Wednesday, May 22, 2024

ECONOMY | 12-04-2023 13:46

Moody's forecasts 1.5% contraction for Argentina's economy this year

Ratings agency Moody's Investors Service warns of impact of drought on Argentina's economy and predicts inflation will rise to 107% this calendar year.

Following in the footsteps of recent doom-laden forecasts, ratings agency Moody's has offered yet another stark assessment for Argentina, predicting that the economy will contract by 1.5 percent of GDP this year.

In a new appraisal of the nation's economy, the international risk assessor warned of the impact of drought on state coffers and predicted that inflation would rise to 107 percent this calendar year.

"Moody's Investors Service has changed its projections for Argentina's real GDP to a contraction of 1.5 percent in 2023 from a previously expected 0.5 percent," the company said, adding that it forecast growth of 1.8 percent the following year.

Outlining its reasoning, Moody's highlighted data published by the INDEC national statistics bureau last month that revealed economic activity expanded 2.9 percent year-on-year in January 2023, "ending four consecutive negative monthly results."

"But despite the January results, from February onwards the economy is likely to start feeling the effects of the severe drought affecting the country," warned the firm.

"The outlook for agricultural production has deteriorated further in recent weeks, suggesting that agricultural production will register an even greater impact than in the 2018 drought," it added in its report.

Moody's estimates are more pessimistic than the revised forecasts offered up by the International Monetary Fund earlier this week. According to the multilateral lender's latest World Economic Outlook report, Argentina's economy will grow by just 0.2 percent this year and inflation will reach 88 percent.

According to the ratings agency, the effects of the drought could lead to "tighter import controls, which will further affect domestic demand and reduce the availability of capital, intermediate and consumer goods."

Addressing the peso and Argentina's tight currency controls, Moody's observed that the illegal parallel exchange rate "has weakened substantially since November as money supply continued to expand at a rapid pace, with the monetisation of the fiscal deficit."

"In this regard, monthly inflation accelerated for the third consecutive time in February, breaking with the gradual decline of the second half of 2022," wrote assessors.

Against this backdrop, Moody's warned that as economic imbalances "continue to grow, there is little political will to enact adjustment measures beyond haphazard policies to tide us over until the October general election."

"This suggests that the balance of risks is skewed towards a deeper contraction, higher inflation and increased pressure on the Central Bank's scarce foreign exchange reserves, complicating the prospects for post-election adjustment and raising the risk of default by 2024-25," Moody's warned.



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