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1 1 (October 10, 2019)

handle is hein.crs/govbbib0001 and id is 1 raw text is: Congressonal Research Service ~~~Inforxrg the egislative debate sancel19l4 Updated October 10, 2019 Argentina's Economic Crisis Argentina is grappling with a serious economic crisis. Its currency, the peso, has lost two-thirds of its value since 2018; inflation is hovering around 30%; and since 2015 the economy has contracted by about 4% and its external debt has increased by 60%. In June 2018, the Argentine government turned to the International Monetary Fund (IMF) for support and currently has a $57 billion IMF program, the largest program (in dollar terms) in IMF history. Despite these resources, the government in late August and early September 2019 postponed payments on some of its debts and imposed currency controls. The outcome of the presidential election on October 27, 2019, which pits current center-right President Mauricio Macri against the center-left Peronist ticket of Alberto Fernindez for president and former President Cristina Fernindez de Kirchner for vice president, will shape Argentina's policy response to the economic crisis. Economic Crisis in Argentina Argentina has a long history of economic crises. It has defaulted on its external debt (debt held by foreigners) nine times since independence in 1816. Argentina has also entered into 21 IMF programs since joining the international organization in 1956. The current economic crisis facing Argentina stems from longstanding challenges, as well as more recent developments. Economic Reforms but Growing Vulnerabilitnes When President Macri was elected in 2015, he ushered in a series of economic reforms aimed to address the unsuccessful economic policies of the previous Kirchner governments, which had governed Argentina since 2003. He cut export taxes, lifted currency controls, and resolved a 15-year long dispute with holders of defaulted Argentine bonds, allowing Argentina to resume access to international capital markets. The central bank also raised interest rates to 25% to curb inflation. The economy contracted by 1.8% in 2016, but resumed growth of 2.9% in 2017. To maintain political support for the reforms and support the country's most vulnerable (one in three Argentines was living below the official poverty line in 2015), the government held off on substantial fiscal reforms to address the budget deficit, 4.3 % of GDP in 2014. However, the Macri government saw borrowing costs rise, as it switched to traditional borrowing from international capital markets relative to the Kirchners' unorthodox financing tools, including money creation and coercing domestic banks into buying government bonds. The Macri government issued $56 billion in external debt between January 2016 and June 2018. Interest payments facing the government caused the budget deficit to increase to 6.4% of GDP in 2017. Meanwhile, capital inflows into the country to finance the deficit contributed to an overvaluation of the peso, by 10- 25%. This overvaluation also exacerbated Argentina's current account deficit (a broad measure of the trade balance), which increased from 2.7% of GDP in 2016 to 4.8% of GDP in 2017. Crisis and Initial Policy Response Argentina's increasing reliance on external financing to fund its budget and current account deficits left it vulnerable to changes in the cost or availability of financing. Starting in late 2017, a number of factors began to create problems: the U.S. Federal Reserve (Fed) began raising interest rates, reducing investor interest in Argentine bonds; the Argentine central bank reset its inflation targets, raising questions about its independence and commitment to lower inflation; and the worst drought in Argentina in 50 years hurt commodity yields, significantly eroding agricultural export revenue. Investors began selling Argentine assets, putting downward pressure on the peso (Figure 1). With most of its debt denominated in dollars, a depreciated peso increased the value of the debt in terms of pesos. To improve investor confidence, the central bank and government announced in April and May 2018 higher interest rates (to 40%) and fiscal reforms to cut the budget deficit. Market volatility continued, however, and in June 2018, the Macri government reached an agreement with the IMF for a three- year, $50 billion program. The government received $15 billion from the IMF upfront, with the intention to treat the remainder of the program as precautionary (having the resources available but to not actually to draw on them). Figure I. Value of the Argentine Peso: 2018 to date Pesos per U.S. dollar IMF increases funding Primary E;3e-t io n 35 IM, program starts I iterest rates to GO% Selective Default > 0 CE 0 Source: Global Financial Data At the program's outset, skeptics raised questions about the fiscal cuts and growth projections underpinning the program. Through the program, the government committed to politically unpopular austerity measures to bring the primary deficit (the government budget, excluding interest payments) into balance by 2020, from 3.8% of GDP in 2017. The IMF was aware of the potential risks when the https:!crsreports cong --sg

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