Argentina - OECD Economic Outlook, December 2020

112 

Argentina After falling sharply this year, GDP is projected to expand by 3.7% in 2021. Rising macroeconomic imbalances and prolonged lockdown measures weigh on domestic demand and limit the pace of the recovery, despite a successful restructuring of public debt with private creditors. Employment has fallen strongly. Monetary financing of the high fiscal deficit is putting further pressure on inflation and the gap between the official and the parallel exchange rate. A gradual lifting of confinement measures will allow some recovery of private consumption, but investment will remain weak until imbalances are addressed.

Bold and timely measures have been taken to contain the pandemic and support households and firms, but they have raised the already high fiscal deficit. Reducing macroeconomic imbalances will require prudent fiscal policies and changes to monetary and exchange rate policies. Efficiency gains in public spending and revenue raising, including through a review of special regimes, exemptions and loopholes in the tax system, would improve the fiscal position. Expanding conditional cash transfers is key to reduce poverty and support incomes, including for informal workers.

Containment measures have recently been relaxed in the capital region Despite a long lockdown in place 20 March, daily infection cases and deaths are still high, in particular in low-income urban neighbourhoods. In most provinces outside of the capital, the lockdown was replaced by physical distancing measures as of late April, until rising case numbers in provincial urban areas in August triggered renewed tightening of confinement measures. The Greater Buenos Aires area saw a decrease in daily case numbers and a lifting of confinement measures in late October. Nationwide containment measures have now been replaced by region-specific restrictions and schools are allowed to reopen on a case-by-case basis.

Argentina The money supply is rising rapidly and currency reserves are falling ARS billion 4000

← Monetary supply (M1) Net currency reserves¹ →

Exchange rate pressures have intensified Inverted scale

3500

35

3000

30

2500

25

2000

20

1500

15

1000

10

500

5

0

0

-500

-5

2016

2017

2018

2019

ARS per USD 10

USD billion 40

2020

30 50 70 90 Official exchange rate

110

Parallel exchange rate

130 150 170 190

0

2018

2019

2020

210

1. Net currency reserves are calculated as official reserve assets held by the central bank minus predetermined short-term net drains on these assets.

Source: Refinitiv; Ámbito.com and OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934217760

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

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Argentina: Demand, output and prices 2017

Argentina GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2018

2019

2020

2021

2022

Percentage changes, volume (2004 prices)

Current prices ARS billion

10 660.2 7 114.6 1 886.5 1 616.3 10 617.4 325.2 10 942.6 1 206.8 1 489.2 - 282.4

-2.6 -2.2 -1.7 -6.0 -2.7 -0.9 -3.7 0.5 -4.5 0.7

-2.1 -6.6 -1.0 -16.0 -7.1 -2.0 -8.7 9.0 -19.0 4.5

-12.9 -15.7 -3.2 -29.8 -15.7 -0.6 -15.8 -11.2 -23.5 1.6

3.7 2.4 6.2 -2.0 2.6 0.4 2.7 4.3 -0.2 0.8

4.6 6.1 -0.9 4.5 4.6 0.0 4.5 6.8 6.9 0.3

_ _

40.0 -4.8

50.6 -0.7

38.9 2.3

38.5 2.6

40.0 2.4

Memorandum items GDP deflator Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934217779

Long and strict lockdown measures have taken their toll The long lockdown has severely affected labour-intensive tourism, leisure, health, social and personal services. Employment has decreased markedly, particularly among low-skilled and informal workers. This weighs on household incomes and holds back private consumption, despite some recent improvements, including in spending on durable goods. The limited reopening that began in late April allowed a rebound of manufacturing and construction activity. Argentina successfully restructured its foreign and domestic law public debt in September and has initiated debt talks with multilateral lenders, but investor confidence and access to capital markets are still limited by significant macroeconomic imbalances. Inflation started to rise in August, despite weak domestic demand and strict price controls, and the spread between the official and the parallel exchange rate surpassed 100% in mid-October. Net currency reserves of the central bank are declining rapidly. Tighter currency restrictions have weighed on imports, while solid commodity demand from China and an ongoing recovery in Brazil have buoyed exports.

Policies have so far protected household incomes and firms Fiscal policy has supported poor and vulnerable households through one-off bonuses, in-kind payments and reinforced unemployment benefits (1.5% of GDP). Wage subsidies and lower payroll tax liabilities have helped some firms, partially compensating for the costs of a generalised ban on dismissals for 240 days. The crisis response has exacerbated the high fiscal deficit, which has been financed through transfers from the central bank, and the money supply has risen significantly. Recent policy announcements suggest more efforts to tap into domestic capital markets and less reliance on monetary financing going forward. Reserve requirements and provisioning needs have been eased, bank holdings of central bank paper limited, and lending incentives strengthened.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020

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Growing macroeconomic imbalances delay the recovery Investment and consumer confidence are unlikely to pick up before macroeconomic uncertainties are resolved and the pandemic subsides. The recent easing of confinement measures will support a recovery in some services sectors, but physical distancing measures and sporadic local outbreaks will damp prospects for a quick recovery. Bankruptcies and job losses will rise once the current wage subsidies for formal sector workers and the ban on dismissals expire. This will further add to high unemployment and weaken domestic demand. Inflationary pressures will intensify once strict price controls are relaxed and domestic demand recovers.

GDP is projected to fall by just below 13% in 2020, before starting to recover by 3.7% and 4.6% in 2021 and 2022, respectively. Risks to this outlook include a spike in inflation, as money demand may not absorb recent increases in supply or future treasury financing needs may rise. Moreover, low international reserves entail risks of a disorderly devaluation, which would add to inflationary pressures. An increase in infection cases could lead to a renewed lockdown. On the upside, a swifter recovery in neighbouring Brazil, stronger commodity demand as well as a more competitive exchange rate could support exports.

Reducing imbalances and facilitating structural change are key for the recovery A country-wide tracing, testing and isolation strategy should accompany the gradual lifting of confinement measures to avoid setbacks in the fight against COVID-19. A credible medium-term fiscal strategy centred on improvements in public spending efficiency, and cutting back regressive tax exemptions and special regimes, could pave the way to reduce macroeconomic imbalances. A stronger and more inclusive recovery will require more policy action to foster formal job creation and lower labour market duality. Social protection could be strengthened by building on existing cash transfer schemes, while simultaneously reducing the cost of creating formal jobs. This would also support the necessary structural adjustment post-crisis. Strengthening the trust in public institutions, including an independent judiciary and central bank, would further help to rebuild much needed confidence.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020