Argentina — Economic turmoil sees capital controls and debt restructure

Latin America’s third biggest economy is in the midst of a profound recession and worsening social crisis. Despite one of the world’s longest lockdowns, Argentina has the fifth-highest number of COVID-19 cases globally (surpassing 1 million cases on 19 October) with a population of just 45 million. The IMF expects the economy to contract almost 12% this year; a third straight year of recession (Chart).

Argentina restructured its US$65 billion in debt to private creditors in early September—following its ninth sovereign default in May. However, the growing economic crisis has eroded investor and household confidence and fuelled a severe US dollar shortage amid dwindling foreign reserves. In response, the government has tightened capital controls. These measures include a further 35% tax on dollar purchases through credit cards; reducing access to a monthly quota of US$200 for individual’s purchases of foreign currency; forcing private companies to restructure external debt; and import restrictions. The latter has led to goods shortages because domestic producers lack capacity to meet demand. Still, stubborn demand for US dollars could yet force the government to allow an abrupt devaluation of the official exchange rate, fuelling inflation, already at 37% in September.

Argentina and the IMF have commenced discussions on deferring repayments for debt owed to the IMF under its US$57 billion package (11% of GDP) agreed in 2018. The agreement will come with conditions under a new IMF program, which it is hoped will set the parameters for reducing the budget deficit and renewed growth. However, the IMF note Argentina faces ‘exceptionally difficult challenges with no easy solutions’. Reduced government spending on social programs will be very hard in the context of increasing poverty. Meanwhile, popular resistance to mobility restrictions is mounting along with anti-government protests. Restricted access to foreign exchange and further economic stress complicates the export outlook and the operating environment for over 50 Australian companies doing business in Argentina.