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Argentina Politics April 2020

Argentina: Government approves underwhelming stimulus package against coronavirus blow

Amid a worsening economic environment due to the outbreak of the coronavirus pandemic and containment measures to contain its spread, the government adopted a set of measures in March to cushion the blow. The stimulus package is relatively limited in scope, however, owing to the country’s already challenging fiscal and debt position. In the same month, the Central Bank adopted a plan to support liquidity and boost credit to SMEs.

The country entered the Covid-19 crisis following two consecutive years of economic contraction, with reduced international reserves, rampant inflation, strict capital controls, a fragile fiscal position and extremely limited market access in dollar-denominated debt. Against this backdrop, the government announced two rounds of fiscal measures on 18 and 23 March. The packages total nearly ARS 700 billion (around 2.3% of GDP), half of which represents direct fiscal spending, while the other half constitutes credit stimulus measures. They are mainly focused on supporting SMEs and include additional investment into the health system; increased social subsidies; extra infrastructure spending; the suspension of social security contributions in certain industries; wage support; loans extension for businesses; and additional transfers to provinces. That said, the anti-coronavirus packages represent only a relatively small percentage of GDP, constrained by the country’s limited fiscal room. President Alberto Fernández consequently declared that the government will resort to monetary expansion to finance the widened fiscal deficit—something the government has already being doing in the last few months.

Looking ahead, spillovers from coronavirus are set to take a heavy toll on an already-ailing economy. The pandemic will depress foreign demand while also hitting investment decisions. Moreover, due to the lack of alternative sources of financing, the monetary financing of the fiscal deficit risks igniting inflation further, putting further pressure on the parallel exchange rate and thus exacerbating macroeconomic discoordination. On top of that, uncertainty surrounding debt restructuring and the grave risk of another debt default will also be undermining investor confidence, cutting the country off from external financing sources.

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