OECD Economic Outlook, Volume 2020 Issue 1

Argentina

When the COVID-19 pandemic hit Argentina, the economy was already in recession and uncertainty was high, in particular regarding the restructuring of the high public debt. While the timely containment measures mitigated the spread of the virus, they reduced production capacity and domestic demand. With the gradual lifting of the lockdown, domestic demand will recover, but remain subdued due to higher unemployment and lower household incomes. A significant rebound of investment will depend on a successful restructuring of public debt. GDP is projected to fall by around 10% in 2020 in the event of a second virus outbreak and another dip in economic activity later in the year (the double-hit scenario). If this does not occur, a faster recovery is possible, with GDP declining by around 8¼ per cent in 2020.

Bold and timely measures have been undertaken to contain the pandemic and support households and firms, and should be repeated in event of a second outbreak. Without access to financial markets, the central bank is contributing to the financing of the fiscal deficit, which puts additional pressures on inflation and the exchange rate. A successful restructuring of the high public debt would alleviate these pressures, but further efforts might be required to strengthen the sustainability of public finances. Improvements in public spending efficiency should be the main tool to achieve this, supported by a thorough cost‑benefit evaluation of special regimes, exemptions and loopholes in the tax system. Maintaining and extending the conditional cash transfer programme is key to reducing poverty and providing a social safety net for households depending on informal work.

The spread of the virus has been contained

The COVID-19 pandemic reached Argentina in early March, later than countries in Asia and Europe. The government took decisive and early action by ordering a complete confinement of the population as of March 20, which has significantly slowed the increase in the number of infected people. Recently, case numbers have risen in main urban areas, in particular in poor neighbourhoods where population density is high and compliance with confinement measures is more complicated.

Argentina: Two scenarios of real GDP and exchange rate

Source: Refinitiv; Ámbito.com and OECD Economic Outlook 107 database.

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Argentina: Demand, output and prices (double-hit scenario)

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The country has around 8500 intensive care units, which is similar to Southern European countries in per capita terms. However, access varies significantly across regions and modalities of healthcare coverage, which are generally correlated with income. Twelve emergency hospitals are under construction and health workers are receiving a monthly bonus, the equivalent of USD 75, from April until July. The government is cooperating with domestic firms and laboratories to increase their supply of respiratory equipment and testing facilities, and decentralised testing is conducted throughout the country. Imports of medical supplies are exempt from import duties, and prices for food, personal care, drugs and medical products are fixed at their levels observed early March.

The lockdown and border closures are currently expected to last until 28 June. All schools and universities as well as shops and public spaces are closed; only essential production and services activities remain open. Provincial governments were given the authority to ease lockdown measures in late April and many provinces have started to lift the confinement gradually.

Economic activity has been hit hard

COVID‑19‑related turbulence in international financial markets reached Argentina well before the lockdown, putting pressure on the parallel exchange rate and on stock prices. Risk spreads reached 4000 basis points and investment stalled. Confinement measures strongly affected supply and demand in many sectors, particularly in entertainment, transport, restaurants and hotels, causing activity to drop by 15%, according to OECD benchmark estimates. Falling household incomes weigh on private consumption. Automotive and retail sales fell by almost 50% in March, with textiles, shoes and furniture showing the largest reductions, and consumer confidence related to durables and real estate decreasing strongly. Strict capital controls are keeping the official exchange rate stable, but high inflation of 50% per annum and strong devaluations in the region have led to a real appreciation that is hurting exports. At the same time, the gap between the official and parallel exchange rates has widened significantly, and the latter is now more than twice the former.

Argentina: Demand, output and prices (single-hit scenario)

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The government is supporting the economy

To cushion the social impact of the crisis and support domestic demand, the government has provided income support for poor households and retirees as well as self-employed and informal workers through one‑off bonuses and in‑kind payments (1.1% of GDP). Employers are not allowed to fire workers for a period of 120 days and need to pay 75% of regular salaries for confined workers who cannot telework. Unemployment insurance has been reinforced. The firms most affected by the crisis receive wage subsidies of 50% capped at two times minimum wages, and their payroll tax payments are reduced. Public and private banks have been encouraged to provide working capital loans at reduced rates, particularly for SMEs, and the self‑employed receive zero‑interest loans. The central bank incentivises private lending through lower reserve requirements for lending to households or SMEs, and temporary easing of bank provisioning needs, bank loan classification rules, and limits to bank holdings of central bank paper.

The recovery will be slow

Severe macroeconomic imbalances including persistently high inflation, a high fiscal deficit and unsustainably high public debt make the economy particularly poorly equipped to deal with a large negative shock and imply a slow recovery. The support measures are helping during the emergency, but fiscal space for further support is severely limited and monetisation of the deficit implies further inflation risks. Gross public debt is projected to approach 83% of GDP at the end of 2020. Domestic demand will stay subdued due to rising unemployment, lower real wages and an increasing number of corporate bankruptcies. GDP is projected to fall by around 10% in 2020 in the double‑hit scenario. Preventing a second virus outbreak would avoid another dip in economic activity and allow a somewhat faster recovery with GDP declining by around 8¼ per cent in 2020. Downside risks include reduced access to finance for corporates in the context of a possible sovereign debt default, as domestic capital markets are severely under‑developed. Inflation risks are substantial and call for prudent monetary policy. Pressures on the official exchange rate could intensify and trigger further depreciation, which would feed back into higher inflation but also support exports. Manufacturing exports would suffer from a deeper‑than‑expected recession in neighbouring Brazil. On the upside, a swift recovery in China could lift prices for Argentina’s agricultural commodity and food exports, whose relatively mild declines have underpinned recent improvements in Argentina’s terms of trade.

The country faces important policy challenges

The efficiency of emergency spending could be further boosted through more transparent allocation criteria for firm support measures and a focus on illiquid firms that were solvent before the crisis. Maintaining and expanding the successful conditional cash transfer programme “Asignación Universal por Hijo” is key to constructing an effective social safety net for vulnerable households dependent on informal work. To reduce the risk of a second virus outbreak, a national tracing, testing and isolation strategy should accompany the gradual lifting of confinement measures. A credible medium‑term fiscal strategy based on improvements in public spending efficiency and a reduction of the fiscal deficit after the pandemic would facilitate a successful restructuring of public debt and help rebuild macroeconomic stability. This would in turn reduce the need for monetary financing, reduce inflationary and exchange rate pressures and allow a deepening of domestic financial markets.