OECD Economic Surveys Argentina OVERVIEW http://www.oecd.org/economy/surveys/argentina-economic-snapshot/ This Overview is extracted from the Economic Survey of Argentina. The Survey was discussed at a meeting of the Economic and Development Review Committee on 22 January 2019 and is published under the responsibility of the Secretary-General of the OECD. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD Economic Surveys: Argentina© OECD 2019 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. EXECUTIVE SUMMARY │ 1 Executive summary 2 │ EXECUTIVE SUMMARY competitive one that Argentina has had in 10 The economy is in recession after markets years. reacted to existing vulnerabilities Risks are related to the contractionary effects The economy is in recession. A strategy of of policies and to external factors. The reducing the large fiscal deficit only gradually, projected return of market confidence could take the reliance on its foreign financing and high longer to materialise if the contractionary effect interest rates due to tight monetary policy opened of macroeconomic policies is stronger or if up significant vulnerabilities (Figure A). In April market volatility remains high. Exposure to 2018, markets reacted with a reversal of capital external risks is decreasing as the sizeable twin inflows, exacerbating a slowdown of currency deficits on fiscal and current accounts decline. inflows due to a record drought. The Argentinian Upcoming elections in October 2019 imply peso depreciated and market sentiment uncertainty about the continuation of reforms. deteriorated abruptly, generating severe liquidity challenges. Confidence and domestic demand Table A. The economy is projected to recover declined markedly, putting an end to seven 2018 2019 2020 quarters of growth. As public debt is largely Gross domestic product -2.5 -1.5 2.3 denominated in foreign currency, the peso Private consumption -2.1 -4.1 2.1 depreciation raised it by about 30% of GDP, Gross fixed capital formation -5.1 -15.3 3.3 pushing it above levels observed in other Exports -2.0 15.0 7.9 emerging market economies. Imports -2.5 -4.7 4.2 Unemployment rate 9.5 12.0 13.0 Figure A. Imbalances have built up Consumer price index (Dec-on-Dec) 47.6 34.0 25.0 Fiscal balance -5.2 -3.2 -1.7 % of GDP Public debt (gross, % of GDP) 76.1 74.1 71.2 3 Fiscal balance Current account (% of GDP) -5.2 -1.2 -0.6 2 Current account balance 1 Source: OECD projections. 0 -1 Fiscal and monetary policies are now -2 strongly contractionary -3 -4 The initial strong reliance on tight monetary -5 policy coupled with a gradual fiscal -6 adjustment has given way to strong -7 simultaneous fiscal and monetary 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 contractions. The new fiscal targets aim for a Source: INDEC, Ministry of the Treasury. balanced primary result in 2019 and a 1% of GDP StatLink 2 http://dx.doi.org/10.1787/888933942391 primary surplus thereafter. This implies a strong consolidation effort and curtail domestic Macroeconomic policies responded swiftly to demand. Its implementation poses political these challenges. While a frontloaded fiscal challenges, but not making the adjustment would consolidation and tight monetary policy will lead aggravate risks of a much more prolonged and, to a strong contraction of domestic demand in the ultimately deeper, downturn. Indeed, adhering to short term, the adjustment being implemented the fiscal targets will be seen by markets as a should eventually pave the way for reduced litmus test for the Argentinian authorities’ imbalances. The current account deficit is willingness to resolve the serious expected to decrease and the potential for macroeconomic imbalances facing the country. stronger exports in the future is substantial as the depreciated exchange rate is the most EXECUTIVE SUMMARY │ 3 Inflation has spiked Many policies are in place to protect the poor and most vulnerable groups Bringing down high inflation has proven very challenging (Figure B). Recognising weak Around 27% of Argentinians live in poverty transmission of monetary policy, the Central and 5% in extreme poverty, half the level after Bank abandoned inflation targeting and has the last major crisis in the early 2000s. This committed to keeping the monetary base constant declining trend continued during 2016 and 2017, in nominal terms until July 2019. A new until the recession raised poverty again during framework for currency interventions allows the 2018 (Figure C). exchange rate to float freely within a moving Social policy will remain important to achieve corridor, while allowing limited interventions if more inclusive growth and cushion the current the exchange rate leaves the corridor. recession. Fiscal targets have been defined in a way to allow some limited space to expand well- Figure B. Inflation has spiked targeted benefits, which should be used to protect 60 YoY low-income households from the burden of the recession. 