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October 2, 2018
Argentina’s Economic Crisis
Argentina, the world’s 21st largest economy, is facing an
Crisis and Policy Response
economic crisis. Its currency, the peso, has lost more than
Argentina’s increasing reliance on external financing to
half of its value against the U.S. dollar over the course of
fund its budget and current account deficits left it
2018. With trouble financing its budget deficit, the
vulnerable to changes in the cost or availability of
Argentine government in June turned to the International
financing. Starting in late 2017, a number of factors began
Monetary Fund (IMF) for a $50 billion program, one of the
to create problems: the U.S. Federal Reserve (Fed) began
largest programs in IMF history. Despite IMF resources and
raising interest rates, reducing investor interest in Argentine
plans for aggressive austerity measures, the government is
bonds; the Argentine central bank reset its inflation targets,
still struggling to restore economic stability. In September,
raising questions about its independence and commitment
a staff-level agreement was reached to increase the IMF
to lower inflation; and the worst drought in Argentina in 50
program to $57.1 billion.
years hurt commodity yields, significantly eroding
Economic Crisis in Argentina
agricultural export revenue.
Argentina has a long history of economic crises. It has
Investors began selling Argentine assets, putting downward
defaulted on its external debt (debt held by foreigners) eight
pressure on the peso (Figure 1). With most of its debt
times since independence in 1816. Argentina has also
denominated in dollars, a depreciated peso increased the
entered into 21 IMF programs since joining the
value of the debt in terms of pesos. To improve investor
international organization in 1956. The current economic
confidence, the central bank and government announced in
crisis facing Argentina stems from longstanding challenges,
April and May higher interest rates (to 40%) and fiscal
as well as more recent developments.
reforms to cut the budget deficit. Market volatility
Economic Reforms but Growing Vulnerabilities
continued, however, and in June, the Macri government
reached an agreement with the IMF for a three-year, $50
When Argentine President Mauricio Macri was elected in
billion program. The government received $15 billion from
2015, he ushered in a series of economic reforms aimed to
the IMF upfront, with the intention to treat the remainder of
address the unsuccessful economic policies of the previous
the program as precautionary (having the resources
Kirchner governments, which had governed Argentina
available but to not actually to draw on them).
since 2003. He cut export taxes, lifted currency controls,
and resolved a 15-year long dispute with bondholders,
Figure 1. Value of the Argentine Peso: 2018 to date
allowing Argentina to resume access to international capital
Pesos per U.S. dollar
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
Source: Central Bank of Argentina.
payments facing the government caused the budget deficit
to increase to 6.4% of GDP in 2017.
At the program’s outset, skeptics raised questions about the
Meanwhile, capital inflows into the country to finance the
fiscal cuts and growth projections underpinning the
deficit contributed to an overvaluation of the peso, by 10-
program. On the fiscal side, the government committed to
25%. This overvaluation also exacerbated Argentina’s
bringing the primary deficit (the government budget,
current account deficit (a broad measure of the trade
excluding interest payments) into balance by 2020, from
balance), which increased from 2.7% of GDP in 2016 to
3.8% of GDP in 2017. The required fiscal reforms require
4.8% of GDP in 2017.
congressional approval, but are politically unpopular and
Macri’s party controls neither chamber of Argentina’s
bicameral Congress.
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Argentina’s Economic Crisis
Additionally, the program projects a mild, short-term
Implications for the United States
interruption to growth, falling to 0.4% in 2018 and
On foreign policy, President Macri has demonstrated a
rebounding to 1.5% in 2019. Given the required fiscal
commitment to improved U.S.-Argentine relations, which
reforms, some analysts questioned whether Argentina
were strained under the Kirchner governments. However,
would face a more serious economic contraction, which
the austerity measures and IMF involvement are politically
would make it more difficult for the program to meet its
unpopular and complicate Macri’s bid for re-election in
targets.
