I recently vacationed in Buenos Aires for about a week. It was the first time that I traveled abroad by myself, and I have to say that I quite enjoyed myself. Not only did I get to see the sights of Buenos Aires, but it gave me an opportunity to talk to Argentinians. One of the common themes that came up in conversation with the people I met was the economy. Inflation is not as bad as it is in Venezuela, but it's bad enough where inflation for food went up 3.7 percent between December and January. While I was down there, they had announced on the news that year-to-year inflation went up by 49.3 percent.
This inflation is the latest in ongoing Argentinian economic woes. In the 2000s and early 2010s, Argentina was run by the Kirchners. During the Kirchner administrations, inflation was at 40 percent, unemployment was high, and Argentina endured a recession. In response, the Argentinian people elected Mauricio Macri in 2015. Unfortunately, Macri didn't do enough to fight off economic issues. An increased reliance on external financing got so out of hand that the Argentinian peso (ARS) devalued by nearly half (see my 2018 analysis here). At the beginning of 2018, the exchange rate was about 14ARS:$1USD. When I was on vacation, the peso devalued to about 40ARS:$1USD. From my conversations while I was on vacation, it does not seem like things have gotten better for Argentina. Looking at the current data and economic projections, I wanted to see if things were getting better, worse, or if it is more of the same.
Fitch Ratings: Fitch affirms its rating for Argentina at B. However, in November, it changed its outlook from stable to negative. Weaker prospects for economic growth, as well as uncertainty surrounding fiscal consolidation and market financing availability, drove Fitch's more pessimistic outlook. Fitch does not expect a positive outlook, and even a stable one is unlikely. Strengthening in external liquidity, recovery in economic activity, and complying with IMF's near-term fiscal targets would provide Fitch with more optimism. The political uncertainty of the elections and potential macroeconomic instability could make matters worse. While macroeconomic adjustments take place, investors are likely to be cautious in 2019. On the plus side, Fitch anticipates that sovereign financing needs will be covered in 2019.
Banco Central de la República Argentina: According to its Resultados del Relevamiento de Expectativas del Mercado (also see here), the Argentinian central bank is predicting 28.5 percent inflation in 2019. GDP growth is varied for 2019 (-1.2%), 2020 (2.5%), and 2021 (2.5%), although it looks like 2019 will be the worst of it for the medium-run. The exchange rate is looking to take a hit. It is expected to go from 38.3ARS to 48.0ARS to the dollar.
Heritage Foundation Economic Freedom Index for 2019: Argentina's economy continues to be classified as "Mostly Unfree" under this Index (also see here). The Index's metrics of Property Rights and Monetary Policy improved year-to-year, whereas Government Spending and Fiscal Health decreased. Government spending has amounted to 41.6 percent of GDP, which is problematic when the Macri government is using austerity (i.e., less government spending and higher taxes) to close the fiscal gap.
International Monetary Fund (IMF): In December 2018, the IMF released its latest report on the stand-by agreement it made with Argentina earlier in 2018. As of October 2018, Argentina met the IMF's program targets, and is projected to meet the 2019 targets. The economy is expected to rebound in the second quarter of 2019 because the agricultural sector will pick up after the drought of 2018 (p. 7). Global financial conditions are of worry, as are the results of the 2019 presidential election. Conversely, increased trade with Brazil could help stabilize (ibid.). Another plus is that demand for Argentinian bonds has strengthened and sovereign risk is on the decline. Monetary policy is also geared to bring down inflation (p. 12).
Organization for Economic Cooperation and Development (OECD): In its November 2018 economic forecast, the OECD expressed concern that fiscal and monetary tightening will keep Argentina in a recession through 2019. On the other hand, what will be a drag on short-term growth will help Argentina deal with fiscal and current account imbalances in the longer-run, as well as restore confidence in the Argentinian economy. While it is expected to be painful for Argentina in 2019, developing stronger macroeconomic fundamentals will help Argentina in the future.
Standard and Poor's: The renowned credit rating agency downgraded Argentina from B+ to B in November 2018 (France24) due to inflationary issues and lack of economic growth. Standard and Poor's does predict that if the economy can stabilize and the upcoming presidential election doesn't take Argentina off course, there should be a recovery in the next year or so.
World Bank: In its January 2019 Global Economic Outlook, it predicts that the Argentinian economy will contract 1.7 percent in 2019, followed by 2.7 percent GDP growth in 2020 (World Bank, p. 83). The 2019 GDP growth prediction is in line with the IMF's prediction (IMF, p. 25).
My Concluding Thoughts: The agreement that Argentina made with the IMF in 2018 is putting the Argentinian economy through some short-term pain. That much I witnessed firsthand when I was in Argentina. Argentina has an unusual economic history in that it went from being an economically developed country in the early 20th century to becoming more undeveloped since the mid-20th century. Argentina has decades of subpar public policy that has shaped its economy into the mess that it is today. It is discombobulated enough where there is no easy solution if Argentina wants a long-term remedy. The hard truth is that if the Argentinian economy not only wants to recover but also become a fully developed economy, it needs to deal with the austerity in the short-term.
That is a difficult thing to convince Argentinians of, especially when there is a presidential election later this year. Although Argentinians are having to deal with lower incomes, higher interest rates, and higher unemployment in the short-run, President Macri might have less to worry about than anticipated, as is outlined in this analysis from the Council on Foreign Relations. Aside from security being an issue that is as important to Argentinians as the economy, there is no great alternative to Macri. The best bet right now is former President Christina Fernández de Kirchner. Her policies were the ones that got the Argentinians in this economic quagmire in the first place. Even better, Kirchner is currently wrapped up in a corruption scandal.
This is not to say that Macri has the election secured because another economic downturn shortly before an election would most probably undo his current advantage. That being said, I understand that what the IMF is asking Argentina to do on a macroeconomic level is politically unpopular. But if the next president of Argentina undoes the progress made, not only would that erode global confidence in Argentina, but it would prevent Argentina from much-needed macroeconomic adjustment. If Argentina could stay the course with the IMF agreement, it would do wonders for the Argentinian economy in the medium-term. It is easy to say "no pain, no gain" as a distant observer who does not have to worry about his cost of living skyrocketing because of tight fiscal and monetary policy. At the same time, short-term pain is exactly what Argentina needs to go through if it wants to stop repeating its history of substantial economic downturn.
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