Drought and Brazil agreement: currencies to play key role in 2023 growth

Consultants warn of the drought’s effect on the economy, but stress the Brazil deal may “ease” its impact.

According to data released by the National Statistics Institute (INDEC) this week, economic activity showed signs of cooling off in the last part of 2022, as it contracted in November for the third consecutive month in the seasonally adjusted series. In any case, according to private projections, the economy may have grown by around 5.5% last year.

Looking at what may happen this year in terms of economic activity, projections are more cautious. Estimates of real GDP growth are 0.5% according to the Central Bank’s Market Expectations Survey (REM). Like last year, the availability of foreign currency will once again be a key factor.

In this regard, the drought is one of the elements that will have a negative impact, as it will likely reduce dollar income from farming exports. In contrast, an agreement with Brazil facilitating bilateral trade and easing exchange stress can help compensate and maintain the good level of the industrial sector.

For example, when analyzing what may happen this year, sources at the LCG consultancy pointed out: “We expect activity to be hurt by the current drought that is affecting the 2022/23 season, which is expecting a loss of around US$10 billion, according to the Buenos Aires Grains Exchange. Therefore, with a lower supply of foreign currency, we expect higher  import controls, which will affect the availability of inputs for the industry’s regular operation”.

Ecolatina is forecasting “more limited growth than in 2022” for this year. “We believe that as long as there are no shocks (either exogenous or endogenous) a recession could be avoided, but not the trend towards more moderate growth,” the company’s analysts stressed.

When listing factors that will contribute to a “lean expansion of the economy”, sources at Ecolatina mentioned “the drop in agricultural production, which will impact economic activity due to a lower operation in both the sector and its connected activities, and in turn will limit the supply of foreign currency throughout the year. Faced with a demanding goal of accumulating international reserves and the aforementioned drought, the government’s management of a foreign currency shortage will continue, with a focus on the continuation (and potential tightening) of import restrictions that would place a limit on the expansion of the domestic market (as well as certain exports) through complications in the supply of finished goods, capital goods and inputs. This would affect levels of both consumption and investment”.

When analyzing the potential impact of the drought, Aldo Abraham, director of the Freedom and Progress Foundation, said: “Last year, the drop in the agricultural sector’s activity because of the drought was countered by a solid increase in international prices. Also, since there was some expectation that international prices would drop later, a good portion of the grains that were in stock were sold, and this contributed to the growth of the economy as a whole, despite the fact that the agricultural sector fell, because we had more money ‘to spend'”.

“This year, while we have US$5.2 billion of funds available from the swap with China, the truth is that it’s very unlikely that international prices will play in our favor. So, in this respect the impact of the drought on the overall economy will be much harder, since not only will there be lower production but income will also be less,” Abraham stressed.  

For his part, CEPA director Hernán Letcher said: “the drought will hit the farming sector negatively, and that has a direct effect on activity as a whole”. He also highlighted that there may also be effects on the rest of the economy: “Historically, in an economy like Argentina’s growth is linked to the amount of dollars available. So I believe this could have an effect. It will depend on how thorough you are in the management of those dollars.” 

Can the Brazil agreement mitigate the impact?

In this situation, the various bilateral agreements announced with Brazil, Argentina’s main trading partner, including the “common currency” pact, could go some way to mitigating the lack of currency this year.

“The bilateral trade agreement with Brazil seeks to calm the possible adverse effects that the lack of currency could have for industrial development,” Letcher said.

Daniel Rosato, president of Small and Medium-sized Argentine Industrial Companies (IPA), emphasized: “We think the agreement with Brazil is important, especially everything related to the common currency, which will open up the playing field. Many purchases will be from Brazil, which is an important manufacturer of capital goods, and without depending on the dollar. There is also the possibility that many Brazilian banks will operate with Argentine banks, with guarantees that Argentine banks can give Brazilian banks. If that possibility happens, it will be good for the economy and the industrial sector.”

“I think the strategy of the agreement with Brazil will have solutions for Argentina in many respects. Because when you deflate pressure on the dollar, you also reduce inflation. Today, things are going up because there’s no availability. That opens the a possibility for hope that this strategic union with Brazil will create tranquility, deflate pressure on the topic of the dollar,” Rosato concluded.

Originally published in Ambito.com / Translated by Agustín Mango

Related Posts



All Right Reserved.  Buenos Aires Herald