2019. Some analysts caution that the crisis undermines
support for Macri’s reform initiatives and could result in the
The IMF was aware of the potential risks when the program
return of populist economic policies from the Kirchner era.
was approved in June. IMF staff noted in program
documents they could not certify under the baseline forecast
In terms of U.S. economic interests, U.S. exposure to
scenario with a high probability that Argentina’s debt
Argentina through direct trade, investment, and financial
would be sustainable. They projected Argentina’s external
channels is relatively limited compared to U.S. economic
debt to increase by about $100 billion between 2017 and
ties with other countries. However, concerns are focused on
2021, to $337 billion, with most of the debt held by the
whether Argentina, together with Turkey, is on the forefront
public sector (Figure 2).
of a broader economic crisis among emerging markets,
which could be significant for the U.S. economy. In
Figure 2. Argentina’s External Debt
general, investors sought out emerging markets following
the global financial crisis of 2008-2009, because interest
rates were so low. There are concerns about the
sustainability of dollar-denominated debts in emerging
markets as the Fed raises interest rates.
The role of the IMF also has implications for the United
States, the IMF’s largest shareholder. Argentina historically
been a frequent IMF borrower, and previous programs have
encountered difficulties. Argentina’s default in 2001, while
on a sizeable IMF program, led the IMF to substantially
revise its lending policies. The U.S. government has
supported Argentina’s current IMF program; in early
September 2018, President Trump expressed strong support
for Macri’s leadership and engagement with the IMF.
However, outside analysts have expressed concerns about
Source: IMF, Argentina Request for Stand-By Arrangement Staff Report,
whether the current program relies on overly optimistic
July 2018.
growth and fiscal adjustment projections, and whether debt
Notes: * Forecast.
will be sustainable over the duration of the program.
Oversight Questions for Congress
Despite an infusion of funds from the IMF and
The Macri government is pursing the generally
commitments on fiscal reforms, the peso continued to
prescribed policies for responding to the crisis, but is
depreciate over subsequent months, and the government
still having trouble securing economic stability. What
announced aggressive policies to stabilize the peso. The
more could or should the Argentine government do?
central bank raised interest rates to 60% in late August, the
highest in the world, and the government committed to
Argentina has been on IMF programs for more than half
hastening the pace of fiscal reforms. President Macri
the years it has belonged to the institution. In what ways
requested the IMF accelerate disbursements of its financing.
is this IMF program similar to and different from
On September 26, they reached a staff level agreement to
previous IMF programs for Argentina?
increase the size of the IMF program to $57.1 billion. It
If there are concerns about debt sustainability in
would also front-load disbursements of financing, roughly
Argentina, should IMF resources go forward in the
doubling the amount available in 2018 and 2019. The staff-
absence of discussions about debt restructuring? What
level agreement will go to the Executive Board for final
risks does the Argentina program pose to U.S.
approval.
commitments at the IMF?
Economic Outlook
Are U.S. financial institutions sufficiently capitalized
Although the Macri government is committed to
and diversified to withstand potential defaults on debts
implementing the prescribed policy measures, including
by Argentina and/or other emerging markets?
fiscal reforms, higher interest rates, and IMF assistance, the
For more on Argentina, see CRS In Focus IF10932,
economic outlook is difficult. As the Fed continues to raise
Argentina, by Mark P. Sullivan. For more on other
interest rates, capital for emerging markets is likely to
emerging market crises, see CRS In Focus IF10957,
become more expensive and/or scarce. The combination of
Turkey’s Currency Crisis, by Rebecca M. Nelson.
fiscal austerity measures and high interest rates may make it
difficult for the economy to grow its way out of the crisis.
Rebecca M. Nelson, Specialist in International Trade and
The government projects that the economy will contract by
2.4% and inflation will reach 42% in 2018. For 2019, the
Finance
government forecasts an economic contraction of 0.5% and
IF10991
inflation averaging 23%.
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Argentina’s Economic Crisis
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