While it is too early to say if Argentina’s recent efforts to correct imbalances represent a genuine shift toward pragmatism or are merely calculated forms of damage control aimed at limiting the magnitude of future devaluations and helping Argentina regain access to international capital markets, it is clear that recent adjustments will raise borrowing costs and erode consumer purchasing power and business confidence in the months ahead.
Recent adjustments and their implications for the business environment include:
- Argentina allowed the peso to fall in January and has also begun to raise interest rates, cut transportation and energy subsidies, and improve relations with external lenders in an effort to stabilize the exchange rate and regain access to capital markets
- While these efforts are beginning to bear fruit, macroeconomic imbalances, including a dwindling supply of foreign exchange reserves and perniciously high inflation, remain, and the government has resisted a complete shift toward orthodoxy, preferring instead to expand price controls and leave import controls in place.
- Argentina’s ability to successfully course-correct remains vulnerable and could be undermined by several key events, including wage negotiations, the soy harvest, and a forthcoming US Supreme Court decision regarding Argentina’s obligations to holdout creditors
- Nearly all key growth drivers, including consumption, investment, and government spending, are expected to contract in the wake of monetary tightening, exchange rate uncertainty, double-digit inflation, falling real wages, and the potential for additional shifts toward fiscal austerity
- As regional and country heads come under increasing pressure from corporate to make the case for continued presence in Argentina, executives are emphasizing the market’s enduring economic and demographic potential