Argentina enters recession with runaway inflation as Milei starts shock therapy
Jonathan Lopez
15-Dec-2023
SAO PAULO (ICIS)–Argentina has entered recession as GDP fell in the third quarter by 0.8%, year on year, adding to the 5.0% fall in the second quarter, the country’s statistics office Indec said on Friday.
Two consecutive quarters with negative growth constitute a recession.
Meanwhile, Indec also confirmed this week inflation kept rising sharply in November, with the annual rate at nearly 161%.
Argentina’s deteriorating financial situation coincides with the start of Javier Milei’s presidency.
Milei was sworn in on December 10 and just hours later his cabinet started announcing measures which aim to liberalize a heavily regulated economy, such the withdrawal of the SIRA regulations to restrict imports into the country to strengthen the country’s squalid dollar reserves.
Chemicals and other manufacturing companies have said SIRA’s were on occasion making very difficult to import into Argentina vital inputs for their operations.
The government has also announced the withdrawal of several subsidies in the heavily subsidized economy, which according to Milei distort free market and competition.
In a widely expected move, the cabinet has also devaluated the official dollar/peso exchange rate to bring it more in line with the unofficial-but-widely-used ‘blue dollar’.
GDP DOWN, INFLATION
UP
Friday’s GDP growth figures
were eagerly anticipated because they would
shed light on whether Milei starts his tenure
with an economy already downhill – that will be
the case.
His reforms are widely expected to cause a deep downturn in Argentina, which petrochemicals sources wonder could be a six-month downturn or a larger, more painful 12 or even up to 18 months of a severe adjustment.
President Milei has been straight warned Argentina’s of all social classes that the pain will be deep but has promised a revival of the beleaguered economy thereafter.
There are fears, however, that the already unbearable official rate of people living in poverty, at 40%, could worsen as the withdrawal of some subsidies is set to start as soon as January 1.
Argentina’s GDP growth started slowing sharply in the fourth quarter of 2022 and posted a 5.0% contraction in the second quarter of 2023 due to a severe drought that heavily curtailed output in the key, dollar-generating agricultural sector.
Argentina
GDP (change in %) | Change quarter on quarter | Change year on year |
Q3 2023 | 2.7 | -0.8 |
Q2 2023 | -2.7 | -5.0 |
Q1 2023 | 0.8 | 1.4 |
Q4 2022 | -1.7 | 1.5 |
Q3 2022 | 0.4 | 5.7 |
Meanwhile, Argentina’s already high inflation rate could escalate much further as heavily subsidized sectors are liberalized: households and corporates alike are set to suffer a shock to the system consequently.
Argentina’s annual rate of inflation accelerated sharply in November, jumping by nearly 20 points.
Argentina annual rate of
inflation
In % change
Source:
Indec
Those on the lower income scales will need to put aside more money for things such utilities or public transport and taking it away from other basic items.
Petrochemicals sources in Argentina, and the country as a whole, are expectant as well as fearful about what is coming.
However, some sort of general consensus has also been forming after Milei toned down some of his most radical proposals during the campaign. Milei’s wide voter support, even in low-income scales who are to suffer from the withdrawal of subsidies, showed a large part of the country favored radical change.
Indeed, Argentina’s decades-long crisis will require deep surgery, which Milei has promised to deliver. But some economists think the dysfunction has grown so large that it can hardly be fixed.
For instance, US credit rating agency continues to state that a debt restructuring or other default event “of some sort is more likely than not” in the coming years.
How deep and how long the downturn will be, and how many companies or ordinary Argentinians go under in the process, will mark Milei’s term: social unrest is not unknown in Argentina.
“SIRAs have ceased to exist but certain restrictions to trade externally remain. In the petrochemicals sectors we have not seen many adjustments in prices yet,” said a petrochemicals source in the country.
“However, some prices like those for PP [polypropylene] are extraordinarily high: the trend should be of a fall, at least in nominal, dollar terms. The background to all this, of course, is made worse by the fact that Argentina is entering recession.”
Front page picture source: Shutterstock
Focus article by Jonathan Lopez
Additional reporting by Bruno Menini
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