Daniel Dawson Writes

Argentina’s economic outlook continues to weaken with a little more than six months until the country’s general election.

After the International Monetary Fund revised Argentina’s economic growth down to 0.2 percent earlier this month, a new analysis from Fitch Solutions, a risk consultancy, said it expects Argentina’s economy to shrink in 2023.

After recording a “healthy” 5.2 percent expansion in 2022, analysts said three primary factors are expected to cause Argentina’s 1 percent economic contraction this year. Argentina and Chile are the only countries in Latin America with negative growth forecasts for 2023.

Currently, we believe that the center-right Juntos por el Cambio has the best prospects at winning the presidency.

Ashkan Khayami, country risk analyst at Fitch Solutions

“The first is the drought caused by La Niña,” said Ashkan Khayami, a country risk analyst at Fitch Solutions. “The drought poses production headwinds to all crops, including wheat, corn and, most importantly, soybeans.”

Commodities researchers at Fitch Solutions estimate that soybean production will fall to 27 million tons, a 40 percent decrease from the previous harvest. According to the Buenos Aires Grain Exchange, this year’s harvest could be the lowest in 15 years.

Argentina is one of the world’s largest soybean producers and exporters, and the stunted yield is expected to weaken exports, significantly lowering government revenues from export taxes.

Along with drought, the lack of dollars dims the economic outlook

Falling reserves of United States dollars have also contributed to Argentina’s expected economic contractions.

“Weaker exports will contribute to a persistent current account deficit this year, which, combined with the cost of maintaining the official peg to the dollar, will drain foreign reserves,” Khayami said.

As a result of falling foreign reserves, Khayami anticipates the official exchange rate of the Argentine peso to depreciate by nearly 98 percent.

The third factor for Argentina’s gloomy economic outlook remains persistently high inflation. “We expect inflation will remain above 100 percent through the end of 2023,” Khayami said.

He cited currency depreciation, high nominal wage growth caused by minimum wage increases and rising health and fuel prices for the expectations of continued inflationary pressures.

“However, we expect wage growth will not keep pace with inflation,” he said. “This will hit household purchasing power, underpinning our expectations of a 1 percent contraction in private consumption.”

While Fitch Solutions widely expects economy minister Sergio Massa to hit the primary deficit target set by the International Monetary Fund, analysts see a growing risk that Argentina will not hit its reserve targets.

“This, in turn, would increase the possibility that the IMF could declare Argentina out of compliance with the extended fund facility deal, which would not only hurt investor confidence but could also cause the IMF to hold back on dispersing its funds in June that the government desperately needs,” Khayami said.

Advancing fossil fuel ambitions to beat the dollar deficit

One spot of good news for Argentina’s economy from risk analysts is the potential to expand its natural gas and oil production in the coming years.

Fitch Solutions oil and gas analysts project a 6.7 percent annual increase in Argentina’s oil and dry natural gas production over the next three years.

Khayami said the windfall would help replenish the country’s dollar supply, but not immediately, as delays have resulted in drilling reaching full capacity until 2024.

“This is going to help them re-create their currency reserves and improve their current account situation,” he said. “That said, I don’t think it’ll be there in time to save the Frente de Todos before this upcoming election.”

Economic concerns could lead to political turmoil for Frente de Todos

With Argentina’s general election in October, the worsening economic situation has jeopardized the ruling leftwing coalition’s future.

Analysts expect the Frente de Todos to lose power to one of the country’s two right-of-centre opposition groups, with former president Mauricio Macri’s Juntos por el Cambio expected to do slightly better.

“The Frente de Todos suffers from two problems heading into the upcoming elections,” Khayami said. “First is the worsening economic situation. The second is a lack of leadership and initiative.”

According to the analyst, President Alberto Fernandez has not registered to run again and lacks broad support from his party. Former president and current Vice President Cristina Fernandez de Kirshner also publicly ruled out running again after her fraud conviction in December.

“Currently, we believe that the center-right Juntos por el Cambio has the best prospects at winning the presidency,” Khayami said.

However, he did not rule out a surprise victory from the right-wing libertarian candidate for La Libertad Avanza, Javier Milei, who has consistently polled well.

While unlikely, if Milei advanced to the run-off to face the Frente de Todos candidate, Khayami said he might be able to win with a consolidated right and centre-right vote.

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