SIM Report: Latin America & the Caribbean, Issue 7

ARGENTINA: Record GDP drop highlights economic difficulties for Fernández administration

On 23 September, figures from the national statistics bureau, INDEC, revealed that Argentina’s economy shrunk by 19.1 per cent in the second quarter of 2020 against the same period last year. The sharp fall in GDP was largely triggered by the novel coronavirus (COVID-19) pandemic and marks the biggest quarterly contraction in the country’s modern history, exceeding the 16.3 per cent drop recorded during the economic crisis of 2002. INDEC’s figures also showed that quarterly investment fell by nearly 40 per cent on the previous year.

The GDP figures offer a snapshot of the severe economic challenges facing the administration of leftist Alberto Fernández, who took office in late 2019. Restrictions on travel and assembly aimed at containing the spread of COVID-19 have exacerbated existing economic malaise, characterised by unsustainable levels of public debt and a highly volatile exchange rate. While the government has taken some steps to address these problems, such as arranging an agreement with private creditors to renegotiate USD65 billion of debt in August and requesting talks with the IMF, the pandemic and an associated downturn in global trade have weakened both supply and demand across the economy. Furthermore, new capital controls imposed in September have complicated access to US dollars.

The impact of the economic downturn has been most pronounced in certain sectors. For example, hotels and restaurants saw a 73.4 per cent fall in activity in the second quarter, followed by social and personal services (-67.7 per cent), construction (-52.1 per cent), and manufacturing (-20.8 per cent). Other sectors, however, have fared comparatively well, including the utilities sector, which fell by a relatively small 3.3 per cent, and the farming sector, which recorded a year-on-year decline of 10.7 per cent. These trends mirror experiences of other countries, whereby industries most dependent on in-person experiences have suffered, while others more suited to digitisation and remote working have been comparatively less affected.

In recent months, Argentina’s economic difficulties, alongside the broader regional and global economic challenges, have had important implications for foreign companies operating in the country. Chilean retail giant Falabella, for example, announced in September that it will close four of its 10 stores in Argentina, citing the increasing digitisation of retail sales. In April, automotive giants Ford and Volkswagen announced they were scrapping plans to build a pick-up truck in Argentina, adding to Honda’s 2019 decision to end its manufacturing operations in the country. In June, regional airline giant LATAM Airlines announced it would close its Argentine branch, while airlines including Air New Zealand and Emirates have suspended routes to the country amid a lengthy government-imposed suspension of international commercial aviation.

The combination of severe economic problems prior to COVID-19 and the economic effects of the pandemic have presented the Fernández administration with an extremely complex economic task. In the immediate term, authorities are set to focus on countering the spread of COVID-19 in order to allow for the gradual resumption of economic activity, as well as protecting existing industries and jobs. In the medium-to-long term, the government must seek to rebalance the country’s public finances and achieve macroeconomic stability through debt renegotiations and fiscal policies balancing societal necessities and the economic and political reality.

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