Argentina has had a terrible pandemic. By 4 October 2021, the country had a total of 115,245 Covid-19 related deaths and 5,123,000 cases, according to Worldmeters. In terms of deaths per million people, it is ranked in eighth-worst place in the world at 2,562 per million, just behind Brazil at 2,824. Until recently, Buenos Aires, the Argentine capital, held the record for the world’s longest Covid-19-related lockdown, enduring 234 days of restrictions from 20 March to 11 November 2020 and a short ten-day circuit breaker lockdown from 21 May to 31 May this year (on 3 October, Melbourne in Australia took the crown from Buenos Aires with the longest lockdown at 245 days).
The country was in recession before it entered the pandemic (the economy contracted by -2.56% in 2018 and by -2% in 2019) and the Covid-19 crisis has made matters a lot worse. Since 1950, Argentina has spent one-third of its time in recession, second in the world only to the Democratic Republic of Congo, according to the World Bank. The country has had 17 finance ministers and 13 central bank governors since the turn of this century.
Since gaining independence from Spain in 1816, Argentina has defaulted on its sovereign debt nine times and there is a chance it could do so again in 2022. In 2018, the IMF agreed a $57bn loan programme with Argentina (of which, about $45bn has been disbursed), but the sovereign is now indicating that it is unable to meet its repayments on the loan next year, when about $20bn in interest and capital is due. The question of how to repay the IMF will dominate Argentina’s political and policy agenda heading into 2022.
The country’s other economic fundamentals are dismal: its annualised inflation rate is running at about 50% (only half-a-dozen countries globally, including Venezuela, Sudan and Lebanon, are worse) and the currency, the Argentine peso, lost more than 70% of its value against the US dollar between September 2019 and September 2021. In 2020, the country’s debt-to-GDP ratio reached an estimated 103% – the highest level since 2004 – according to the IMF. The unemployment rate is about 10.6%. Argentina is now cut off from the international capital markets again and has resorted to financing its fiscal deficits by printing money, fuelling the inflation crisis. Last year’s deficit was -8.5% of GDP and is forecast to be about -4% this year.
Argentina's politics is bitterly divided. Plus ça change...
Bitter infighting is taking place between Argentina's President Alberto Fernández – who assumed office on 10 December 2019 – and his deputy Cristina Fernández de Kirchner – widely known as 'Cristina' – who was president of the country between 2007 and 2015. She was also First Lady between 2003 and 2007, when her late husband Néstor Kirchner was in power. Alberto Fernández and Cristina are both Peronists, but she is seen as the more radical and left-wing of the two.
Cristina is the one running the show, she is the one wearing the trousers. Cabinet infighting has now reached crisis levels. Luciano Cohan, Seido
"Argentina is in worse economic shape than Brazil by far," says Luciano Cohan, managing partner at Seido, a Buenos Aires-based economic consultancy. "The current crisis is historic in proportions and as bad as any the country has faced before, including in 2001. The macroeconomic outlook is horrible. The lockdown was too long and impacted the economy profoundly. The big problem now is the drop in real wages – wages are only rising by about 35% or 40% annually while inflation is at 50%. People's standard of living is plummeting.
"Cristina is the one running the show, she is the one wearing the trousers. Cabinet infighting has now reached crisis levels."
In 2001, the government ended the peso's one-to-one peg to the US dollar and introduced the 'corralito', a freeze on bank deposits. Social unrest followed and the IMF cut off its financial lifeline to the country. Many experts say the current crisis is in many ways just as bad.
"The peso is now incredibly weak," says Miguel Ángel Boggiano, founder of Carta Financiera, a financial advisory website based in Florida. "The central bank is printing about 2trn pesos a year and has no credibility left. Inflation next year could jump to the 70% or 80% level, the sort of level when hyperinflation starts and is very hard to rein in."
Can economic stimulus offset the pandemic impact?
Argentina's government carried out a strong economic stimulus in 2020 to combat the worst effects of Covid-19, the equivalent of about 6% of GDP. Its measures included improved health spending, financial support for workers and vulnerable groups, support for hard-hit sectors through the exemption of social security contributions, and grants to cover payroll costs.
