OECD Economic Outlook, Volume 2019 Issue 1

Argentina

The economy will recover gradually from the financial market turmoil in 2018. A strong currency depreciation has exacerbated high inflation, denting real incomes and investor confidence. Contractive macroeconomic policies and policy uncertainty in the run-up to the October 2019 elections will weigh on the recovery of domestic demand. However, exports will continue to lead the economy out of the recession, supported by the weaker real exchange rate and a strong harvest, although their strength will be severely limited by slow world trade growth. Unemployment is projected not to recede before 2020.

A large and appropriate fiscal consolidation is under way to achieve a primary fiscal surplus in 2020. Monetary policy will remain tight to fight persistently high inflation. Sticking to the announced targets will be crucial to restore confidence, but agreed fiscal room to cushion the social impact of the recession should be used as needed. Reducing barriers to competition and foreign trade is key to stronger growth.

The economy is in recession, but vulnerabilities are being reduced

During 2018, several bouts of capital flight and a weather-related decline in agricultural export revenues triggered a sharp depreciation of the currency, causing significant confidence losses and plunging the economy into recession. Macroeconomic policies responded swiftly with a more frontloaded fiscal consolidation and tight monetary policy. Fiscal and external accounts are already improving visibly, thus reducing imbalances and associated vulnerabilities. At the same time, the exchange rate has remained volatile in recent months and consumer confidence and retail sales have declined. Unemployment remains high at 9.1%, almost 2 percentage points above end-2017.

Fiscal, external balances,exchange rate and inflation: Argentina

1. Four-quarter moving average.

Source: INDEC; Ministry of Economy; CEIC; and Refinitiv.

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Argentina: Demand, output and prices

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Inflation has risen to 56% year-on-year due to the sharp currency depreciation and has proven more persistent than expected, owing to inertia, transitory supply shocks in the food sector and subsidy withdrawals. This limits the prospects for restoring lost consumer purchasing power, despite recent increases in pensions and social transfers, and ongoing wage negotiations. A more competitive exchange rate and good weather conditions have been supporting exports.

Sticking to policy targets is crucial to restore confidence and reduce inflation

An ambitious fiscal consolidation is aiming at a balanced primary budget for 2019 and a primary surplus of 1% of GDP in 2020, compared to a primary fiscal deficit of 2.4% of GDP in 2018. Fiscal targets were overachieved in 2018, and the bulk of public sector financing is assured by multilateral lenders until end‑2020. Public debt is expected to decline relative to GDP, although significant risks remain, including slower fiscal adjustment, higher interest rates or renewed currency depreciation.

A recent rebound in inflation has led the central bank to tighten monetary policy further by extending the current monetary base target until end‑2019. Although tight financial conditions will limit investment, a strong commitment to fighting inflation will be crucial to re‑anchor inflation expectations and restore lost confidence. Securing greater independence of the central bank by approving the draft bill recently submitted to congress is key for the strategy to restore credibility in the monetary policy regime and bring down inflation.

A modified exchange rate regime now provides greater scope for non‑sterilised interventions in support of the central bank’s disinflation strategy. Vigilance is nevertheless advisable to avoid a large real exchange rate appreciation that could undermine improvements in export performance.

More progress in structural reform is needed to improve productivity, boost exports and raise growth. Competition remains weak in many sectors, owing to domestic restrictions on firm entry, barriers to entrepreneurship and import restraints. Lower consumer prices resulting from stronger domestic and foreign competition would improve household purchasing power, especially among low‑income households. Better access to intermediate inputs would raise productivity and competitiveness of domestic producers, allowing firms to create better-paying and formal jobs. More professional training would help workers prepare for these new opportunities, while more effective unemployment insurance could provide income support for workers as jobs move across firms or sectors. About a third of the workforce is currently in informal employment, lacking any employment protection.

Exports are projected to lift the economy out of recession

As domestic demand remains constrained, exports are projected to drive the recovery, with quarterly growth rates turning positive during 2019. A slowdown of international trade is likely to limit the growth of export demand, but as domestic demand recovers, GDP growth is projected to strengthen to 2.1% in 2020. Policy uncertainty ahead of the October general elections is a key downside risk, while a more vigorous export recovery could constitute an upside risk.