Having taken office on December 10th 2019, the new president, Alberto Fernández of the left-wing Frente de Todos Peronist coalition, will have to work quickly to tackle the pressing problems of economic crisis and distressed sovereign debt.
Despite the presence of leftist populists in the government, The Economist Intelligence Unit expects Mr Fernández to follow a fairly pragmatic, centrist course. Nonetheless, a shift away from orthodox economic policy will create market distortions.
Our forecasts assume that the government will restructure bonded external debt with a small haircut of 25%. We expect the IMF to insist on this condition if it is to resume its lending arrangement, which is a vital lifeline for Argentina amid its liquidity crunch.
We expect some moderate fiscal and monetary loosening, in line with Mr Fernández’s goal of boosting consumption. However, a sharp drop in investment and persistently weak labour market conditions will keep economic activity subdued in 2020.
The medium-term outlook will also be dampened by investor concerns over contract rights and rule of law. The business environment will not be conducive to long-term investment, despite huge potential in sectors such as energy, mining and agriculture.
Currency adjustment will briefly push the current account into surplus in 2020. However, assuming that the high inflation problem is not tackled, we expect renewed deterioration in the medium term, as Argentina’s macroeconomic normalisation remains elusive.
Key changes since 6th December
Mr Fernández assumed office with a cabinet comprising both moderates and hardline leftists.
The jostling for dominance between these two factions will present challenges for the president during his four-year term, which ends in 2023.
On December 23rd 2019 Mr Fernández signed into law a broad package of economic measures aimed at boosting domestic demand. The increased public spending is largely paid for by tax increases, indicating a commitment to fiscal prudence.
Default risk is high. The Buenos Aires provincial government has indicated that it cannot repay US$250m in principal repayments due on January 26th, and has asked creditors for an extension until May 1st. This complicates sovereign debt-restructuring talks as well.
Preliminary economic data for October-November 2019 indicate a smaller fourth-quarter contraction than initially expected. We now expect GDP to contract by 2.7% in 2019 (from 3.3% in our previous report).
Although we retain our outlook for continued weakness in the first half of 2020, the statistical carryover from 2019 will be significantly less negative. As a result, we now forecast a GDP contraction of 1.4% in 2020 (from 2.5% previously).
Having taken office on December 10th 2019, the new president, Alberto Fernández of the left-wing Frente de Todos Peronist coalition, will have to work quickly to tackle the pressing problems of economic crisis and distressed sovereign debt.
Despite the presence of leftist populists in the government, The Economist Intelligence Unit expects Mr Fernández to follow a fairly pragmatic, centrist course. Nonetheless, a shift away from orthodox economic policy will create market distortions.
Our forecasts assume that the government will restructure bonded external debt with a small haircut of 25%. We expect the IMF to insist on this condition if it is to resume its lending arrangement, which is a vital lifeline for Argentina amid its liquidity crunch.
We expect some moderate fiscal and monetary loosening, in line with Mr Fernández’s goal of boosting consumption. However, a sharp drop in investment and persistently weak labour market conditions will keep economic activity subdued in 2020.
The medium-term outlook will also be dampened by investor concerns over contract rights and rule of law. The business environment will not be conducive to long-term investment, despite huge potential in sectors such as energy, mining and agriculture.
Currency adjustment will briefly push the current account into surplus in 2020. However, assuming that the high inflation problem is not tackled, we expect renewed deterioration in the medium term, as Argentina’s macroeconomic normalisation remains elusive.
Key changes since 6th December
Mr Fernández assumed office with a cabinet comprising both moderates and hardline leftists.
The jostling for dominance between these two factions will present challenges for the president during his four-year term, which ends in 2023.
On December 23rd 2019 Mr Fernández signed into law a broad package of economic measures aimed at boosting domestic demand. The increased public spending is largely paid for by tax increases, indicating a commitment to fiscal prudence.
Default risk is high. The Buenos Aires provincial government has indicated that it cannot repay US$250m in principal repayments due on January 26th, and has asked creditors for an extension until May 1st. This complicates sovereign debt-restructuring talks as well.
Preliminary economic data for October-November 2019 indicate a smaller fourth-quarter contraction than initially expected. We now expect GDP to contract by 2.7% in 2019 (from 3.3% in our previous report).
Although we retain our outlook for continued weakness in the first half of 2020, the statistical carryover from 2019 will be significantly less negative. As a result, we now forecast a GDP contraction of 1.4% in 2020 (from 2.5% previously).
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