Local economists warn of deeper slump as crisis continues

Argentina’s escalating financial crisis is prompting local economists to replace forecasts for a rebound in growth in 2020 with predictions of a third year of contraction.

The Central Bank on Tuesday released a monthly survey of economists which projected a toxic mixture of declining gross domestic product, faster inflation and a slump in the peso. The economy is now seen shrinking 2.5 percent in 2019 compared with a July projection of minus 1.5 percent. Banks such as Goldman Sachs and Barclays have also revised down their bets.

The sharp turnaround in fortunes comes as President Mauricio Macri looks almost certain to lose to opposition candidate Alberto Fernández in the October election. That outlook has scared investors and forced the current administration to seek to pacify them with a re-profiling of the nation’s debt, price freezes, minimum wage hikes and even capital and currency controls.

“Argentina is heading for a credit crunch,” said Marcos Buscaglia, senior partner of the Buenos Aires-based investment firm Alberdi Partners. “It’s also facing a loss of confidence, a brutal drop in growth and an increase in inflation.”

His firm had forecast a contraction of one percent this year; but now expects a two to three percent decline in GDP. For 2020, it anticipates the economy will shrink between four and five percent.

The central bank’s so-called ‘REM’ survey, which accepted its last forecasts on Friday, showed that the median expectation among Argentine economists is now for a contraction of 1.1 percent in 2020, down from a previous projection of two-percent growth in July. Thirty-nine economists took part in the poll, the lowest number since the start of 2018.

CHALLENGE

Forecasting Argentina’s unpredictable economy is a challenge at the best of times. With polls published prior to the primaries showing a pretty evenly balanced contest, analysts had based their outlooks on a Macri win and a continuation of his pro-business policies. While Fernández’s plans for the economy remain deliberately vague, his running-mate – former president Cristina Fernández de Kirchner – alarms investors horrified by her interventionist policies in her two presidential terms of office, from December 2007 to December 2015.

Last Friday Goldman Sachs revised downwards its forecast for both 2019 and 2020, to minus 3.2% and minus1.6% respectively. Like Buscaglia, Alberto Ramos, the investment bank’s chief Latin America economist, stressed that the latest forecasts were tentative, given the fluid nature of developments in Argentina. Nevertheless, the trend is clear.

“Tighter financial conditions will significantly affect the performance of the economy through the end of the year,” he said. “And we think those tighter conditions are with us for most, if not all, of next year.”

Inflation is now set to reach 55 percent by the end of year, up from an earlier estimate of 40 percent, the Central Bank survey also showed. Meanwhile the peso will fall to over 66 per US dollar by the end of 2019, compared with the prior forecast of 50 per greenback.

“Our main case for Argentina was disinflation, and now the scenario is upside down,” says Daphne Wlasek, XP Investments macro strategist. The company is now projecting inflation at 60 percent at the end of 2019 from 35 to 40 percent.

“Argentina’s macroeconomic scenario changed completely from the primary vote,” she added. “Inflation is in an upward trajectory and growth won’t come anytime soon.”