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1 [1] (October 2, 2018)

handle is hein.crs/govebae0001 and id is 1 raw text is: Conresioa Reeac Service October 2, 2018 Argentina's Economic Crisis Argentina, the world's 21st largest economy, is facing an economic crisis. Its currency, the peso, has lost more than half of its value against the U.S. dollar over the course of 2018. With trouble financing its budget deficit, the Argentine government in June turned to the International Monetary Fund (IMF) for a $50 billion program, one of the largest programs in IMF history. Despite IMF resources and plans for aggressive austerity measures, the government is still struggling to restore economic stability. In September, a staff-level agreement was reached to increase the IMF program to $57.1 billion. Economic Crisis in Argentina Argentina has a long history of economic crises. It has defaulted on its external debt (debt held by foreigners) eight 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 Vulnerabilities When Argentine President Mauricio 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 bondholders, 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, which was 4.3% of GDP in 2014. However, the government's financing costs rose. The Kirchners' had financed the deficit through money creation and coercing domestic banks into buying government bonds. As the Macri government shifted to more traditional financing through borrowing in international capital markets, its financing costs grew. It 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 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 higher interest rates (to 40%) and fiscal reforms to cut the budget deficit. Market volatility continued, however, and in June, 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 15 I MF 20 program starts Interest rates to 2) 60% 25 Interest 30 rates to 40% 35 40 Source: Central Bank of Argentina. At the program's outset, skeptics raised questions about the fiscal cuts and growth projections underpinning the program. On the fiscal side, the government committed to bringing the primary deficit (the government budget, excluding interest payments) into balance by 2020, from 3.8% of GDP in 2017. The required fiscal reforms require congressional approval, but are politically unpopular and Mach's party controls neither chamber of Argentina's bicameral Congress. https://crsreports.con gress.gov S

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