Argentina: Economic Chaos Continues
Argentine reserves have dropped to a 6 years low and is set to continue to face difficulties in the coming months due to the impact of the droughts. We believe the government will have no answer, but to increase the import restriction which is likely to put Argentina in a recession in 2023. As economic chaos increases until the October’s election we see a great chance that the opposition ends up as winners.
Figure 1: Argentina Gross International Reserves
Source: BCRA
Argentina reserves have dropped to the lowest levels in 7 years. Initial estimates points that Argentina is likely to loss USD 3.5 Bn in grain exports due to the severe drought in 2023, which will affect the capacity of the Central Bank of Argentina (BCRA) to accumulate dollars. Despite the IMF agreement offering additional USD 8bn in the upcoming months of 2023, the BCRA will have little to no choice rather than restrict even more imports access to U.S. dollar, which is likely to have a negative impact on inflation and on the product which will increase the misbalance of Argentina macroeconomics.
There are several media reports pointing out that Argentina is seeking to advance the IMF disbursement and seeking other creditors to help them manage their reserves during this difficult year. Advancing the IMF deal is likely to only postpone the problem a few months. The other option, a good candidate for lending to Argentina is Brazil, a country in which President Alberto Fernandes have good friendship. Indeed, Lula has stated that he is seeking the of the New Development Bank (BRICS Bank) to offer a guarantee so the Brazilian Development Bank (BNDES) could make a deal with Argentina. Even though, this is a possibility, Brazil lacks a financial instrument in which it can use its large reserves and loan it to a country. Brazilian Development Bank (BNDES) could only do loans with other countries to finance infrastructure and in case Brazilian enterprises could be beneficiate from it. This would not apply to Argentina current needs which is a buffer of international reserves.
Figure 2: Argentina Monthly Economic Activity Index (Seasonally Adjusted)
Source: INDEC
In terms of activity, February data is highlighting that Argentina economy continues to decline in the first months of the year. The BCRA is keeping its promise to the IMF and have raise interest rate slightly real positive terms equivalent to 140% rate, higher than the current 104% inflation. However, this is also increasing the risk that at some point the government increase deficit and the debt and then turns back to the central bank printing machine.
With little option, we see that the most likely scenario is that Argentina puts additional imports restrictions to contain the drought of international reserves, this will likely force Argentina to face a recession in 2023. Despite the BCAR keeping interest rates high, it is very unlikely that they are able to control inflation as they will need additional monetary emission to fulfil government needs adding fuel to the inflation fire. As we approach the election in October economic misalignments are setting to be bigger, which we believe will trigger a victory for the opposition who will have a large task to solve Argentina macroeconomic unbalances.