Argentina, back to global markets?

Since 2016, Argentina has enjoyed enormous changes, all of them aligned to achieve the goal of putting the country back into the global economy. The reason is quite simple: to overcome recession, boost the economy and create employment, the government strongly believe that getting into the global capital markets and having access to corporate and government bonds, will give the country the financial support necessary to achieve economic growth.

Every reason that I have exposed so far seem logical, so there would be no doubt that the set of policies put forwarded will have a positive effect. Nevertheless, regardless of the possible good effect of these measures (as getting out of default, let free entrance of foreign exchange and make more efficient public spending, among others), we must consider that the global environment may not lead to what we want. Therefore, the real question is: will “the return to the global economy” lead to economic growth? In other words, is convenient to Argentina to return to the global economy?

Firstly, we must analyse how the behaviour of USA affects the country.  As foreign debt, in September 2016, went up 7.71% and it keeps increasing daily, USA economic condition is crucial. To understand why, it is important to highlight that because the central bank is pursuing an inflation targeting policy, so there is a constant contraction of money supply, and the via to finance fiscal deficit is by debt. Hence, when the Federal Reserve (FED) set a higher interest rate, the cost of financing by bonds increased and, therefore, Argentina´s economy was affected leading to a higher pressure to reduce fiscal deficit because of this rise in financial costs. Moreover, the rise of Donald Trump produces uncertainty about how the market will perform. This has resulted in Argentina´s financing strategy to be, in fact, weak.

An important partner of Argentina, is Brazil. Therefore, its economic condition is a key aspect for the health of the economy. During 2016, Brazil represented 15.41% of total exports, which highlight the importance of the trading between the two most important economies of Latin America. Keeping this in mind, the evolution over time of the commerce with Brazil would be a good measure of testing if Argentina would fit right into the global economy. The reason is that, if the commerce between a country and its main partner is going well, then other countries would be more likely to trade with them. However, in the case that one country´s commercial condition goes worse, that might cause that other countries would be more averse to interact with them.

So, we can look at how Brazil´s GDP evolve during the last three years and we can conclude, therefore, that the growth path of Argentina´s main partner is clearly recessive.

Date GDP Growth
2014     0,1 %
2015   -3,8 %
2016   -3,8 %

Such bad economic condition lead to commercial partners to not have good outcomes, as we can see from Argentina’s trade data.

Argentina Trade

 The trade balance data are in millions of USD

The strong stagnation in the Terms of Trade (an index that refers to the relative price of imports in terms of exports), and the deficit path of the trade balance, are the results of weak monetary and commercial conditions. Hence, while Brazil´s economy was going down, Argentina’s followed. In conclusion, Argentina is facing two recessive and difficult paths. On one hand, the debt the country is taking at this moment is clearly dangerous.

The expected rise in interest rate, the uncertainty of how much the dollar will appreciate and how more debt will the country need to ask for to finance its fiscal deficit, are the main three matters that makes some economist think the country should reassess its strategy. Moreover, the trading conditions of Argentina, whether you evaluate it from the currency or the trade balance, are weak. These issues, in addition to the unstable path pursued by the actual government, make the country a not so good partner.

To sum up, the set of policies Argentina undertakes may lead to a more open economy. But the facts are indicating that the international partners may not be willing to strengthen the interaction with the country. Such possible outcome, considering that Argentina is the second biggest economy in the region, makes Latin America less attractive as a whole.


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