ARGENTINA

Argentina has a long history of political and economic instability. In recent years, the country has experienced strong policy shifts with substantial ramifications for macro stability, marked by strong economic and currency volatility, structurally high inflation, recurring default crises and social tensions. The victory of the left-leaning coalition in the general elections in October 2019 led to a renewed period of economic and political instability. The ensuing depreciation of the peso and exacerbated liquidity tensions led to a renewed default on Argentina’s sovereign bonds, which was not resolved until September 2020.  

The economic and social impact of the pandemic exacerbated the bleak macroeconomic outlook. Containment measures and lower global demand for Argentina’s main exports led to a contraction of around -10% of real GDP in 2020 as Argentina entered its third year of recession. The economic and social impact of the pandemic led to a rise in the poverty rate, increasing the risk of social unrest, which further limits the room to manoeuvre to implement reforms. Strong base effects and a recovery in agricultural exports coupled with the gradual re-opening of the economy will lead to a strong rebound in 2021 (+7.7%) before the economy returns to moderate growth levels of around round +2% in the medium term.

Inflation is likely to remain very high. High inflation expectations, massive central bank financing of the fiscal deficit in recent years and strong sensitivity to FX fluctuations have fueled exceptionally high levels of inflation in the country, averaging 38% between 2017 and 2019. Inflation fell to 36% in 2020 from 54% in 2019 due to subdued domestic demand, price controls and base effects. We expect inflation to remain very high in the medium-term, given continued monetary financing, the pass-through effects of the peso depreciation and high inflation anticipations. The real policy rate remains negative and we do not expect a potential tightening to substantially curb inflation in the medium term.

Political and policy risks remain high ahead of the legislative elections in November 2021. Argentines will renew half of the Chamber of Deputies and a third of the Senate in the Congressional elections in November 2021. The ruling coalition suffered a defeat in the primary congressional election in most Argentine provinces in September 2021, reflecting growing discontent vis-à-vis the government’s policies. The results led to a political crisis within the cabinet, exacerbating the divide between the president’s more centrist stance and the more left-leaning propositions from the vice-president and former president Cristina Kirchner. This could lead the government to increase spending ahead of the election. The results could alter the power dynamics within the ruling coalition and could lead to a shift towards more investor-friendly policies if the right-leaning coalition progresses in both assemblies. However, strong macroeconomic imbalances will still weigh on the government’s ability to implement reforms.

The business environment in Argentina is quite poor. Capital controls are quite stringent and extremely sensitive to the country’s external position and the track-record of expropriation, although current risks are lower. Argentina ranks 126 out of 190 in the World Bank Doing Business survey, below the regional average. The country has low rankings in terms of the ease of starting a business, construction permits and paying taxes. While it does have higher scores in access to credit and protecting investors, financial intermediation remains low compared to other countries in the region, pointing to a limited role of banks in financing the economy.