Argentine economic outlook will worsen this year

Significance

The severe drought’s impact on export earnings has fuelled fears of devaluation, increasing exchange pressures and forcing the government to implement further domestic debt swaps and a new preferential exchange rate for soya exporters. Falling export tax revenues have increased dependence on domestic financing to close the fiscal gap.

Impacts

• Short-term measures to protect reserves and reduce the Treasury’s dependence on Central Bank transfers will increase inflationary pressures.
• The drought will put the primary deficit target of 1.9% of GDP at risk and may fuel a recession, increasing social tensions.
• Further relaxation of IMF targets would oblige the new government to implement more draconian adjustments next year.
• The government will seek to prevent a major currency run ahead of the October elections.