In September 2020, the sovereign managed to restructure about $65bn of its debt when 99% of creditors agreed to a 45% haircut on their bonds. The government said the deal – and a separate restructuring of local law dollar debt – would together bring financial relief of $37.7bn over the next decade and help cut average interest payments on foreign law bonds to 3% from 7%.
In mid-December, the Argentine Senate passed the ‘Solidarity and Extraordinary Contribution of Great Fortunes’ law – dubbed the 'millionaire's tax' – a one-off tax intended to raise $3.5bn to help cover the costs of the pandemic. The country became the first in the world to impose this sort of tax, levied on the 12,000 richest people – only 0.02% of the population – with declared assets greater than $2.5m. It was met with a local backlash by those most affected. About 220 taxpayers – including the family of late football legend Diego Maradona – took legal steps against the government to avoid paying it, claiming that it was confiscatory and unconstitutional.
The government’s own statistics show that the poverty rate jumped to 40.9% in the first half of 2020, up from 35.5% six months earlier. Schools were closed for many months throughout 2020 and 2021, exacerbating inequalities between rich and poor families. More than 45% of households in Buenos Aires’s poor neighbourhoods do not have internet access at home against only 3% in wealthier districts, according to Catholic University.
By the end of September, Argentina had fully vaccinated about 55% of its entire population. In February, the country's health minister, Ginés González García, had to resign after a scandal over privileged access to vaccinations for well-connected Peronists (at the height of the lockdown in 2020, President Fernández was also embroiled in another scandal after he held an unlawful birthday celebration for his girlfriend at his official residence). The country will reopen to international tourists on 1 November after 18 months of closed borders.
A mid-term jolt for Peronists?
Critical mid-term elections take place in Argentina on 14 November. Half of the seats in the Chamber of Deputies and one-third of the seats in the Senate are up for grabs. The government was badly beaten in an open primary election on 12 September, seen as a reliable indicator of the mid-term elections. The right-wing opposition led by about five percentage points in the key province of Buenos Aires and many experts believe the government could lose its majority in the Senate and its largest minority position in the lower Chamber of Deputies in November.
Following the primary election defeat, Cristina wrote in an acerbic letter to the president: "The day after such a political catastrophe if you listened to some officials, you would think that nothing had happened, they were feigning normality and, above all, screwing around in their armchairs.”
The president responded on Twitter: "The administration of the government will continue to develop in the way that I deem appropriate. For that I was elected."
He implied that he was in charge of the administration, but most commentators say that Cristina is running the show and, in mid-September, President Fernández was forced to reshuffle his cabinet and put new ministers in charge of the key roles of cabinet chief, foreign minister and agricultural minister.
Argentina has defaulted on its debts so many times in the past that one more default would not have a lot of political impact. Martín Litwak, Untitled
Cristina herself is a highly controversial figure and has faced a series of allegations of corruption over the years. In January 2015, Alberto Nisman, an Argentine prosecutor, was found dead from a gunshot wound in his Buenos Aires apartment hours before he was due to testify against her in a case about alleged Iranian involvement in a deadly bombing at a Jewish centre in the city in 1994. An official investigation had ruled that the prosecutor had taken his own life but, in December 2017, a federal judge ruled that he had been murdered.
The government is a broad coalition of centre-left and left-wing factions of the Peronist movement. The left-wing faction – which Cristina leads – would like to pursue more 'heterodox' macroeconomic policies, à la Venezuela, and is against the government repaying the $45bn IMF loan, which was taken on by the previous president Mauricio Macri, a centre-right politician, in June 2018. President Fernández described the debt as a "toxic and irresponsible loan" in a speech at the UN General Assembly last September.
