WATER POLITICS

Argentina is infamous for its economic malaise, but once a year, from March through May, it gets a reprieve. This is when agricultural exports bring in foreign exchange that Buenos Aires badly needs to carry the economy through the rest of the year. In 2023, however, Argentina’s poor crop performance means the country can expect minimal relief for the time being. The government is trying to adjust, but the knock-on effects will linger for months or longer.

Prolonged drought has taken its toll on Argentine farming. In fact, 2020-22 was the driest period for the country in more than 60 years. The wheat harvest yielded 12.4 million tons, roughly half the previous season’s total, and projections for the remaining crops have been repeatedly downgraded. For example, expectations for the soy harvest were cut by 12 percent (33.5 million tons), while corn estimates were slashed by 15 percent (41 million tons).

The global impact should be muted, but the effect on Argentina’s economy is already apparent. In the first two months of 2023, the government brought in a mere $1.3 billion from agriculture exports, down 46 percent from the same period a year ago. For the full season, analysts expect these exports to bring in between $7 billion and $10 billion less than a year ago, which would shave 1.5 to 2 percent off gross domestic product. The government’s initial fiscal plan anticipated receipt of $7.6 billion in revenue from agriculture exports, but this has been cut to between $3 billion and $3.5 billion. This comes amid a global realignment in commodities due to the war in Ukraine. Argentina’s struggles put it at a disadvantage when it comes to securing market share and longer-term contracts for its exports.

Argentina’s poor agriculture prospects have also strained its relationship with the International Monetary Fund. Last week, Economy Minister Sergio Massa met with IMF Managing Director Kristalina Georgieva to discuss the monitoring and conditions of the country’s IMF loan. Buenos Aires is expected to fall well short of its required net international reserves, which were supposed to reach $7.8 billion by the end of March but are currently $4 billion. As a result, the IMF agreed that it would no longer do quarterly reviews of Argentina’s reserves. (Other guidelines pertaining to the fiscal deficit and monetary issuance remain in place.) According to Massa, the IMF adjustment will provide stability and predictability for the loan program because Buenos Aires will not need to seek frequent waivers from the fund. It also puts the IMF in an awkward spot, because other debtor states will try to use Argentina as a precedent.

For Argentina’s farmers, the crisis is far from over. Despite public support programs, small farmers are barely scraping by. Those who stay afloat are under pressure to switch crops and reduce planting area to cope with the drought and high input costs. The price of fertilizer has soared since 2020. From January to July 2022, Argentina imported 26 percent less fertilizer by volume year over year but paid 61 percent more for it. And the damage is still matriculating through the production chain. For instance, because of the country’s soybean crop shortfall, Argentine soybean crushers and meal factories will need to import up to 10 million tons of soy this year to keep the industry running. Finally, the difficulties have fueled an uptick in tax avoidance that is already evident in cattle exports.

For the broader national economy, with fewer dollars, the government will struggle to pay its debt. Failure to do so will endanger its access to capital markets. The dollar crunch also limits the Argentine central bank’s ability to stabilize the peso, which will drive up the cost of imports, including all-important energy imports. Last year, Argentina spent $12 billion on energy imports and, in spite of a dramatic rise in energy exports, ended the year with an energy trade deficit of $4.4 billion. In the past, Buenos Aires has prioritized households over industry in the event of energy shortages. Other import-dependent industries are also struggling. For example, the Chamber of Airlines warned of difficulties importing computer equipment, aircraft spare parts and security equipment.

Last but not least is the question of government subsidies. Despite government efforts, subsidies for electricity, water and transportation still consume a chunk of the budget. The government already announced price hikes for later this year, and the shortfall in export revenue means additional hikes cannot be ruled out. This will not sit well with the public, and it comes ahead of a general election in October. Suffice it to say Argentina will be dealing with the fallout of this year’s poor agriculture performance for quite some time.