Economic Analysis - External Accounts Support Growth Outlook - OCT 2017

BMI View : Argentina's external liabilities will grow in the next several years as the economy continues to open to foreign trade and investment flows. An expanding export base, rising capital goods imports and direct investment support a robust growth outlook that will ensure external account stability.

  • Argentina will maintain modest current account deficits over the coming years, which will be financed by capital inflows.

  • We have downgraded our forecast current account deficits to 2.6% of GDP in 2017 and 2.9% in 2018, from 2.3% and 2.5%, respectively.

  • Rising capital goods imports and foreign direct investment support our robust, investment-led growth outlook.

Argentina's goods trade surplus will narrow over the coming quarters amid surging imports. Goods imports grew 13.0% y-o-y in H117, surpassing our expectations and leading us to downwardly revise our forecast current account deficit to 2.6% of GDP in 2017, from 2.3% previously ( see ' Trade & Investment Gains Support Growth ' , May 19). The surge reflects in part higher oil prices, driving a 20.8% rise in energy imports. We expect oil prices will continue to rise over the coming months, boosting the country's import bill. However, in absolute terms the largest gains came from capital goods imports, which grew 16.9%. We expect capital goods will continue to drive import growth, as investment picks up over the coming quarters ( see ' Growth Will Accelerate In H217 ', May 31).

Trade Accounts Will Continue To Expand
Argentina - Goods Trade, % y-o-y (6mma)
Source: INDEC, BMI

Export growth is also likely to pick up, although at a slower pace. Goods exports grew just 0.8% y-o-y in H117, weighed down by weaker agricultural exports. We expect that higher soybean prices from July will boost cereals exports and we see upside potential should Mexico decide to buy agricultural goods from Argentina, Brazil and other South American producers, as the renegotiation of NAFTA creates risks to its trade relationship with the US ( see ' Mercosur-Pacific Alliance: The Time Is Ripe To Strengthen Ties ', March 22). Additionally, a weaker exchange rate will support industrial goods exports, which grew 11.1% in H117, while Brazil's recovering economy will support demand from Argentina's most important regional trading partner.

Capital inflows will more than cover Argentina's external financing needs. While government debt made up the overwhelming majority of the financial account in Q117, the latest data available, we believe that a narrowing fiscal deficit and robust growth outlook limit sovereign risks ( see ' Sovereign Risk: Politics To Prevent Significant Compression Of Credit Spreads ', July 11). Meanwhile, private sector debt issuances, which grew 37.7% y-o-y in Q117, will support a broadening of the country's export base. Although MSCI declined to upgrade Argentina to 'emerging market' status in June, we expect an upgrade in 2018 will bring significant portfolio flows into the country. Rising non-debt foreign direct investments, which grew 36.5% in Q117, will limit capital flight risks.

Capital Inflows Exceed Financing Needs, Building Reserves
Argentina - Foreign Exchange Reserves, USDbn
Source: BCRA, BMI

With capital inflows exceeding external financing needs, Argentina's foreign reserves will grow. This will offer tailwinds to its sovereign credit rating and give the Banco Central de la Republica Argentina (BCRA) the ability to mitigate exchange rate volatility via open market operations ( see 'BCRA Intervention Likely To Backstop Peso's Slide', July 31). At USD47.0bn in July, foreign reserves were up 44.6% y-o-y. By end-2017, we expect reserves to equal 8.6 months of imports, up from 6.6 at end-2016.