2023. The farm sector has been plagued by misfortune: for the third consecutive year it has been hit by drought – whose intensity has been compounded by climate change – and an outbreak of avian influenza. Inflation has soared, forcing the central bank to tighten monetary policy. Despite fiscal efforts, the balance of payments and foreign reserves are coming under increasingly fierce pressures, even with IMF support. The government has rolled out a series of measures to avoid wasting foreign reserves and defaulting on its external debt with official creditors. It has also had to offer a proposal to reschedule domestic debt in the local currency.

Eco Emerging

Time is running out
01/25/2022 • By François FAURE

Looking beyond the strong recovery in 2021, the Argentine economy remains fragile. Production in primary and secondary sectors has returned to its pre-pandemic levels. However, the economy remains constrained by high though largely repressed inflation, which is hitting household consumption and services. Since December 2021, a new wave of Covid-19 infections has introduced additional uncertainty. The mid-term elections have weakened the government coalition, which is still negotiating with the IMF. Monetary policy is tightening and the normalisation of budget deficit financing will require a slowdown in expenditures, although a drastic consolidation is unlikely. However, time is running out

Eco Emerging

Still under emergency measures
10/05/2020 • By François FAURE

The health crisis has slammed an economy that was already suffering from more than two years of recession. GDP will probably contract by more than 10% in 2020. With the technical rebound that began in late Q2 and the signing of a public debt restructuring agreement, the country should manage to pull out of recession in the second half. Yet financial instability persists with the erosion of foreign reserves, the stark disconnection between official and parallel exchange rates and expectations of surging inflation. The authorities have tightened forex controls again. IMF support is essential for financial stability but might not suffice for a sustainable recovery.

Argentina is the third largest economy in Latin America, behind Brazil and Mexico. The economy is mainly based on primary goods and the agro-food industry which together represent 70% of exports. Argentina has large energy resources (e.g. huge shale gas reserves). Despite its substantial economic potential, the country has experienced severe crises in the recent past (in 2001, Argentina defaulted on USD 100 bn sovereign debt and again recently in 2019 on USD 66 bn sovereign international bond debt) and the country is characterized by strong growth volatility and high inflation mainly due to macroeconomic mismanagement.

Following presidential elections in November 2015, President Mauricio Macri had taken decisions to restore the country’s external liquidity and liberalise the economy. After a recovery in 2016-2017, the economy fell in recession again in 2018 due to negative external shocks and macroeconomic mismanagements. The economic situation kept deteriorating up to the October 2019 general elections. In a context of uncontrolled inflation and currency depreciation, the erosion of foreign reserves and the failure to roll over short-term bonds forced the government to i) impose an extension of the repayment of Treasury bonds under domestic law (including  bonds in USD imposed in late 2019 leading external rating agencies to downgrade the sovereign in the default category), ii) announce a re-profiling of its international bond debt and iii) tighten capital controls. Finally, the Macri government lost general elections and Peronists returned to power with Alberto Fernandez as President.

In 2020, the lockdown imposed by the covid19 outbreak took a hard toll on an economy already in recession for two years. The administration of President Fernandez confirmed in early 2020 its intention to restructure its long-term bond issued under both local and foreign law. And in September 2020, the government concluded a debt restructuring which will alleviate liquidity pressure in the near future. But the central bank had to tighten capital controls further to contain the drain on fx reserves. Moreover, the government got only a very marginal reduction in the face value of its debt. As a consequence, state’s solvency remains very fragile. An agreement with the IMF, currently under negotiation, is vital to bolster external liquidity and restore the state’s solvency.