Updated: Dec 17, 2019
The likely election of Alberto Fernandez, head of the left-wing Justicialist party, alongside long-time president and current running mate Cristina Fernandez de Kirchner (unrelated) in October is casting a bleak shadow over Argentinian economics. Following primary elections in early-August that realized an astounding defeat of incumbent reformist Mauricio Macri, the Argentine Peso has fallen against the dollar by nearly a quarter. In attempts to remedy the situation, Macri was forced to implement damaging currency controls and the government announced some debt repayments would be delayed in a move that effectively represents an unofficial default.
Despite being handed a state crippled under years of mismanagement during the Kirchner regime (she held office from 2007 to 2015), the Macri administration was likely too slow to reform. The choice to gradually balance the budget and implement liberalizing economic changes was a tactical error given the electorate saw few tangible benefits. Even so, a return to Justicialism will be far worse for Argentina over the lo
ng-run. Such a change in sentiment is stunning. Just four years ago, international views towards Argentina were unusually positive following the ascension of President Macri and the belief Argentina was finally on a stable fiscal and monetary path.
Argentinian Grain Production at Risk
Grain loadings out of Argentina have long served as the state’s bumper export commodity. Over the past year, Argentina has shipped some 4.5 Mt in grains, accounting for 17% of the global seaborne total. Much of this volume emphasized destinations in Asia (2.4 Mt) with totals meant for China (0.4 Mt), Vietnam (0.58 Mt) and Saudi Arabia (0.28 Mt) leading the way. Grain exports headed towards Spain (0.43 Mt) were also elevated over the past year. These export levels are now at risk given Peso devaluation and currency controls. Even fertilizer usage, which is traditionally priced in dollars, is poised to decrease over the coming months, which will weigh on overall yields.
Even if the situation steadies over the next several weeks, a Fernandez Administration will do little to boost the outlook for Argentinian farmers. During the Kirchner administration, strict grain export curbs and taxes on overseas farm sales alienated much of the agricultural industry. A leftist government is likely to undergo such market controlling measures once again. The result of such uncertainty is reportedly driving farmers to produce more soy, which costs 70% less per hectare vs that of corn.
Vaca Muerta Shale Production Growth Unlikely
Grain exports are not the only commodity at risk. Oil and LNG departures could very well fail to realize potential growth levels expected over the coming decade. Vaca Muerta, which covers some 30,000 sq km, not only holds vast production capacity but has long been viewed as a key strategic asset to Argentina. In July, LNG departed from the state for the first time in more than five years as gas output has slowly risen from the shale play. The problem with Vaca Muerta remains the massive infrastructure buildout needed to make the region viable for broader production. YPF, the state oil company, has struggled to find international FDI willing to take a chance on the region. Such worries now appear well-placed with the recent implementation of fixed exchange rate contracts priced below market. Expectations of oil exports out of the region surpassing 140 kbpd by end-2021 will likely go unmet. Argentina currently exports some 70 kbpd on a 4-month moving average basis.