Argentina's contraction will be longer and deeper than expected

Crédito y Caución does not rule out a disorderly default on debt payments that would affect bonds worth $65 billion
Hit by decades of inflation, recessions and cyclical devaluations, in 2020 many Argentines prefer to take refuge in the dollar as a form of saving

AFP/JUAN MABROMATA  -   Hit by decades of inflation, recessions and cyclical devaluations, in 2020 many Argentines prefer to take refuge in the dollar as a form of saving

The latest Crédito y Caución report analyzes the current situation of Argentina, which is facing the deep deterioration of its economy together with the ninth default of its sovereign debt.  Argentina was already facing major economic problems before the coronavirus pandemic. The country has been in recession since 2018 with inflation above 50%, unemployment above 10% and a poverty rate affecting more than a third of the population. Social distancing and containment measures resulting from the coronavirus outbreak have worsened the situation with a negative impact on all industries except agriculture and food. 

GDP is projected to contract by 8.8 per cent in 2020 and to recover only partially next year. Exports, private consumption and industrial production will contract by more than 10% this year. The decline in investment will be even more intense, reaching 18%. The structure of the Argentine economy makes it extremely vulnerable to external shocks due to its high dependence on agricultural exports, which represent more than 50%, its high external financing needs and its long history of debt default.

To limit the economic impact, the Government has announced fiscal measures worth 3.5% of GDP to protect the most vulnerable sectors of the population. Argentina's public debt has increased from 56% of GDP in 2017 to almost 90% in 2019 due to the contraction of the economy and the depreciation of the currency. Debt repayment, financed 78% in foreign currency and 49% by non-residents, has become unsustainable in a shrinking economy with a depreciating currency and increasing poverty. 

Argentina's access to international capital markets has been exhausted. The lack of a restructuring agreement with international bondholders led Argentina in May to default on its payment commitments, its ninth default since 1816. Investors will not take immediate legal action, as long as negotiations with the Argentine government are underway. The deadline for debt restructuring has been extended several times, currently to 24 July. Although it seems that the will of both parties is to reach an agreement, Crédito y Caución does not rule out a disorderly default that would affect bonds worth $65 billion.