Brazil & Southern Cone - July 2021

After a bruising three years of falling activity levels there are early signs that Argentina’s economy is bottoming out. But the recovery is very fragile.

According to Argentina’s national statistics institute (Indec), GDP in the first quarter of this year was up by 2.5% year-on-year, and by 2.6% quarter-on-quarter. These modest signs of growth came after four successive quarters of contraction. With the coronavirus (Covid-19) pandemic coming on top of deep structural imbalances, GDP crashed by 9.9% last year. Aided by a low basis of comparison and the reopening of the economy at the beginning of this year, construction activity soared 21.3% in the first quarter, with manufacturing up by 11.4%. However, hotels and restaurants, still affected by pandemic restrictions, plunged by 35.5%. The monthly economic activity index (Emae) for April also indicated strong growth of 28.3% year-on-year, although it was down 1.2% compared with March. Unemployment fell to 10.2%, down from 11% in the fourth quarter.  

Growth in consumption was modest, and exports only edged up marginally (despite strong international soya prices). Among other positive signs, tax collection rose 69% year-on-year in June, ahead of the inflation rate (estimated at 49.3%). The economy ministry says tax receipts in the first half of this year have come back up to pre-pandemic levels. The ministry has become more optimistic about growth. The 2021 budget was built on the hypothesis that the economy would expand by 5.5%, but that prediction has since been raised to 7%.

That said, there are various clouds on the horizon. One is a new surge in Covid-19 infections which has forced the government to impose new and controversial international travel restrictions. It is feared that the new wave of infections could once more derail the economy. In second place, business sentiment has been weakened by a decision on 24 June by investment index provider MSCI to downgrade Argentina from ‘emerging market’ to ‘standalone’ status. MSCI said the change reflected the negative impact of continuing capital and exchange controls in the country. The change will take effect in November and is expected to lead investors to withdraw as much as US$610m from the three remaining companies in the MSCI Argentina Index (these are Globant, Adecoagro, and state-owned oil company YPF).