By Valerie Hernandez, International Banker
On May 12, Argentina’s official statistics agency confirmed that prices had surged by a mammoth 108.8 percent year-on-year in April, having already posted 104.3 percent in March and 102.5 percent in February. The last time the South American country posted such sky-high rates was back in 1991 when it was mired in a period of hyperinflation during which annual prices exceeded a 3,000-percent hike. And while the country may well avoid a similarly torrid bout of hyperinflation in 2023, the ongoing deterioration paints a desperate picture for the beleaguered South American economy.
On a monthly basis, Argentina’s inflation surged by 8.4 percent in April, comfortably surpassing analysts’ consensus forecast of 7.5 percent. Government data additionally showed that food prices, representing the single largest weighted category in the price index, jumped 10.1 percent from March’s levels, while clothing, restaurants, hotels and home goods also exceeded the headline figure. Only the category of alcoholic beverages managed to raise prices by less than 5 percent on a monthly basis—scant relief for a country battling gargantuan price hikes this year that have sent the Argentinian peso plummeting and prompted citizens to withdraw more than $1 billion of US-dollar deposits from the banking system during April.
Inflation in Argentina has been massively elevated since the economy descended into a crisis in 2018, when its foreign-debt obligations ballooned to unsustainable levels and the peso collapsed against the US dollar. A $57-billion relief package from the International Monetary Fund (IMF)—its largest-ever credit package—was agreed with then-President Mauricio Macri that year, with the understanding that Argentinian policymakers would reduce inflation and public spending, among several key conditions. But inflation continued to spiral even higher as the country struggled to service its debt.
Under Macri’s successor, Alberto (Ángel) Fernández, who took over the role in 2019, prices seemed to only escalate at an even quicker pace, with a substantial sell-off of government bonds and an eventual default in May 2020 (the ninth in Argentina’s history); the country’s failure to make a scheduled $500-million interest payment to foreign creditors proved to be a critical moment in the country’s misfortunes. With access to finance severely curtailed by the default and a global pandemic only worsening the economic prospects of millions of Argentinians, the government resorted to printing money to provide economic support during this challenging time. Not surprisingly, inflation was pushed to even higher levels. A mix of currency controls and price freezes implemented by the new government failed to cool prices and only added further complexity to the myriad of exchange-rate systems already existing in the country, thus denting business and investor confidence.
This year, the worst drought in Argentina in around 60 years has been hugely significant in sending prices skywards, with large swathes of crop-producing land being impacted by a prolonged heatwave and even wildfires in some parts. “Argentina has been affected by a severe drought, which has undermined the performance of the economy and significantly harmed the country’s population. This has complicated the job of policymakers,” the International Monetary Fund’s managing director, Kristalina Georgieva, acknowledged on April 13, just a few days after a new IMF report dramatically slashed Argentina’s growth forecast for this year from 2 percent to just 0.2 percent.
The drought has so severely curtailed volumes of the country’s biggest exports, such as soy, corn, wheat and other important grains, that the Buenos Aires Grain Exchange (BAGE) has already slashed 2023 production estimates on several occasions—its latest forecast for corn production being 36 million metric tonnes (MT)—for soybean output, currently to 21.5 million MT from its previous forecast of 22.5 million MT. Given that Argentina is the third-largest corn exporter and the biggest exporter of soy oil and soy meal, the global repercussions from these historically low projections could be seismic, with consumers worldwide being detrimentally exposed to the shortages. As the largest source of soy for consumption by pigs, for instance, Argentina’s crop woes will be sure to leave many of the world’s feedlots struggling this year.
“We are going to have a cut in production of 50% considering when we were seeding last November December. I think we’re going to be close to 20 million tons. This is really low. I have been in this industry for 20 years, and I have never seen such a small crop.” Sol Arcidiácono, head of the Latin American Grain Desk at HedgePoint Global Markets, recently said of soybeans when speaking to the agricultural-market news site AgWeb. Arcidiácono thus expects that Argentina will have to import around 10 million metric tonnes of soybeans just to keep its processors in business.
With a dearth of crops being sold, then, and with jobs in—and tax revenues from—the industry being heavily slashed as a result, the Rosario Grains Exchange estimates that the drought will directly cut a mammoth $19 billion from Argentina’s gross domestic product (GDP) this year compared to 2022 levels. As for inflation, these crop shortfalls are already exerting upward pressures on prices at home amid an environment of surging food costs; indeed, Bloomberg recently noted that meat costs jumped by more than 30 percent in February from the previous month. And with fewer dollars flowing into the country due to the sharp decline in export business, inflation will continue to surge as currency controls push costs even higher.
As such, the outlook for prices for the coming months makes for rather grim reading. Surveying 40 leading economists, Banco Central de la República Argentina (BCRA) released its monthly report on forward inflation expectations on May 5—two weeks after it had raised its benchmark Leliq interest rate by 300 basis points (bps) to 81 percent, followed by a further 1,000 basis-point increase a week later to a record high of 91 percent. Despite these mammoth hikes, the report was unforgiving in its inflation estimates, revealing that prices in 2023 could climb as high as 126.5 percent—17.3 percent higher than the previous month’s projections. As for the 12 months out to April 2024, the report foresees inflation reaching 146.5 percent, a mighty 33.2 percent higher than the previous survey. While inflation in the 24 months to April 2025 is now expected at a slightly more “encouraging” 73 percent, which is 5.1 percent lower than the previous projection. In the short term, meanwhile, month-on-month inflation is projected to remain above 7 percent until at least October, the report added.
While all this may seem depressing for Argentina’s prospects, some reasons for cautious optimism still exist. For one, a new $44-billion deal with the IMF was hammered out last year, effectively easing the payment schedule first agreed upon during the 2018 deal. And in March, it was announced that Argentinian authorities and IMF staff had reached a staff-level agreement on “an updated macroeconomic framework and associated policies necessary to complete the fourth review under Argentina’s arrangement”, which will “give Argentina access to about US$5.3 billion”.
The economic outlook also contains a few distinct bright spots that could shine brighter over a multi-year horizon. “Nobody doubts this will be a very difficult year,” Pierpaolo Barbieri, founder and chief executive of the internet bank Ualá, told the Financial Times in mid-March. “But in the medium term, four sectors make me very optimistic: agribusiness, energy, mining and digital services.” Indeed, the world’s second-biggest shale gasfield, the Vaca Muerta Formation, located in the southern Patagonia region of the country, should soon begin pumping gas along a new pipeline to Buenos Aires, while exports to neighbouring Brazil and Chile are expected to ramp up considerably. Optimism is also growing surrounding the development of Argentina’s vast lithium reserves, with JPMorgan Chase forecasting that the country will become the world’s third-biggest producer of the hugely important white metal.
As such, all hope of a turnaround in fortunes is not completely lost. But it does make the upcoming presidential election in October all the more crucial for ordinary Argentinians, with the ruling party’s hold on power significantly weakened by its fragile economy—and by inflation being unlikely to escape triple digits in the preceding months. “Policy changes to fix the inflation problem will have to be more drastic the longer it holds about 100%. There’s little the government can do ahead of the October election,” Adriana Dupita, Bloomberg’s economist for Brazil and Argentina, reported on April 14. “A rate hike at the next central bank meeting would keep real rates positive, as agreed with the IMF, but wouldn’t have a practical near-term impact on inflation.”
Indeed, with aggressive rate hikes administered since that assessment seemingly having had a negligible impact on surging prices to date, the chances of a quick-fix solution to this ongoing inflation disaster against the backdrop of a historic drought remain decidedly remote.