50 Figure C. Poverty has been on a declining trend 40 % of population below poverty lines 30 60 20 50 Extreme poverty Poverty 10 40 0 30 20 Jul-2017 Jul-2018 Apr-2017 Oct-2017 Apr-2018 Oct-2018 Jan-2018 Jan-2019 Jan-2017 Source: INDEC. 10 0 StatLink 2 https://doi.org/10.1787/888933942296 2006-II 2009-II 2003-II 2004-II 2005-II 2008-II 2010-II 2011-II 2012-II 2013-II 2014-II 2015-II 2016-II 2017-II 2007-II* Structural reforms hold the key to stronger Source: Tomarolli, L. (2018), Series Comparables de growth Indigencia y Pobreza, CEDLAS, UNLP, INDEC as of 2016- II. Since 2015, the current administration has StatLink 2 http://dx.doi.org/10.1787/888933942638 made considerable efforts to create conditions for sustainable and inclusive growth. Recent reforms include a tax reform, changes in the Argentina has not shared in the benefits of fiscal relations between the provinces and the international trade central government, a new competition law, improvements in the sustainability of the pension Argentina is significantly less integrated into system, new legal frameworks for capital the world economy than other emerging markets and for public-private partnerships, the market economies (Figure D). The main reason creation of an independent fiscal council and a for this are high tariffs and non-tariff trade commitment to bolster the independence of the barriers. Reducing trade barriers would raise Central Bank. But much more remains to be consumer purchasing power, especially for low- done. income households, and would reduce the cost of firms’ inputs. 4 │ EXECUTIVE SUMMARY Trading little, Argentina has also remained on the creation during the recovery. For new jobs, side lines of global value chains, all of which extending the current unemployment insurance represents significant lost opportunities for scheme used in the construction sector, which is growth and well-being. based on individual accounts, economy-wide while reducing severance costs would make Stronger integration into the world economy formal hiring less costly and protect individuals would also raise competition and lead companies rather than specific jobs. in shielded sectors to become more productive. Currently, many jobs are trapped in activities with limited potential for productivity and wage Education and health policies are crucial for growth. Priority should be given to reducing ensuring inclusive growth tariff barriers in capital and intermediate goods, to support competitiveness and job creation. Improvements in the quality of education have high pay-offs. They prepare future Figure D. Trade flows are small generations for new opportunities, address skill % of GDP shortages and can help raise low female labour 140 participation (Figure E). 120 40% of secondary students leave school without 100 a degree, often owing to a failure to acquire essential skills during early childhood. This 80 could be addressed by further expanding early 60 childhood education, which would also allow more women to seek remunerated employment in 40 the workforce, increasing their incomes and life- 20 options. 0 Figure E. Differences in employment rate IDN IND CRI JPN ESP CHL THA BRA USA COL PER TUR RUS DEU CHN MEX KOR ARG between men and women Source: OECD Economic Outlook database. % of population aged 15+ 50 StatLink 2 http://dx.doi.org/10.1787/888933942999 40 Policies can cushion adjustment costs of 30 integration into the global economy 20 As jobs move across firms and industries, new opportunities arise. Exporting firms are more 10 likely to be formal and pay 30% higher wages. But job reallocation can also require re-training 0 ITA ISR CRI IDN IND ZAF ESP CHL AUS USA PER BRA TUR COL DEU RUS CHN ARG MEX and result in temporary income losses. Policies KOR that could ease the transition include enhancing Source: ILO; INDEC. training and social protection, improving the functioning of product markets and strengthening StatLink 2 http://dx.doi.org/10.1787/888933942999 innovation. High severance payments are currently the principal insurance mechanisms against dismissal-related income losses, but only for workers in the formal sector.