Alphacast Highlight - Argentina December 2022 Macro Brief

After a decade of mediocre performance, with near-zero growth since 2011 and two consecutive years of recession in 2018 and 2019, Argentina suffered a large contraction in 2020 - with GDP dropping by 9.9% in 2020. The recovery, nonetheless, was quick, with a subsequent expansion of 10.4% in 2021. Growth is expected to remain relatively strong, with professional forecasters predicting GDP to increase over 5% in 2022, but with slower rates of growth in 2023 and 2024. The main indicator to watch is inflation, however, which has increased rapidly and in a sustained fashion since 2018, where it reached 45% - and has broken post-2002 records every year except 2020. Price growth in 2022 is expected to close at roughly 100%, and price growth in 2023 is not seen as likely to decrease, with a near-identical expected inflation rate. The coming presidential elections are expected to bring further instability to the economy.

Activity

Post-COVID expansion continues at moderate pace. The Monthly GDP Estimate for October showed growth of 4.5% YoY, although a moderate contraction of 0.3% MoM, similar to the previous month's figures. In terms of sectors, Hotels and Restaurants showed an extremely strong performance, with most other sectors showing positive growth that month - although Education and Healthcare at a slower rate. However, both Agriculture and especially Finance had negative showings that month.

Inflation

Inflation eased in November. Headline and Core inflation slowed in November, with prices growing 4.9% MoM (vs 6.4% MoM in October) and core prices in particular at a similar 4.8% MoM (vs 5.6% MoM). In annual terms, prices continued breaching post-hyperinflation records, since headline inflation was 92.4% YoY. The rate of inflation is also expected to be moderate in December (compared to the over 6% printings of the previous four months), and inflation expectations for 2022 are just below the 100% mark, while forecasts for 2023 are on the verge of crossing the triple digit threshold. Considering that policy is seen as likely to become more expansionary in 2023, an election year, it is plausible that price growth accelerate even further from its already breakneck pace.

Monetary Policy

The Argentinian Central Bank did not increase its 75% policy rate in November or December, and private rates remained relatively stable as well. Rates had remained flat at 38% since the pandemic while inflation surged, first to 51% in 2021 and later to nearly triple digits in 2022; policy did not change until January, and over the year rates have risen by more than 35 b.p. Nonetheless, all rates are significantly below inflation, both observed and expected, though the real ex-post rate for October was moderately positive, for the first time in three years.

FX & Markets

The Argentinian peso has depreciated throughout 2022, although at different speeds depending on the market- the official rate has grown slowly and steadily, but far below the rate of inflation, while the parallel rates (especially the BCS rate) have grown much more quickly, breaching the 300 peso mark in July after sudden changes to the Cabinet. Compared to the official are of 182 ARS/USD, the parallel market offers values closer to 340, compared to 109 and 210 respectively. Restrictions on operations on the currency market, especially trade, have been taken to protect the Central Bank's dwindling reserves and avert a sudden depreciation with potentially catastrophic consequences on inflation.

Equities have shown an erratic performance in 2022, tracking the country's economic fortunes, with significant fluctuations in value compared to late 2021 - the country's economic volatility and uncertain future have clearly had an impact on the value of traded assets. Meanwhile, the risk premium spiked in June and July after a series of political incidents, and have begun to revert to early 2022 levels.

Fiscal

Argentina's fiscal policy has been expansionary over the past 3 years - especially in 2020, with a deficit of 6.5% of GDP, but also in the election year of 2021 (4.3% of GDP). However, a recent renegotiation with the IMF has put the government on a path towards fiscal moderation, and the deficit is expected to narrow somewhat in 2022. Some of the improvement to public finances is due to the recovery of economic actiivty, and some to higher international prices of commodities, furthering export tax revenue - both factors are expected to exhaust themselves sometime next year, putting further strain on genuine deficit reduction. Fulfilling the agreement with the IMF, which would imply a further tightening in 2023, is under question - given the traditional practice of expanding spending during election years.

Trade and Balance of Payments

Argentina's trade balance has recovered moderately from its recent slump, with exports growing somewhat and imports deccelerating, which has allowed for a more comfortable situation. Export growth over 2022 has been powered by a recovery in quantities tracking the economy's overall output, but primarily due to record-high prices for the country's main commodity exports. Meanwhile, imports have grown mainly in quantity owing to both an overvalued exchange rates and the needs of a recovering economy, while prices (especially of oil and gas) have played a minor, but significant, role. The reduction in demand for heating, powered by (imported) natural gas, has helped the Balance of Payments, as well as restrictions on imports.

Given the stringent restrictions on financial flows into and out of the country, Argentina's balance of payments largely depends on the current account, which has produced a surplus (due to the goods trade balance), although one shrinking into negative territory on Q3-22: services, which is largely composed of international tourism, has taken a bite out of the surplus, and the smaller positive trade balance has not been sufficient to offset it.