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Drought in fields, foreign reserves pile pressure on Argentina

Crises combine in the South American nation as its drought-hit fields are expected to lead to losses of at least $5 billion USD — hurting its ability to raise its scarce foreign reserves and repay its debt to the IMF.

BUENOS AIRES, Argentina (CN) — Argentines are living through historic times, with the country dealing with a set of unpreceded challenges from extreme drought to sky-high inflation.

Prices have accelerated by 102.5% in the last 12 months with wages failing to keep pace with the spiraling cost of living. A recent rise in the minimum wage was criticized by leading trade unions, stating that it would leave the poorest in society unprotected from the effects of inflation.

Argentina is also emerging from a historic drought that gutted grain and meat supplies destined for export. Sweltering temperatures linked to climate change exacerbated summer conditions that led to the country’s worst drought in 60 years. It devastated the harvests of soybeans and corn, key crops that are the source of hard currency.

The IMF estimates the drought is expected to leave a $5 billion hole in Argentina’s exports, leading the international money lender to relax its reserves target by $1.8 billion. The new target for the Argentine government this year is $8 billion and forms one of the conditions of the country’s $44.5 billion debt deal. It’s currently holding net reserves of around $4.4 billion.

“We know that Argentina was hit by a severe drought that has undermined the performance of the economy and it has harmed people in the country significantly,” said Kristalina Georgieva, managing director of the IMF. “That has complicated the job of policymakers.” 

Georgieva said in addition to its relaxation of the reserves target, the Argentine government has promised to fine-tune its economic policies.

Brazil President Luiz Inácio Lula da Silva openly criticized the IMF as he spoke at a ceremony for the BRICS’s New Development Bank in China. “A bank shouldn’t choke national economies, like the International Monetary Fund is doing in Argentina,” said the leftist leader. “No ruler can work with a knife on his throat because he is in debt.”

Brazil is Argentina’s largest export partner, with Lula looking to build an alternative to dollar dependency for international trade.

Argentina’s ability to adhere to its IMF debt deal had been further complicated in British and American courtrooms. In 2018, Argentina’s state oil company YPF was sued in a Delaware court by creditors of one of its now-bankrupt subsidiaries for $14 billion.

The origins in the Maxus case date back to 2005, when the state of New York sued Maxus Energy Corporation (which the recently privatized YPF acquired in 1995) for contaminating the Passaic River. YPF was renationalized in 2012, and Maxus filed for bankruptcy in 2016. The liquidation trust set up to settle Maxus’ debts then sued YPF for $14 billion.

On April 6, the state oil company reached an agreement in the U.S. to pay almost $300 million to the creditors — just 2% of what the creditors sought. The settlement also allowed YPF to avoid admitting any responsibility for environmental damages.

With one case closed, Argentina faces another legal action across the Atlantic in the U.K. In Palladian Partners v. Argentina, a London court ruled that Argentina must compensate investors for losses in GDP-linked bonds totaling $1.5 billion.

After the 2001 economic crisis, Argentina issued growth-linked securities to funds including Palladian Partners, HBK Master Fund and Hirsh Group. Palladian sued in 2019, with its case centering on two tranches in 2005 and 2010. Following a change in how Argentina calculated GDP in 2013, the investors argued the government failed to comply with the terms of the bonds.

Lawyers for the Argentine government insisted they will appeal. “The republic believes that the London court has wrongly interpreted the terms of the securities and intends to seek permission to appeal,” said Sullivan & Cromwell, the law firm representing the government.

Back in Argentina, there is little optimism for the rest of 2023. The drought has provoked a downturn in the IMF’s growth projections for the country. It forecasts growth of 0.2% for 2023, down from previous estimates of 2%. “It’s a massive drought,” said Pierre-Ouliver Gourinchas, director of research of the IMF. “It’s having a huge impact on the economy.”

As GDP projections are pushed down, expectations are that inflation will continue to climb. The Central Bank’s Market Expectations Survey forecasts the inflation rate for 2023 to be around 110%.

In August 2022, President Alberto Fernández appointed a new economy minister, Sergio Massa, who's tasked with taming rampant inflation yet has struggled to get it under control. And that puts the current ruling coalition in danger as the country heads for presidential elections this October.

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Categories / Economy, International

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