Twin deficits increase Argentina's economic fragility

Subject

Argentina's twin fiscal and trade deficits.

Significance

The recent plunge in global stock markets highlighted the exposure of the Argentine economy to a negative external shock, with the exchange rate depreciating by 2.5% in the first week of February. The worsening external deficit, combined with the still high fiscal deficit, increased concerns about the consistency of the economic policy framework and vulnerability to a sudden shift in capital inflows.

Impacts

• Capital outflows will remain high absent greater public confidence in government policy.
• Slow fiscal adjustment and rising foreign public debt are storing up sustainability worries.
• Weather troubles, such as drought in the Pampa region, could undermine the harvest, hitting exports and worsening the trade deficit.