Argentina Economic Outlook. June 2024

Summary

After 6 months in office, the government has made significant progress in improving the fiscal balance, which in turn resulted in a reduction of monetary issuance and a deceleration of inflation. The challenge now is to consolidate the fiscal surplus and dismantle FX-market restrictions to foster sustainable growth.

Key points

• Key points:
• In the first 5 months of 2024, the government achieved a primary fiscal surplus of 1.1% of GDP, a feat not seen since 2008. The challenge ahead is to sustain this fiscal consolidation, replace distortionary taxes and solidify expenditure cuts. We forecast a primary fiscal surplus of 0.1% of GDP for this year.
• Economic activity deepened its recession in 1Q24, due to the measures aimed at addressing macroeconomic imbalances. We expect the economic recovery to begin in the second half of the year. A contraction of 4% of GDP is projected for this year, followed by a 6% rebound in 2025 driven by investment and private consumption.
• Net international reserves have grown by USD 9.5 billion since the current government took office. However, the pace of USD accumulation slowed in June despite it being a period of high export inflows. Therefore, considering the need to rebuild reserves for import and debt payments, an acceleration of the official exchange rate is expected in 2H24, potentially reaching ARS/USD 1200 by year-end.
• Inflation has decelerated faster than expected. Looking ahead, pending adjustments to regulated prices could somewhat restrain further disinflation. Due to favorable inertia in inflation dynamics, along with stronger-than-expected fiscal-monetary adjustments and a more stable official exchange rate, our inflation estimate has been revised to 140% for 2024 and 45% for the following year.
• The government aims to set the economy's benchmark interest rate using short-term Treasury Bills (LECAP), which currently yield 4.25% per month. Banks are shifting their holdings from overnight REPOs to LECAPs, a process that has led to a 50% reduction in Central Bank’s interest-bearing liabilities over the past 30 days.

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