Even though activity fell again in Q4 2021, GDP will have posted a strong recovery over the whole year, given strong carry-over effects. In 2022, however, growth is likely to slow markedly due to: 1/ the expected acceleration of inflation and tightening of monetary policy (the BCRA has already raised its policy rate from 38% to 40%; 2/ the (temporary) shock from the expected devaluation of the official exchange rate, a necessary condition to reduce the increasing divergence between exchange rates[1] and for the gradual withdrawal of foreign exchange controls; and 3/ the normalisation of the financing of the budget deficit and a slowdown in current spending.
The monthly inflation rate fell by an average of around 4% between October 2020 and April 2021, and by 3.2% between May and December 2021. But this deceleration is temporary. Granted, the depreciation of the official exchange rate has been reduced to 1% per month since July, compared to 3% in H1 2021. But the gap between the market rate and the official rate is well above the 40% threshold at which the pass-through effect of the exchange rate on prices is amplified. Moreover, the slowdown in inflation has come at the cost of price controls (going as far as a temporary freeze between October 2021 and early January 2022), the already-broad scope of which is likely to be extended[2]. Repressed inflation is estimated at around 10 percentage points compared with 51% y/y for CPI inflation.
The expected catch-up of frozen prices and the adjustment of regulated prices have raised fears of a reacceleration in H2 2022, which could push the inflation rate to 60% y/y at mid-year or so. On top of this, there is the possible unfavourable effect of future monetary and exchange rate policies if their negative effects (devaluation of the official exchange rate, increase in the target rate of depreciation to allow the central bank to rebuild currency reserves) outweigh the positive effects (monetary tightening, closing of the gap between official and market exchange rates).
A mixed picture for public finances and external accounts
At first sight, the budget deficit was reduced markedly in 2021. It was only 3.1% of GDP (2.2% excluding interest payments) over the 12 months to November, compared to 8.5% and 6.5% respectively in 2020. However, the performance is less impressive when one takes account of the transfer of SDRs (1% of GDP) and exceptional revenue raised on the extraordinary tax on financial market gains (0.6% of GDP). Moreover, the interest paid by the central bank on its debt (Leliq and swaps), which in December represented around 100% of money supply (from 80% in 2020), is not included in the central government’s budget. Even so, these payments represent the sterilisation cost of budget deficit monetary financing. These payments were the equivalent of 2.6% of GDP, as in 2020, despite the reduction in direct advances from the BCRA to the Treasury (from 7% of GDP in 2020 to 2.7% in 2021). In all, the budget deficit corrected for transfers from the central bank, but including sterilisation costs, was 6.4% of GDP, which gives a more accurate picture of the imbalance in the public finances. By the end of December, the 2022 budget had still not been adopted, having been rejected by the Senate. The government will need to revise it and get it passed quickly, as its adoption is a precondition for the IMF.
External liquidity remains low despite a trade surplus that has increased, and will probably exceed USD15 billion in 2021 as a result of the very strong price increases for the main agricultural exports (+47% for soybeans, +38% for corn and +16% for wheat). The basic balance (current account balance + net direct investment) is likely to show a surplus of at least USD10 billion. However, forex reserves, which increased to USD46 billion after the acquisition of SDRs, have since fallen to USD39 billion, below their end-2020 level. Net outflows of portfolio investment reached USD5 billion over the first nine months of 2021, and net purchases of foreign currency by the non-financial private sector resumed in the second part of the year.
According to estimates from Global Source Partners, payments of interest and principal on external debt will reach around USD25 billion in 2022 (USD22 billion to the IMF) and USD29 billion in 2023 (USD23 billion to the IMF). A rescheduling agreement is essential before the next major repayment date in March (when more than USD5 billion are due to official creditors alone, consisting mainly of the IMF and the Paris Club).
