Argentina ended 2018 in a recession, and it’s facing a challenging recovery. It has now gone through five technical recessions (defined as two consecutive quarters of contraction) in the past decade, and this one is shaping up to be one of the worst. Even with a substantial loan from the International Monetary Fund, recovery is a ways off; Argentina doesn’t have the same fiscal tools in place it had ahead of its worst recession in the past decade, in 2008-09. The government will need to lean on external markets to dig its way out. But just as Argentina is searching for alternative sources of investment and consumption, the global economy is approaching a downturn. Argentina may be forced to navigate this downturn with fewer tools than it had before.
2018 did not turn out the way Argentina thought it would. The government anticipated 2 percent growth in gross domestic product, inflation around 15 percent and an exchange rate of 20 pesos to the U.S. dollar. The IMF was similarly optimistic, estimating 2 percent growth and 22.7 percent inflation. But these numbers were way off. The government revised its expectations for the economy to 2.4 percent contraction; the IMF similarly anticipated a contraction of 2.8 percent. Accumulated inflation for 2018 reached 48.5 percent, according to Argentina’s central bank. The country’s currency fell from 18.6 pesos to the dollar at the start of the year to 38.4 by the end – despite the central bank, in the hopes of curbing interest rates and inflation, raising interest rates from 28 percent to a peak of 73 percent in October (though rates are now down to 60 percent). According to a study by Argentina’s Catholic University, urban poverty reached 33.6 percent in the third quarter of 2018, up more than 5 percent over the previous year. Unemployment hit 9 percent, up 0.7 percent from 2017. And public debt jumped from 59 percent of GDP in January to 78 percent at the close of the year.
The current economic crisis has largely been a domestic affair, driven by the implementation of structural reforms, including subsidy cuts on consumer items, and a severe drought that wreaked havoc on soy crops. Years of high spending on state subsidies by populist governments grossly distorted the cost of basic goods, and the public became acclimated to artificially low prices. In 2018, the government took its most significant steps yet to correct these distortions, removing subsidies and allowing prices to rise toward market value. Over the past year, this led to average price increases of 24 percent for electricity, 70 percent for gas and 116 percent for public transportation. The drought-stricken soy crop produced 36 million tons, well below the anticipated 54 million tons and 37 percent less than the previous season. Argentina sustained an estimated $3.4 billion in economic losses in 2018, and the government was forced to reinstate a controversial export tax on grain, hoping to generate additional revenue in U.S. dollars, but it still saw an internal decline of 9.9 percent in tax collection in November.
In 2008, Argentina was more financially isolated from the international system. It was coming off annual growth averaging 8.8 percent between 2003 and 2007, driven by domestic consumption and investment. Leading up to the current crisis, however, it has already endured three short technical recessions. After a lackluster recovery, consumers have less to spend, and their money is being spent on basic needs – which have just gotten more expensive. In addition, most wage increases did not keep up with inflation this year, further reducing consumers’ purchasing power. And businesses now find themselves with less money to invest. The end result: Argentina will need help from the outside world to jump-start growth through, for example, exports and foreign investment. But as the global economy slows, the likelihood that Argentina can attract foreign consumers and investors will dwindle.
A Closing Window for Recovery
Any risk of Argentina’s crisis spilling over into other countries is still negligible, thanks to the IMF loan. But the rest of the world could have an impact on Argentina’s ability to recover from the current crisis: Just as Argentina tries to climb out of a recession, the rest of the world appears to be approaching the end of a growth cycle. This would make Buenos Aires’ response efforts all the more challenging, particularly when it comes to the structural reforms that will have long-term effects on the sustainability and strength of Argentina’s economy in years to come.
Economists predict Argentina’s current crisis will be on par with 2009, which was its worst recession in the past decade. In 2009, however, Argentina’s economy was better prepared to deal with the fallout of a global economic downturn than it is now. Ten years ago, it had room to implement a strong fiscal stimulus package focused on social programs. In addition, many of the countercyclical social policies enacted in response to the 2001 crisis were still in place and could be quickly adapted to deal with the new downturn. But much of that stimulus has been tapped out, and this time around, Argentina was forced to take out an IMF loan – a resource it did not have in 2009 – as a last resort.
The terms of the loan have constrained the government’s ability to spend its way out of this recession. The loan provides a necessary lifeline, but it’s predicated on the government reducing spending and bringing its deficit down to zero percent by the end of 2019. Half of the $56.3 billion loan has been paid to the Argentine government; the rest will be paid out in tranches through 2021. (Another $22.8 billion will be disbursed in 2019, and the remaining $5.6 billion in 2020-21.) What began as a precautionary loan has become an essential source of funding for the government’s budget. So, while Argentina has the IMF’s support this time, it comes with severe restrictions and aggravates the grievances of a population that remembers the IMF’s perceived shortcomings in response to the 2001 crisis.
The duration of the current recession matters, too. Argentine President Mauricio Macri has said that the downturn has bottomed out and that he anticipates a quick recovery. His government expects the economy to contract by only 0.5 percent in 2019. The IMF is less optimistic. It believes the downturn won’t bottom out until the first quarter of 2019, when it expects the Argentine economy to contract by 1.7 percent. Private sector analysts project an even longer recession. A former central bank chief warned that Argentine consumers shouldn’t expect the recovery to begin until the third quarter of 2019, and financial consulting firm FyE Consult puts it even later, at the fourth quarter of 2019. The company also estimates the economy will contract a further 2 percent. The chances of a strong economic recovery diminish the longer the recession lasts as Argentina becomes more likely to find itself in the midst of a global downturn.
There’s more at stake than just Argentina’s ability to implement structural reforms and stick to the terms of the IMF deal, although both are critical to Argentina’s long-term economic stability. Argentina is trying to regain its economic standing in the world. While a member of the G-20, it now has only the 26th-largest economy in the world – overtaken by Switzerland, Taiwan, Sweden, Poland, Belgium and Thailand. Brazil is the regional economic power, and if Argentina fails to pull off a strong recovery, it will lose any remaining ability to check its rival. Without the resilience Argentina had in 2008, it’s not as well prepared for the coming global slowdown. The time before it hits will be critical for Argentina; once the global slowdown takes hold, it won’t have the needed external resources available to help it overcome its domestic constraints – and recovery will be even more difficult to achieve.