Outlook Worsens In Argentina

Argentina and the IMF reached a preliminary agreement on 7 June for a three-year USD 50 billion stand-by arrangement that will keep the economy afloat as the government pushes through economic reforms. While the final agreement is still subject to approval by the IMF board, the government pledged to now accelerate economic reforms, including reforming the Central Bank charter, reducing currency interventions and achieving a primary fiscal surplus by the year 2021. These measures are intended to make the economy more resilient to economic shocks and capable of achieving faster economic growth in the medium and long term. However, the tough reforms and fiscal consolidation are expected to have a negative impact on economic growth in the short term and weigh on the ongoing economic recovery. GDP is expected to have expanded solidly in the first quarter due to buoyant growth in the domestic economy. Economic growth is expected to slow sharply from 2017’s strong expansion due to fiscal consolidation measures, restrictive credit conditions and the pass-through effect of higher inflation on private consumption. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, growth is expected to reach 2.5%.

National inflation inched up from 25.4% in March to 25.5% in April. Inflation is expected to remain above the Central Bank’s inflation targets for 2018 and 2019 as a weaker currency and expected subsidy cuts in public utilities will stoke price pressures going forward. Panelists expect national inflation to end 2018 at 27.4%, which is up 3.7 percentage points from last month’s forecast. For 2019, inflation is seen moderating to 19.2%.

The monthly indicator for economic activity (EMAE, Estimador Mensual de Actividad Económica) slowed notably in March, registering a 1.4% expansion in annual terms, a sizeable moderation from February’s revised 5.0% increase (previously reported: +5.1% year-on-year). This was the slowest pace of growth since April 2017; it nonetheless marked the thirteenth consecutive month of economic expansion in Argentina. The slowdown was driven by contractions or weaker growth in most of the components of the index. Notably, economic activity in agriculture, livestock, hunting and forestry contracted 5.5% year-on-year in March (February: +3.3% yoy). Meanwhile, growth in the manufacturing industry eased to 0.8% (February: +5.9% yoy). Construction activity also slowed, expanding 5.9% in March (February: +12.7% yoy), and financial intermediation growth moderated to +3.3% (February: +7.6% yoy). A seasonally-adjusted month-on-month comparison showed that economic activity contracted for the second consecutive month, falling 0.1% in March, following a 0.2% contraction in February. Lastly, average economic activity in March remained unchanged at February’s two-year high of 3.6%.

At its latest bimonthly meeting held on 22 May, the Central Bank of Argentina (Banco Central de la República Argentina, BCRA) decided to leave the 7-day repo reference rate unchanged at an all-time high of 40.00%. The decision was widely expected by market analysts, as the Bank tried to settle markets by restoring confidence following weeks of financial volatility and a sell-off of the currency in the past few weeks. The Argentine peso came under severe pressure due to growing expectations of faster-than-expected monetary policy normalization in the United States. The latest rate decision also came against a backdrop of double-digit inflation. According to the National Statistics Institute (INDEC), national consumer prices rose 2.7% over the previous month in April (March: +2.3% month-onmonth) on the back of cuts in government subsidies. National inflation ticked up from 25.4% in March to 25.5% in April. According to the Bank, the sharp depreciation of the Argentine peso observed in the first two weeks of May will contribute in fanning price pressures going forward and consequently Monetary Policy Rate | in % Note: 7-day Repo Reference Rate in %. Source: Central Bank of the Argentine Republic (Banco Central de la República Argentina). 22 26 30 34 38 42 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 % Inflation | Consumer Price Index Note: Annual and monthly var. of Buenos Aires consumer price index in %. Source: Statistical Institute of the City of Buenos Aires. 20 30 40 50 -4.0 0.0 4.0 8.0 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Month-on-month (left scale) Year-on-year (right scale) % % Consumer Confidence Note: Monthly consumer confidence index. Values above 50 indicate an optimistic assesment in consumer sentiment while values below 50 indicate a pessimistic assesment. Source: Universidad Torcuato di Tella (UTDT). 35 40 45 50 55 May-16 Nov-16 May-17 Nov-17 May-18 FOCUSECONOMICS Argentina LatinFocus Consensus Forecast | 24 June 2018 warrant tight monetary conditions. The Bank saw the current monetary stance as appropriate to impede a further sell-off of the peso and prevent a further depreciation, which would translate into higher inflation. The Central Bank reiterated its commitment to conducive monetary policy, with the objective of achieving the 15.0% inflation target by the end of the year. A timeframe, however, was not provided, and future rate decisions will depend on developments in financial markets. The BCRA also stressed its willingness to normalize monetary policy as financial turbulence and uncertainty dissipates. On average, Panelists participating in the LatinFocus Consensus Forecast see the 7-day repo repurchase rate ending 2018 at 31.38%. They see the 7-day repo repurchase rate easing further in 2019, closing the year at 23.24%.

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