Despite the austerity policies that have been implemented by the government of President Mauricio Macri, Argentina will see a bigger than expected recession this year, the International Monetary Fund (IMF) said in a new report. The economy is set to decline 1% this year, a drop that is 0.3 percentage points larger than the previous forecast that the IMF had released in October.
Although the organization welcomed Argentina’s “transition” and the policies that President Macri’s administration has implemented, it warned austerity will lead to a “mild” recession in 2016.
Argentina’s forecast is in line with a negative outlook for Latin America as a whole, which would drop 0.3% in 2016 mainly pushed by declines in Brazil (3.5%) and Venezuela (8%). It will be the first time since 1982 the region sees two consecutive years of economic declines.
Argentina “has started an important transition to correct macroeconomic imbalances and microeconomic distortion,” IMF’s Western Hemisphere Director Alejandro Werner said. While the “new approach” improved prospects for growth in the medium term, the country is set to see a “mild” recession this year, he said.
The IMF representative claimed Argentina has taken “significant steps” to improve the economy during the transition and highlighted many of the policies implemented by Macri’s administration such as eliminating foreign currency and trade restrictions and the plan to partially remove energy subsidies.
Werner also welcomed that the government announced “the main guidelines of the macroeconomic framework,” which Finance Minister Alfonso Prat-Gay described two weeks ago. The government hopes to lower the country’s fiscal deficit, now at 7.1% of the GDP, one percentage point this year, while aiming at inflation between 20 and 25%.
The IMF official also said he was looking forward to begin working with the INDEC statistics bureau, claiming some informal talks have already taken place between INDEC and IMF officials to work on a schedule to lift the motion of censure placed on Argentina.
The country has declared a national statistics emergency and won’t publish most of its statistics for several months. The IMF sanctioned Argentina with a “motion of censure” on February 2013 due to a lack of credibility on inflation and economic growth data published by the INDEC.
“We welcome the government’s intent to correct Argentina’s statistics. The IMF is willing to work with the government,” Werner said.
The World Bank had already praised the economic changes implemented by the Macri administration and forecast the country to grow 0.7% this year, instead of the 1.8% previously expected. Argentina would then see a better performance in 2017 with a growth of 1.9% and in 2018 with a 3% increase.
The government, for its part, expects the economy to grow between 0.5% and 1%, to be followed by an average 4.5% increase for the next three years.
Uncertainties related to the slowdown in China, lower commodity prices, and divergent monetary policy in advanced economies are the reasons behind Latin America’s negative forecast, Werner said, claiming countries with “strong political frameworks” have adjusted better than those with “weaker domestic fundamentals.”
Latin America was originally projected to grow a minimum amount this year, but the IMF changed course with its Brazil revision and now estimates the entire region’s economy will shrink for the second year in a row. The region will drop 0.3% this year — 1.1 points lower than before — and return to a 1.6% growth in 2017.
The IMF sharply lowered its economic forecast for Brazil by 2.5 percentage points to a contraction of 3.5% in 2016, the largest revision of all major countries. The negative figures in Brazil would then continue in 2017 as the IMF expects a reading of zero — a decline of 2.3 percentage points from the October report.
Investment is now paralyzed in Brazil, Werner said, after a combination of political problems and macroeconomic fragility. Unemployment has risen “sharply” and inflation has reached double digits, while the adoption of a “credible” fiscal strategy is delayed by political dysfunction, he said.
“Although exports are now beginning to show signs of strength with the Real depreciating sharply, resolution of political and policy uncertainty is essential to an eventual return to positive growth,” Werner said.
The IMF expects a more modest global growth and has shaved its forecast by 0.2 percentage points both for 2016 and 2017. The global economy will expand 3.4% this year, followed in 2017 by 3.6% growth.