ARGENTINA

In the face of the pandemic that hit economies beginning in January 2020, the Argentine government started to implement health policy responses in mid-March. On 20 March, a full lockdown was put in place, lasting until 07 June. The country introduced the strictest set of measures in Latin America in order to thwart the risks weighing on the healthcare system. Argentina’s government health expenditures as a percentage of GDP is low (5.6% for an OECD average of 10.05%), pointing to a risk of having a health infrastructure unequipped to face the outbreak. However, Argentina does have the second-highest ratio of hospital beds in Latin America (5 for every 1000 inhabitants), which should help mitigate the number of casualties.

The pandemic represents both an external shock – with external demand plummeting due to global lockdowns – and an internal economic shock on consumption and investment. This will lead all of Latin America into recession this year (-6.5% annual growth in 2020) but Argentina will plunge into an even deeper recession at -8% in 2020. However, we do expect a significant recovery in 2021 with our forecast pointing to +5.5% GDP growth.

Policy leeway might be too narrow to effectively fight the crisis

Fiscal and monetary measures will assuage the crisis but not avoid it. On the monetary side, the Central Bank of Argentina has targeted money supply in a way to almost halve the policy interest rate, which stood at 63% in December 2019. Other measures have been implemented to enhance bank lending, such as lower reserve requirements for bank lending and regulations that limit bank’s holdings of central bank paper to provide room for SME lending (IMF). Although it will have positive consequences on domestic activity, this additional liquidity could lead to more pressure on the currency. The government has intended to reduce the country’s high inflation through price controls (on food and medical supplies) and lower indexation. However, increasing monetization of fiscal deficits by the central bank could actually push up inflation above the already high 50% level, which risks putting the country in a hyperinflationary loop. On the exchange rate side, measures aimed at restricting financial and current account transactions implemented since August 2019 have helped in limiting capital outflows, which have been considerable in other emerging economies during the Covid-19 crisis.
Fiscal relief measures amount to around 5% of GDP and have focused on providing increased health spending, support for workers and vulnerable groups, support for hard hit sectors, demand support, forbearance and credit guarantees. Although relatively limited compared to other countries, this additional fiscal stimulus is a long shot given the country’s likely future difficulty to issue debt due to financial markets searching for safe assets and current debt restructuring.