OECD Economic Outlook, Volume 2024 Issue 1

Argentina

GDP is expected to contract by 3.3% in 2024, before growing by 2.7% in 2025. High inflation, a sizeable but necessary fiscal adjustment, and policy uncertainty will weigh on private consumption and investment for most of 2024. The gradual lifting of import restrictions and currency controls will eventually boost the recovery of domestic demand, particularly in 2025. Pent-up demand resulting from these restrictions will keep imports strong while exports will continue their robust recovery. Inflation is decelerating visibly, even if only gradually so far, but it is eventually projected to decline more sharply.

The announced fiscal consolidation should continue to be implemented. Together with an end to monetary financing and a stronger central bank balance sheet, this will restore macroeconomic stability and allow currency and capital controls to be lifted. Planned reforms to ease regulatory burdens, improve the business environment and open the economy to international trade would raise productivity and long-term growth, helping to curb poverty.

Activity has contracted sharply

Activity contracted by 1.4% in the fourth quarter of 2023, despite a strong recovery of agricultural output. Industry, construction, retail sales, financial intermediation and utilities were the sectors most affected by fiscal adjustment and the erosion of real incomes that followed the 54% currency devaluation and subsequent inflation peak in December. As a result, GDP contracted 1.6% in 2023. The slowdown continued in January 2024 with a 4.3% contraction compared to the same period in the previous year. Annual inflation reached 288% in March, but monthly changes in prices have started to moderate.

Argentina: Fiscal and exchange rates indicators

Source: CEIC; OECD Exchange rate database; Central Bank of Argentina; and Ambito.com.

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Argentina: Demand, output and prices

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Regulated prices rose rapidly in early 2024. Price controls have been eased since December to correct relative price distortions, resulting in the adjustment of electricity and public transport tariffs, fuel prices, pre-paid medicines and rents. The current account deficit widened to 4% of GDP at the end of 2023. The net foreign currency reserves of the Central Bank remain slightly negative but have started to improve in 2024. This has so far mostly reflected temporary measures, but exports resulting from the ongoing soybean and maize harvest will bolster currency inflows further.

Fiscal and monetary policies are tightening

The 2024 primary surplus target of 2% of GDP is consistent with a balanced overall budget. In the short run, consolidation efforts are focusing on cutting the size of the public administration including staff, increasing import taxes, phasing out energy and transport subsidies, cancelling public tenders and reducing discretionary transfers to provinces. This allowed primary budget surpluses in the first quarter of 2024, further supported by the erosion of real spending amid still high inflation and higher import taxes. The benchmark monetary policy rate fell from 133% in early December to 70% in April, resulting in negative real interest rates for most local currency assets. However, real monetary aggregates have been falling since December, suggesting a restrictive monetary policy stance, and the spread between the official and parallel exchange rates has narrowed.

Restoring macroeconomic stability is essential for the recovery

The challenging domestic environment will weigh on activity for most of 2024. Falling real incomes will hit private consumption and uncertainty about the pace of reforms will hold back private investment. Public consumption and investment are expected to decline amid ambitious fiscal consolidation plans. Exports will recover as weather conditions improve and the real exchange rate becomes more competitive throughout the year. The gradual lifting of import restrictions and currency controls will eventually boost imports. Ongoing adjustment will put the economy on a more solid footing, underpinning a gradual recovery in late 2024 and in 2025. A more favourable business environment will help sustain the recovery of private investment, while lower inflation and gradually increasing real incomes will bolster private consumption. Tighter fiscal policy and the end of monetary financing will support further declines in inflation. The current account balance will progressively improve as exports recover. Risks around this scenario remain substantial, however. Low foreign reserves, tight currency restrictions, and high inflation provide a volatile backdrop against which sudden currency depreciations and slow disinflation could trigger a prolonged recession. Slow implementation of reforms would delay the recovery.

Progress with structural reforms needs to be stepped up

Additional fiscal measures are needed to reach the announced primary target, while preserving well-targeted benefits for vulnerable households. A credible medium-term fiscal strategy, relying on improvements in public spending efficiency, would sustainably improve macroeconomic stability. Efforts to bolster the central bank’s balance sheet should continue, while strengthening its operational independence and governance. Accelerating the pace of monthly devaluations in the crawling peg currency regime may be required to preserve export competitiveness, accumulate foreign reserves, and eventually phase out capital and currency controls. Improving the business environment and strengthening competition, including through increased exposure to foreign markets, could raise productivity and exports and boost job creation and incomes, which in turn would help to reduce high poverty.