OECD Economic Outlook, Volume 2023 Issue 1

Argentina

Following an economic slowdown at the end of 2022, GDP is expected to contract by 1.6% in 2023 and then recover by 1.1% in 2024. The labour market has improved, but the coming recession is expected to bring a drop in employment. Exports are suffering from a severe crop drought in 2023 but will recover in 2024. Inflation surpassed 100% and will remain high in the short term, despite a slightly less expansionary fiscal stance. Tight capital controls and policy uncertainty ahead of the October 2023 elections will hold back investment and consumption in 2023.

Public spending will rightly fall during 2023, as energy subsidies are scaled back and compliance with fiscal targets requires further spending restraint. A continued reduction in transfers from the central bank to the treasury should reduce inflationary pressures in the medium term, narrow the gap between the official and the parallel exchange rates and lower the risk of a sudden devaluation. Stabilising the macroeconomic situation and lowering inflation will be crucial to reduce high poverty and address mounting social pressures.

Growth is weakening

Output contracted in the last quarter of 2022, mainly driven by a decline in investment and private consumption. Short‑term indicators point to a further contraction during the first half of 2023, as agricultural production is affected by a severe drought. Unemployment has returned to pre‑pandemic levels, reaching 6.3% in the fourth quarter of 2022, although informality has increased sharply, approaching 40% of the labour force. Consumer confidence has declined. Headline inflation rose to 108.8% in the year to April, the highest level in over 30 years, amid a widening gap between the managed official and the parallel exchange rates. With no formal anchor for inflation expectations, inflation is broad‑based, and core inflation is at 105%.

Argentina: Activity, inflation and exchange rates indicators

Source: CEIC; Instituto Nacional de Estadísticas y Censos; OECD Exchange rate database; Central Bank of Argentina; and Ambito.com.

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Argentina: Demand, output and prices

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As a net energy importer, Argentina has been exposed to high and volatile energy prices, particularly of LNG. To soften the impact of higher energy costs, the government has extended price controls into 2023, which also cover some food and beverage items. Lower export revenues and low foreign currency reserves are increasingly putting pressure on public finances, external accounts, and the overall economy.

Fiscal and monetary policy will remain tight

Fiscal policy targets imply a less expansionary fiscal stance in the future but meeting the primary deficit target of 1.9% of GDP in 2023 will be challenging, despite continued reductions of energy subsidies. In the coming months, the drought will lead to a sharp drop in export tax revenues, which could raise the fiscal deficit. The central bank has raised the policy interest rate thirteen times since early 2022, to reach 97%, which has improved the incentives for holding domestic currency balances and relieved exchange rate pressures. Given the recent increase in inflation, further increases are warranted during 2023. Continuous reductions in transfers from the central bank to the treasury will be key to stabilise the economy, and this will also require further fiscal restraint.

Output will contract in 2023 amid increasing risks

The economy will contract by 1.6% in 2023 and then gradually recover, with growth of 1.1% in 2024. Higher inflation, fiscal moderation and tighter capital controls will all weigh on consumption during 2023, while low confidence levels and import restrictions will continue to hold back investment. The drought and the bringing forward of some exports in 2022 due to exchange rate incentives imply weaker exports in 2023. Inflation is projected to remain high in 2023 amid high food inflation and emerging wage pressures. A gradual upturn is projected for 2024 as macroeconomic vulnerabilities are gradually reduced and exports recover. The opening of a newly built gas pipeline from gas fields in the country’s south is expected to reduce dependence on gas imports and could reduce external vulnerabilities.

Risks appear tilted to the downside. Low foreign exchange reserves, tight currency restrictions and large volumes of outstanding central-bank bonds in a context of rising inflation and interest rates could lead to currency devaluation, spiralling inflation, and an inability to comply with current fiscal targets. Recently introduced preferential exchange rate arrangements for agricultural exporters managed to anticipate currency inflows and provide temporary relief, while shifting some of the underlying risks into the near future. Political pressures for higher spending in the face of a deteriorating economic situation could also jeopardise the planned fiscal adjustment. On the upside, stronger global demand for Argentina’s exports could lead to stronger growth and currency inflows, reducing pressure on the exchange rate.

More targeted reforms could reduce poverty and strengthen growth

More effective social spending could help to reduce poverty and inequalities, as poverty has risen to 39% and more than 50% of children live below the poverty line. Current attempts to improve the targeting of utility subsidies go into the direction of improving public spending efficiency. However, further reforms to subsidies are still pending and remain politically challenging. Reducing barriers to competition and trade, raising female participation in the labour market including through better access to early childhood education, and investing more in the quality of primary and secondary education would foster stronger productivity and improve equity.