The sovereign cannot restructure its debts with the IMF but does have the option of signing a new arrangement, which would give it some breathing room. Negotiations on an extended fund facility have begun but are painfully slow. On 22 September, the government paid $1.9bn to the IMF, the first instalment in a series of quarterly payments ending in 2024. There is another $1.9bn capital payment due on 22 December, before quarterly repayments ramp up – in 2022 alone, Argentina owes the IMF close to $20bn in interest and capital.
"I believe that a new agreement is necessary for both parties," says Sebastián Menescaldi, associate director of Eco Go, a Buenos Aires-based strategic consultancy. "In the case of Argentina, it is necessary so that it is able to clear up its debts that mature during the next few years. In the case of the IMF – after granting a loan that was hard to justify – it needs an agreement so as not to lose the status of its portfolio [the country is its main creditor] and that it is not seen as culpable in a new crisis in the country. The downside is that it could result in a negotiation that starts from distant positions and end in a new programme that is not sustainable in the short term because of a lack of [structural reforms]."
Martín Litwak, chief executive officer at Untitled, a law firm, believes the sovereign could default on its IMF debt. "Argentina has defaulted on its debts so many times in the past that one more default would not have a lot of political impact," he says. "The IMF loan was granted to Macri, to a different political party, so the current government could argue that a new default is his fault, not the fault of the country. It is a stupid argument, of course, but one the government could make.
"In my opinion, Cristina wants a default; she is a believer in 'heterodox' measures. President Fernández does not carry much political weight; he is just a functionary. In her mind, he lost the primary elections, so she now wants to do things her way."
Argentina's inward FDI plummets
Argentina's foreign direct investment (FDI) inflows have been in steady decline during the past few years. According to the 2021 World Investment Report published by the UN Conference on Trade and Development, they nosedived by 38% to $4.1bn in 2020 from $6.7bn in 2019. New investments retreated by 45% and reinvested earnings fell by 22%.
The country had 63 greenfield investment proposals valued at $4.48bn in 2020, down from 92 proposals valued at $4.1bn in 2019, according to Santander. The FDI stock amounted to $85bn in 2020 and outward investment from Argentina dropped to $1.2bn last year. More than half of the FDI inflows came from the US, Spain and the Netherlands. The investment has been mainly oriented towards manufacturing, mining and oil extraction, banking and other financial services, ICT and agriculture.
Political instability and the lack of economic visibility are damaging the country's investment climate, particularly from a foreign investors' perspective. Sebastián Menescaldi, Eco Go
About $299m of disinvestment took place in Argentina in 2020, after major foreign investors – including Walmart (from the US), Schlumberger (US), MetLife (US) and Danone (France) – sold their local businesses to domestic or regional buyers. On the other hand, in January 2021, US-based Accenture acquired Wolox, a leading Argentine cloud-native and agile development start-up that provides digital solutions, for an undisclosed sum.
"Political instability and the lack of economic visibility are damaging the country's investment climate, particularly from a foreign investors' perspective," says Menescaldi. "Nowadays, we are seeing the exit of foreign investment. However, there are some segments where investment is being sustained, including mining [lithium], gas and oil extraction, and technology, owing to low wage costs and the available human capital."
During the past decade, Buenos Aires emerged as one of the most important tech start-up hubs in Latin America. The city has the biggest middle class in the region and a great deal of tech talent. By August 2021, 11 start-up companies founded by Argentines had ascended to the $1bn stock valuation threshold, putting them in the category of unicorns (though many of the Argentine founders are now based in Silicon Valley). These companies include Mercado Libre, an online retailing giant, and Globant, an IT and software development company. Mercado Libre's valuation surpassed $100bn in January 2021. Another company, Auth0, an identity management platform founded by Argentines, was this year sold for $65bn.
Other unicorns set up by Argentines include: Vercel, a front-end software company; Aleph, a digital advertising company; Mural, a virtual whiteboard company; Bitfarms, a bitcoin mining company; Ualá, a fintech company; and TiendaNube, an online sales platform for entrepreneurs that grew exponentially during the pandemic.
