External liquidity squeeze
Argentina is experiencing sharply slowing economic growth and rising inflation. Foreign-exchange reserves fell considerably last year, forcing the authorities to proceed to a large devaluation of the peso and adopt more orthodox policies. In the short term, foreign-currency inflows from agricultural exports should ease the external constraint. However, to avoid a liquidity crisis, the Argentine authorities will have to be focused on increasing international investors’ confidence. This will require greater fiscal austerity and a successful negotiation with the Paris Club.
■ Weaker growth
In 2013, Argentina's economic growth was sustained overall, but slowed sharply in the last few months of the year. Real GDP growth fell from 8.8% in Q2 to 5.5% year-on-year in Q3. According to the EMAE (a monthly indicator published by INDEC that is a proxy for growth), economic growth was estimated to 2.7% in Q4, giving a full-year average of 4.9%. However, official growth data are now being calculated using 2004 as the base year instead of 1993, and in late March the authorities published a preliminary growth estimate of 3.0% for full-year 2013. The new figures do not feature a quarterly breakdown, and so we cannot gauge the extent of the late- 2013 slowdown. However, the authorities may have intentionally underestimated full-year 2013 growth, which is just below the level at which the government would have had to make payments to holders of GDP bond warrants1. On the supply side, agricultural production grew 10.6% in 2013, while industrial production fell 0.3%. The slowdown has continued in early 2014, with the EMAE (with 2004 as the base year) showing year-on-year growth of 1.2% in January 2014, or a month-on-month contraction (seasonally adjusted) of 0.4%.
Growth is likely to continue slowing this year, pushing the economy into recession. Wage negotiations due in April are likely to result in lower real wages, with a serious negative impact on consumer spending. Public-sector consumption will be unable to make up for weak consumer spending because the government needs to reduce its budget deficit to rein in inflation. In addition, despite investment in the oil and gas sector, investment is also likely to make a lower contribution to overall growth. Argentina's real GDP could contract by 0.5% in 2014.
BY Valentin LETHIELLEUX