Argentina’s economy has a systemic competitiveness problem, causing it to under-perform compared to almost every other country in the region over the last decade, and turning it into one of the countries with more recessions in the world since the 1970s. But even without fixing its deepest underlying issues, the country has at times shown it is capable of short-term recoveries when some conditions combine. When global liquidity flows are on its side, and this comes with either some short-term macroeconomic solidity or a government whose character and rhetoric sounds promising to markets, then economic bounces can be possible even if the country is still incapable of altering its long-term downward trajectory. Will such a bounce take place in the year after the pandemic?
The Fed’s liquidity injection
After the crash seen in almost all the world’s assets in March, when stocks, emerging markets, oil and even gold tanked amid the run for safety, the US Federal Reserve responded with a liquidity injection that has been even stronger than its previous Quantitative Easing programs, and this rapidly turned the dynamic of the markets around.
Gold and US stocks rallied back to all-time highs, and after propping up the cheap but solid assets available, investors also turned to anything that was simply cheap, so emerging markets hopped on to the financial bounceback. Latin American economies in distress, most of which called the IMF to ask for credit lines between April and May, were already finding credit private credit in June and July, and returned aggressively to debt markets.
Brazil, Chile, Mexico, Paraguay and Peru are all good examples of this, securing loans at interest rates between 2.5 and 5 percent. Even Ecuador and Argentina, with all their difficulties, have managed to reach agreements on their defaulted debts, so clearly the scenario of unprecedented global liquidity has helped prop up areas of the market that would have normally been seen as too risky.
The impact of COVID-19
There’s still an enormous divergence between the impact that COVID-19 is having on financial markets, due to the action of central banks, and its impact on health and on the growth levels seen in the real economy.
The IMF was forecasting a 3 percent global yearly growth rate at the start of the year and has now changed this to a 5 percent decline, but the last few months in Latin America have seen much sharper drops.
The chart above shows that economic activity has been aggressively falling across the continent, and that the decline is not necessarily correlated to the strictness of the lockdown. Argentina, which has one of the highest lockdown stringency index scores, is in the middle of the pack in terms of the strength of its recession, while the government can show it got a good trade off with a smaller toll in lives. (This, of course, is only a snapshot that does not tell the full story, which still has at least a few more months to go)
But the longer-term evolution of Argentina’s economy is clearly among the worst in the continent. When looking at the country’s GDP since the last world crisis in 2009, it shows a zig-zagging pattern with short periods of growth followed by recessions, while Peru, Colombia, Mexico or Chile have shown much more consistent growth, up to the COVID-19 decline earlier this year, which didn’t spare anyone.
Fiscal response
Another constant across the world this year was the large fiscal stimulus packages, often without precedent, to compensate the costs of the pandemic. The largest packages were seen in the developed world, with the US or the European periphery likely to end the year with deficits of 20 percent of GDP, thanks to their larger room for fiscal expansion, unlike the situation in Argentina.
In Latin America, fiscal expansion has not been as big, but the deficits are still massively larger than last year. With debt markets closed and the Central Bank balance sheet in poor condition, Argentina was not in a position to be as fiscally expansive as it could have been in a different economic context.
Macroeconomic fundamentals
With not a lot of room left for stimulus, what fundamentals does Argentina have to spark a recovery?
Some of the country’s fundamentals have improved recently, but only for bad reasons. After two years of devaluation and recession, Argentina’s balance of trade is better and its exchange rate has become more competitive. If 2010 is used as a basis of comparison, the peso is now 33 percent more competitive than the US dollar in inflation-adjusted terms, and the gains in competitiveness are even higher when compared to 2015, the year in which Macri took office, as the numbers below show.
The gains in competitiveness are also there when comparing the peso to a multilateral basket of currencies (including the Brazilian real and the euro). But the country is still far off from the competitiveness of 2002, not to mention the fact that there is now a how “gap” (or brecha cambiaria, in Spanish) between the official value of the peso and that of black markets, which did not exist in 2002 or 2010.
Electricity and natural gas tariffs are also closer to their underlying costs than in 2015, at 50 and 71 percent respectively, compared to 10 and 29 percent when Macri took office, but still far from the starting point of 100 percent in 2002. Inflation, meanwhile, is much higher, as is public spending (almost doubled since 2002), the fiscal deficit, and the snowballing monetary problem in the Central Bank, which is now almost twice the size it had during the 2019 election.
Two scenarios
Clearly, Argentina’s macroeconomy does not have the strength for a sustained recovery like in 2002, so the future is likely to come down to one of two possible scenarios: some macroeconomic stabilization, or a full blown stagflation similar to that of the 1980s.
One of the factors that will decide this is exogenous: global liquidity needs to continue at the current high pace for Argentina to avoid the worst. The debt agreement sealed last week and a potential rollover of IMF maturities in the horizon could also help dodge a debt-induced crisis.
But perhaps the biggest difference will be made by fiscal and monetary factors. If the fiscal deficit can climb back to just 2 percent of GDP in 2021, then fiscal convergence will be seen as more likely and a monetary disaster possibly avoidable, but a fiscal deficit closer to 6 percent of GDP next year would make it obvious that Argentina’s figures simply do not add up.
Argentina’s money printing has put the country’s monetary base at 8.9 percent of GDP already — rising to 18.7 percent if the Central Bank’s interest-paying liabilities (such as its short-term Leliq notes) are included in the calculations. If the worst scenario comes to pass, with a fiscal deficit of 6 percent of GDP in 2021, the monetary base could rise as high as 14 percent of GDP next year — or 32 percent if interest-paying liabilities are included.
In the real economy, the stabilization scenario would mean an inflation rate around 30 percent in 2021, compared to 80 percent inflation if stagflation deteriorates. In terms of growth, the 12 percent economic decline we expect for 2020 could be followed by an 8 percent bounce in GDP next year if there’s some stabilization, or zero if the second scenario takes place, while unemployment is likely to remain high in both scenarios, between 13 and 14 percent in 2021.
