Twin deficits increase Argentina's economic fragility
Monday, February 26, 2018
Subject
Argentina's twin fiscal and trade deficits.
Significance
The recent plunge in global stock markets highlighted the exposure of the Argentine economy to a negative external shock, with the exchange rate depreciating by 2.5% in the first week of February. The worsening external deficit, combined with the still high fiscal deficit, increased concerns about the consistency of the economic policy framework and vulnerability to a sudden shift in capital inflows.
Impacts
- Capital outflows will remain high absent greater public confidence in government policy.
- Slow fiscal adjustment and rising foreign public debt are storing up sustainability worries.
- Weather troubles, such as drought in the Pampa region, could undermine the harvest, hitting exports and worsening the trade deficit.