OECD Economic Outlook, Volume 2022 Issue 2

Argentina

After a strong rebound in 2021 and an expected deterioration in the second half of 2022, GDP is projected to rise by 0.5% in 2023 and 1.8% in 2024. The agreement with the IMF has significantly reduced uncertainty about short-term macroeconomic policies, but the external situation remains fragile. High inflation will weigh on private consumption and will take time to recede. Tight capital controls and policy uncertainty are leading to a sharp fall in investment in the second half of 2022 and their persistence will allow only a modest recovery in 2023 and 2024.

Public spending will fall during 2022 and 2023, as pandemic-related fiscal support is withdrawn and energy subsidies are scaled back. Still, compliance with IMF targets will require further spending restraint. A planned sharp reduction in monetary financing will reduce inflationary pressures in the medium run, reduce the gap between the official and the parallel exchange rates and decrease the risk of devaluation. Stabilising the macroeconomic situation and lowering inflation are crucial to reduce high poverty and mounting social pressures.

Economic activity is stagnating

Economic growth continued to progress in the first half of 2022, but at a slower pace. Short‑term indicators point to further slowing during the third quarter of 2022. The unemployment rate has returned to pre‑pandemic levels, reaching 6.9% in the second quarter of 2022, although informality has increased sharply, approaching 38% of the labour force. Year‑on‑year headline inflation rose to 88% in October, amid unanchored one-year ahead inflation expectations of 99% and a widening gap between the official and the parallel exchange rate.

Argentina

Source: Refinitiv; BCRA; and Ambito.com.

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Argentina: Demand, output and prices

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Trade links with Russia and Ukraine are minimal, but global price changes are affecting Argentina. While food exports have temporarily benefited from rising global prices, higher costs of energy imports have worsened the trade balance as Argentina is a net energy importer. Higher global energy prices imply higher subsidy expenditures, hampering the ongoing fiscal consolidation plan. This situation has accelerated the need for a gradual removal of energy subsidies, which started in September.

Fiscal and monetary policies are tightening

The IMF formally approved the second review of the Extended Fund Facility programme in October and disbursed USD 3.8 billion (1% of GDP). This reflected the fulfilment of programme targets in the second quarter, which restored market confidence. The Central Bank of Argentina has raised the policy interest rate nine times since early 2022, to 75%. Future increases are expected to be smaller. Large amounts of outstanding central bank bonds, worth 10% of GDP, imply potential risks for the central bank’s balance sheet. Primary deficit targets were set at 2.5% of GDP for 2022 and 1.9% of GDP in 2023, implying significant consolidation. IMF targets also include specific limits on transfers from the central bank to the Treasury, which are to decline to 0.8% of GDP in 2022 and 0.6% of GDP in 2023.

Growth is slowing and risks are tilted to the downside

The economy is projected to contract in the third and fourth quarters of 2022, but annual 2022 GDP growth will nonetheless reach 4.4%, before slowing to 0.5% in 2023, and then recovering to 1.8% in 2024. Against the background of high inflation, tightened import restrictions, low international reserves and severely limited fiscal space, risks remain elevated, which will keep investment and private consumption subdued in  2023. A gradual upturn is projected in 2024 as the macroeconomic situation improves. Export growth will slow in 2023, in part due to the overvalued currency, but will gradually pick up in 2024. The combination of temporary measures and strict currency controls will bolster currency reserves in the short term. However, high external financing requirements and a crawling peg exchange rate regime with an overvalued currency imply that reserves will remain low. Inflation is projected to remain high in 2023 driven by further monetary expansion and ongoing wage negotiations but gradual disinflation should start during 2023. Downside risks include a failure to comply with fiscal commitments amid growing social pressures, jeopardising fiscal sustainability. Lower commodity prices could hamper reserve accumulation and raise pressures on the exchange rate. Upside risks to growth include stronger global demand for commodities, which would bolster export revenues.

Structural reforms to boost productivity could reduce imbalances

Improving the business environment for the private sector and strengthening competition could open up new opportunities for raising productivity and exports. Current attempts to improve the targeting of utility subsidies will enhance public spending efficiency, but further progress is needed to ease fiscal imbalances. Better targeting of social transfers, including reviewing tax and pension regimes, would reduce poverty and inequity while improving fiscal accounts. Argentina is implementing a National Decarbonisation Plan aiming at net-zero emissions by 2050 but achieving this goal will likely require more ambitious policies, especially to develop renewable energy sources.