Argentina has been hit hard during 2020 by the Covid-19 pandemic and a new series of demand-side shocks that have pummeled an already struggling economy. Argentina has reported over 40,000 confirmed deaths from Covid-19. With inflation nearing 40% and its Central Bank short on dollars, Argentina is facing renewed pressure to devalue its currency. President Alberto Fernandez and his government are also working to renegotiate $44 billion in loans the country owes the International Monetary Fund. Nearly a third of the country’s workforce is unemployed or has given up on finding work. But, despite the constraints it faces, Argentina’s government has tried to implement policies to help citizens stay at home and contain the spread of the coronavirus. According to Martin Guzman, the country’s Finance Minister, “In a crisis in the context of a pandemic, the state plays an important role to protect the most vulnerable and co-ordinate actions to maintain stability — but that is a role that will no longer be necessary in an economy that has restored macroeconomic stability.” After reporting negative growth in 2018 and 2019, Argentina’s economy is expected to record a double-digit contraction in 2020. With the right stewardship, however, Argentina is expected to report positive growth in 2021 and 2022. So far, 2020 has been a tough year for Argentina. But, President Fernandez has a chance to implement reforms to create opportunities for renewed investment, job creation and economic growth. Foreign executives and investors looking at Argentina need to do extensive due diligence to understand the country’s political risk dynamic and outlook. To talk about what’s ahead for Argentina, I reached out to Jimena Blanco, the Research Director for the Americas at Verisk Maplecroft, a political risk consultancy.
Nathaniel Parish Flannery: Is this economic crunch worse than other recent macroeconomic emergencies in Argentina? How worried do foreign investors need to be about this current crisis?
Jimena Blanco: The one certainty about the Argentine economy in 2020 is that it’s heading for the largest single-year contraction ever – and that says a lot given the country’s long history of economic downturns. Indeed, 2020 could result in four lost decades in one year, and this is making foreign investors quite jittery.
The pandemic hit economies the world over, but Argentina is closing a decade of stagflation in 2020 – with at least two deep recessions during this period. The expected pronounced contraction this year threatens to take GDP per capita back to 1980 levels.
Unlike regional peers in South America, Argentina had no savings to fall back on during the pandemic. I think that, in economic terms, the government’s imposition of a quarantine for more than eight months was like trying to put out a fire with kerosene. Indeed, I expect the overall contraction to come in closer to the 15% mark than the 12% forecast by the Central Bank market survey.
The success of securing the restructure of the sovereign debt with private creditors now feels like a lifetime ago for the Fernández administration. The expansion of the fiscal deficit during 2020 and the risk of further FX volatility in early 2021 in the financial and black markets mean that the renegotiation with the IMF will be a difficult one in 2021. And with the government quickly running out of policy levers, foreign investors are becoming increasingly concerned with more policy announcements that impact their operations.
Parish Flannery:What are the biggest policy obstacles that Fernandez’s government will have to overcome to open the possibility for any type of meaningful medium-term recovery?
Blanco: Fernandez’s only chance to return to meaningful growth in the medium-term is for provide investors – both domestic and foreign – with legal and macroeconomic certainty. Key to this will be a successful renegotiation of the IMF bailout in 2021, which will require providing a path for the reduction of the fiscal deficit, and the gradual removal of key operating constraints on business. Among the latter are liberating the ARS/USD FX rate – even if gradually – as well as capital and import controls. In the ideal world, the government would also undertake a significant tax and labour reform to ease doing business in the country.
So, the biggest obstacle in this regard is not policy driven – it is political. With his approval levels steadily plummeting and the social mood souring, Fernández’s needs to maintain the political support of VP Cristina Kirchner and her left-wing populist movement will fail to provide the requisite policy path clarity, and continue to trample over his moderate economic rhetoric.
The need to bankroll major social spending programs to cater to a voting base that has been hard hit by the pandemic – Argentina’s poverty rate is hovering near 50% at end-2020 – limits the prospect of meaningful tax reform in 2021. And when it comes to labor, Fernandez needs the support of the Peronist unions almost as much as he needs Kirchner.
Parish Flannery: Is it feasible that Argentina’s government can make a serious effort to implement some necessary but potentially unpopular reforms or will short-term political concerns undermine any type of long-term economic recovery plan?
Blanco: Fernández does not appear to have the political will to take the reins and make the tough, but necessary, policy choices the country needs to get its fiscal accounts back to where they were when he came to power in 2019. Delays will make the eventual adjustment a much harder pill to swallow.
In the first 3 quarters of 2020, the government undid all the fiscal progress Macri made in his entire term. And if Guzman’s budget proposal is to be believed, the same adjustment will be made in 2021.
As the saying goes, actions speak louder than words. And during 2020, Fernández’s actions have indicated he lacks the courage to break away with Kirchner’s politically effective, but economically unviable, populism. The government expanded outlays to increase social spending, even when its revenue collapsed, and it has failed to promote reforms that would stimulate investment in the post-pandemic economy.
The collapse of fiscal revenue provided an opportunity to overhaul the system to ease both the tax burden and the complexity of meeting tax requirements, while incentivizing more Argentines to leave informality in the post-pandemic economy. Instead, the government created new taxes and increased the rate of existing ones to extract more from a shrinking pool of contributors.
For instance, the levy of a purportedly one-off wealth tax has increased concerns well beyond the 9,000 taxpayers with a net worth above $2.4 million who are affected by it. The tax incentivizes evasion by concerned Argentines who fear they might fall under another ‘one-off’ future levy, as well as encouraging the exodus of high net-worth individuals.
With the 2021 midterms less than a year away, I think that the government will stay clear of any reforms that jeopardize its electoral effectiveness – even if that compromises the country’s medium-term economic performance.