Argentina

A second year of recession

The economy is expected to sink further into recession in 2024. While in 2023 the dry weather strongly affected agricultural production, macroeconomic imbalances will be the main drag in 2024. Household consumption will shrink, primarily hampered by the significant erosion of purchasing power, with the substantial and sticky inflation reaching even higher levels this year. The marked increase in consumer prices will be mainly fueled by the pass-through of the sharp devaluation of the ARS in December 2023 and by the correction of transport, fuel, and energy prices. Meanwhile, gross fixed investments are also expected to contract, squeezed by the government’s decision to freeze public capital expenditure and as private investors remain cautious in the current fragile political and economic environment. Furthermore, public expenditure will also shrink as policymakers move forward with fiscal consolidation. Last, exports are expected to strongly rebound thanks to the normalisation of agriculture foreign sales volume (owing to the recovery of soybean, corn and wheat harvests). This should outweigh the lower growth trends expected in the main export markets (Brazil and China) and relatively weaker prices in agricultural commodities.

External account to switch back to a surplus and durably uncertain fiscal consolidation

In 2024, the current account will return into a surplus, mainly driven by the trade balance, which will move back into positive terrain. Growth in net exports will be underpinned by the recovery of agricultural exports and a sharp import compression (amid a depressed domestic demand). Furthermore, the energy trade balance is expected to flip into a surplus, thanks to the progress in a key gas pipeline construction. On the financing side, FDI will remain low due to economic and political uncertainty. Meanwhile, foreign currency reserves remain at critical levels, despite the improvements seen in the initial months of the new government. The central bank accumulated USD 6.2 billion in foreign exchange reserves from 10 Dec 2023 until the end of February 2024. In addition, the IMF also approved a net disbursement of USD 2.9 billion (as part of the USD 44 billion loan programme). As a result, gross reserves stood at USD 27.6 billion at end January 2024, while net reserves were still estimated at negative USD 4.7 billion. Importantly, the government´s intention to lift capital controls by the end of 2024 seems challenging. In fact, the exchange rate gap with the parallel rate has narrowed (to average of 20% in early March 2024, from 55% in January 2024). However, total outstanding import obligations remain high (USD 42.6 billion in December 2023 or USD 13.6 billion above the 2017-2021 average norm), leading the central bank to launch three series of dollar-denominated bonds to be bought with pesos. They will allow importers to access the official foreign exchange market on maturity (varying between 2025 and 2027). In addition, in 2024, Argentina’s consolidated public sector faces external debt servicing costs (amortisation + interest) estimated at USD 15.4 billion (including USD 8 billion to the IMF) versus USD 6.5 billion in disbursements from the IMF.

On the fiscal front, while authorities are pursuing a nominal fiscal balance in 2024, it will be very challenging to achieve it. The government’s initial plan was to promote an adjustment notably through lower expenditure (including cut in subsidies, lower transfers to provinces, and the suspension of uninitiated public works), but also based on increasing revenues (through higher import and export taxes, and the scrapping of a recent income tax reform, among others). However, the failure to pass the so-called omnibus bill prevented an increase in tax revenue of around 1.4% of GDP (including 0.4% for not reversing the new income tax rule). As of January 2024, policymakers have relied notably on the real erosion of expenditures (amid the escalating inflation) to improve the fiscal balance, but this is unsustainable. Looking forward, the deeper economic recession in 2024 and the expected continued appreciation in real terms of the official currency will take a toll on tax collection despite a projected rebound in agriculture revenues. Furthermore, implementing a substantial cut in transfers to provinces is politically challenging. Similarly, containing demands for higher pensions and wages could prove difficult.

The new government suffered the first setbacks

The libertarian Javier Milei was sworn in as Argentina’s new President in December 2023. An economist and former Member of Parliament (2021 - 2023), he gained traction in the elections as an outsider, promising to use a chainsaw on the country's ailing economy. He stated that it would require a little more time than the year of 2024, to make reforms in the financial system so that it is suitable for a dollarised system. The incoming government promptly allowed the local currency to depreciate by 54% against the USD and it was announced a monthly devaluation rate of 2% from then on. With regard to fiscal consolidation, an ambitious target of achieving nominal balance by 2024 was revealed. Moreover, amid a weak base in Congress, authorities implemented the so-called Decree of Necessity and Urgency (DNU) that listed 366 measures to deregulate the economy three days after taking office. However, the labour reform part of the DNU, which would have made it easier to fire employees, was overturned by the courts as unconstitutional at the end of January 2024. More important, in February 2024, the so-called omnibus bill, with 664 articles that originally included fiscal measures, provisions to allow the privatisation of state entities and to give more powers to the president (among others) was knocked back in the Lower House. Following the defeat, political tensions escalated between the administration, provincial governors and legislators. As a result, in early March 2024, Milei summoned governors to endorse a wide-sweeping national agreement via a 10-point "social pact" to be signed on 25 May. However, it would be subject to the approval of a fresh draft of the omnibus law and a fiscal package. Looking to the social front, the risk of tension will remain high throughout the year as inflation rises and public spending is cut. The government has already faced some protests and strikes against its economic agenda. Concerning foreign policy, despite having toned down his criticism on Brazil and China, Milei refused the invitation to join the BRICS groups from 2024. He has made alliances with the US and Israel a priority.

Last updated: March 2024