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Argentina - Economy

After contracting by 9.9% in 2020 due to the economic effects of the COVID-19 pandemic, Argentina's economy recovered in 2021 with 10.7% GDP growth, but this rate was not sustained. In 2022, the growth rate dropped to 4.9%.48 Argentina's economy then contracted by 1.6% in 2023, as a severe drought limited agricultural exports, rapid inflation weakened private consumption, and political uncertainty hampered investment. By the end of 2023, Argentina's annual inflation rate reached 211.4%, its highest since the 1990s.

Successive governments, starting with populist President Juan Domingo Peron in the 1940s and 1950s, saddled Argentina with huge unmanageable debts. After the presidency of liberal Mauricio Macri (2015-2019) and that of centre-left Peronist Alberto Fernandez (2019-2023), the combined effects of inflation, devaluations, the Covid-19 pandemic and budget deficits have pushed the country’s poverty rate from 30 percent to more than 40 percent.

Disoriented by hyperinflation and rising poverty, many Argentinians see the adoption of the US dollar as the country’s official currency as the long-awaited solution to an economic crisis that they’ve been struggling to escape from since 2018. With inflation reaching new heights – 124 percent per year in 2023 – and yet another devaluation of the peso – by almost 20 percent – in August 2023, Argentina increasingly looked like it will never wake up from its economic nightmare.

Argentina was already hurtling toward its second sovereign default in 20 years when the COVID pandemic struck. In May 2021, three months after COVID struck, Argentina defaulted for the second time in two decades when it failed to pay interest on debt to private creditors. The sovereign default was its ninth since independence from Spain in 1816. Argentina's economy plunged by 9.9% last year. Like so many others, it was ravaged by the coronavirus pandemic. The difference is that the South American country was already struggling under a total debt burden of $323 billion (€266 billion).

In September 2020, Latin America's No. 3 economy restructured a further $65 billion of debt with private creditors, not the IMF. The government had been negotiating with a group of large US investment firms, led by BlackRock. The investors agreed to drop their defaulted bonds for new bonds. These will be paid back at under 55 cents of every dollar of the original value — a significant loss. The deal was important as it means the country won't be locked out of international credit markets. It also avoids the huge reputational damage that comes with a full, open-ended default.

By mid-2019 unemployment and poverty had risen. Researchers at two Argentine universities estimate that 35 percent of the population is living in poverty, up from the official government rate of 27.3 percent in the first half of 2018. The Argentine peso plunged 6.1 percent to 49 to the US dollar on 12 August 2019, after voters rejected President Mauricio Macri's austere economic policies in primary elections, casting serious doubt on his chances of re-election in October 2019. His popularity had been dented by the spending cuts and tax increases made in an effort to bring the primary fiscal deficit to zero next year under IMF guidelines.

The Argentine peso continued to slide to trade at 30.82 against the U.S. dollar on 22 August 2018, marking a new record low after South America's second largest economy was severely hit by the Turkish lira's devaluation, Central Bank of Argentina data showed. The peso had become the world's worst performing currency with its value depreciating around 40 percent so far this year, while accumulated inflation has hit 19.6 percent. The losses were partly attributed to fears of a possible financial crisis in Turkey. Argentina's large fiscal deficits and high debt load have also impacted the currency. To stabilize the peso, the government had taken several measures, including raising interest rates and issuing treasury bills with yields in foreign currency.

The Sick Man of South America

Why is Argentina perpetually subject to crises? The country of 43.4 million people has a literacy rate of over 98 percent, enormous natural resources, a vibrant export-oriented agricultural sector and a diversified industrial base. Yet it has defaulted on sovereign debt eight times, experienced a massive economic depression from 1998 to 2002 and weathered repeated monetary crises. The country has gone through boom periods as well. It rebounded from its most recent crisis in 2002 - which resulted in an $82 billion (72 billion euros) sovereign debt default - with six years of growth at an average of 8.5 percent.

At the time of the Great War, Argentina was one of the world’s richest countries, with an income per person higher than France, Germany, or Sweden. Today it is a poor country. Argentina has experienced long-term economic growth, but it has been sluggish.

For six years, the administrations of Cristina Fernández de Kirchner and Mauricio Macri faced the deepening global economic crisis — and a public-sector debt accumulated since the 1980s — through austerity, ballooning interest rates to attract financial capital at the expense of industry and cuts in social spending. Since late April 2018, these conditions burst into a flight of capital and a precipitous fall in the value of the peso, with all accumulated consequences being placed on the shoulders of the working class.

By January 2019, Argentina's economy was at rock bottom. President Mauricio Macri had failed to reduce the country's vast budget deficit and boost competitiveness. The increase in interest rates in the US saw many investors withdraw capital from emerging economies - another blow to Argentina. Although it's had financial aid from the IMF, inflation is still soaring. To qualify for a 50-billion-dollar IMF rescue package, the country has to raise taxes and cut social programs.

Argentina faced obstacles to growth in a number of other areas. The obstacles are well known inside and outside Argentina, and all have been the subject of extensive study.

• Rule of law. Safeguards against takings of private property by the government are weak. The judicial system has a reputation for inefficiency and corruption. Violent crime became a big problem when the recession became a depression.
• Tax strategy. Combining tax cuts with tax simplification and greater efficiency by the tax bureaucracy, Argentina could bring much of the underground economy above ground. It could change from a country that imposes high tax rates on a relatively narrow tax base to one that imposes lower rates on a broader base.
• Federal-provincial financial relations. Federal revenue sharing weakens the link between the taxes provinces levy and the revenues they spend. The federal government had not been willing to get tough with provinces that are essentially bankrupt. As a result, the provinces face weak financial discipline.
• Government spending. Spending on pensions and salaries of government employees, including superfluous employees, comprises a larger part of the budget than is desirable for a country at Argentina’s level of economic development. Many expenditures lack transparency.
• Labor. Inflexible labor laws contribute to a high unemployment rate. Employers must pay heavy severance charges to fire employees, so they are less likely than employers in the United States to take a chance on hiring employees who may not work out. Argentina’s statistical agency estimates that 40 percent of wage earners work in the underground economy. (Many of these people have first or second jobs in the above-ground economy.)

As the world's largest producer of lithium, the second largest producer of borates, the third largest producer of silver, the fourth largest producer of copper and the fifth largest producer of gold, Argentina has the commodities China needs.

The Argentine shale gas formation, called Vaca Muerta (“dead cow” in English), was estimated to hold one of the most important gas resources outside the United States. The gigantic deposit in Neuquen Province in remote Patagonia contains 802 trillion cubic feet of technically recoverable gas. It also has the fourth largest shale oil reserves – roughly 27 billion barrels of technically recoverable oil, buried three kilometers beneath the surface. An oil and gas exploration and development company owned by the Argentine fossil fuels producer Bulgheroni and the Chinese oil company CNOOC, announced a US$500 million investment to exploit Vaca Muerta’s 663 kilometers square oil shale zone in October 2013.

Argentina has resorted to controversial methods, namely hydraulic fracturing or fracking, which can boost energy exports but can also generate great environmental damage, such as water contamination. Fracking is a large-scale extraction technique that drills down deep into the earth to release the gas rocks contain. Water, sand and chemicals are injected into the rock at high pressure, which enables the gas to flow out of the well.