"The development of Buenos Aires as a tech hub is down to a combination of factors, including the tech sector's entrepreneurial drive, a favourable ecosystem for pioneers – it is in Argentine genes – universities, investors, the government, and a high level of digital connectivity, in a context where low salaries offer a competitive advantage," says Menescaldi.
Can Argentina's agricultural strengths improve FDI?
Despite its recent economic struggles, Argentina – a member of the G20 – continues to play an important role within the global economy, in particular through its agricultural production. The sector is mainly based on livestock farming, cereal cultivation (wheat, corn and transgenic soya), citrus fruits, tobacco, tea and grapes (mostly for the production of wine). The country is the world’s largest exporter of soy-derived products and the world’s third-largest producer of these products. Soy and sugar cane are extensively cultivated for biofuel production. Argentina is the world’s largest exporter and sixth-largest producer of bio-diesel.
I do not think we will see a lot of foreign investment during the next few years. It is very hard for foreign companies operating in the country to repatriate any profits, for instance. That just puts them off investing here. Adrian Limoli, Banco Comafi
Oil deposits are concentrated mainly in the north-west and in Patagonia. The basin around the Patagonian port of Comodoro Rivadavia is estimated to hold approximately two-thirds of the country’s onshore reserves. Other deposits are located in the Jujuy and Salta provinces, in the Mendoza and Neuquén provinces, and at the tip of Patagonia and Tierra del Fuego. The main natural gas fields are also in the north-west, near Campo Durán (Salta province) and Mendoza, and in Patagonia, near Neuquén and Comodoro Rivadavia.
"In order to gain scale and return the country to the global investment map, Argentina must achieve political stability and improve governance," says Menescaldi. "That would enable better planning to take place. Without that and with continual rule changes, foreign investments will be cut off from the country."
Argentina was ranked in 126th spot out of 190 countries in the World Bank's 2020 Doing Business report. On Transparency International's Corruption Perceptions Index 2020, it was ranked in 78th place among 180 countries worldwide.
Adrian Limoli, a research analyst at Banco Comafi, an Argentine bank, says: "I do not think we will see a lot of foreign investment during the next few years. It is very hard for foreign companies operating in the country to repatriate any profits, for instance. That just puts them off investing here. Furthermore, the dual exchange rate regime is a complicated system for foreign investors to navigate. The Blue Chip Swap exchange rate is almost 100% higher than the official exchange rate. There are also many foreign exchange restrictions and capital controls that make doing business in the country difficult."
The Blue Chip Swap is a legal mechanism in Argentina for reporting entities and individuals to hold and transfer dollars. It takes place via the purchase of a US dollar-denominated security or bond onshore, transfer of the security offshore and the sale of the security for US dollars. The buying and selling of the bond creates an implied exchange rate. It is a way of circumventing the limits the government has placed on obtaining foreign currencies and has become an unofficial peso exchange rate. On 5 October 2021, one dollar fetched 98.90 pesos at the official exchange rate but 193 pesos at the Blue Chip Swap rate, for example.
Argentines do not have a great deal of confidence in their own country's financial stability. At least $300bn of Argentine wealth is held offshore, according to the Tax Justice Network. Furthermore, Argentines have tucked away 'under the mattress' or in safe deposit boxes a further $200bn in dollar bills – about two in every ten dollar bills in circulation outside the US – according to the local economist Nicolás Gadano.
Argentina's current woes show how far the country has fallen from a century ago. It began the 20th century as one of the wealthiest places on the planet. In 1913, it was richer than France or Germany, almost twice as prosperous as Spain, and its per capita GDP was almost as high as that of Canada. Until the 1930s, the French used the phrase 'riche comme un Argentin' (or 'as rich as an Argentine') to describe the foolishly wealthy.
The country has tremendous economic potential but will not start to fulfil it until it undertakes deep structural reforms. The central bank must stop printing money so that the inflation rate can start to normalise and the government must take steps to unwind the dual exchange rate regime. Foreign investors will only start to look at the country again in a big way once it has demonstrated greater financial stability and improved its governance.
Jason Mitchell is a senior editor at Investment Monitor, with a specialisation in emerging markets.