Business and consumer sentiment towards Argentina have become notably pessimistic following a massive depreciation of the Argentine peso, particularly in the months of May and June. The Mauricio Macri administration – in a bid to restore confidence – signed an IMF stand-by arrangement (SBA) establishing a line of credit for US$ 50 billion.
The IMF’s deal comes with conditions, namely more aggressive fiscal deficit and inflation targets. This will require a major austerity push by the Macri administration, which will require a difficult balance between achieving the targets – and thereby regaining market sentiment – and maintaining the social peace leading up to the 2019 general elections.
The probability of Macri’s re-election and long-term sustainable growth in Argentina is contingent upon the following five economic variables:
- Inflation: Inflation has been the Macri administration’s biggest failure. While he inherited significant inflationary pressures from the Cristina Kirchner (CFK) administration, this does not change the fact that the Macri administration and Central Bank of Argentina (CBRA) made many unforced errors. For inflation to decelerate, the CBRA needs to regain its credibility to anchor inflation expectations. Decelerating inflation would lead to a relief in consumers’ purchasing power and business costs, boosting Macri’s chances at the electoral box
- Political risk:Investors will continue to hold off investments in Argentina until there is more clarity on whether current economic policies will continue after 2019’s elections. Political uncertainty will also affect consumer confidence. The magnitude of political uncertainty that we can expect, rather than an independent variable, will depend on how fast Macri’s administration can put the economy back on track, which will be measured by inflation levels, the strength of the Argentine peso, and unemployment. The worse the economy is performing before the elections, the higher the likelihood that Cambiemos loses the reelection bid to a more populist electoral platform
- Unemployment:Argentina’s level of unemployment will be the most direct measure of economic well-being, and will impact consumer spending and voter intentions accordingly
- Agricultural output:Argentina had its largest drought in approximately 50 years in the 2017/2018 growing season, which cut potential GDP in 2018 by up to 1.5 percentage points. A record wheat harvest expected in December 2018, an assumption of better weather for the 2018/2019 soy season, and a weakened Argentine peso mean that agriculture could propel Argentina’s economy going into next year
- Fiscal outcomes:The most important immediate result of meeting the IMF’s fiscal targets means accessing further tranches of the loan, lessening Argentina’s external financing requirements. Furthermore, it will be important to reducing FX volatility and influencing private investment inflows.
Actions to take
Multinationals should consider the following actions leading up to the elections in 2019:
- Ensure that you are aligning on scenario outcomes with corporate and demonstrating a growth path across different outcomes: Assume that a return to populism is still a low-likelihood event, but understand the signposts to watch that would increase the probability of such a scenario
- Prepare for volatility: Ensure that your local operations are as resilient as possible to new rounds of FX, demand, and financial volatility as the 2019 election season gets closer
For a more detailed analysis of our political scenarios and signposts to watch, please schedule an analyst conversation with your Client Services Director. Clients can also refer to FSG’s new Ahead of the Curve report, Argentina’s Pre-Election Scenarios, which will be published next week.
Not a client? Please contact us to learn more.
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