May 30, 2023

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Strong warning from Davos Forum on Argentina due to high inflation, debt and state weakness

Davos Forum warns of country risk Reuters

The Davos Economic Forum (WEF, according to its summary in English) warned that Argentina faces serious risks to its economy, such as high inflation, potential problems with its sovereign debt and shortages of raw materials.

This was indicated in the “Global Risk Report 2023″ before the start of the annual session of the WEF, which will be held from the 16th to the 20th of this month, in which he pointed out the main risks that Argentina faces: ” Rapid and / or prolonged inflation; the debt crisis; the proliferation of illegal economic activities ; the collapse of the state; and severe crises in the supply of raw materials.”

On inflation, the 98-page report prepared by WEF with Marsh McLennan and Zurich Insurance Group said “managing inflation is a global concern”.

In this regard, “Rapid and/or prolonged inflation” is one of the top five risks in the next two years, and a significant increase from 2021, in the survey of 89 countries.

“It ranks as a top threat in several G20 countries, including Brazil, South Korea and Mexico, although inflationary pressures have affected both developed and developing economies.. Inflation rates in Argentina and Turkey exceeded 80 percent. “Zimbabwe, the Bolivarian Republic of Venezuela, Lebanon, the Syrian Arab Republic and Sudan recorded triple-digit inflation,” he said in his conclusion. Argentina recorded inflation close to 95% in 2022, the highest since 1991 and the second highest in Latin America after Venezuela; By 2023, the government is predicting a 60% price increase, but analysts believe a figure closer to 100 percent will repeat itself.

Inflation in Argentina to approach 100% in 2022 Reuters
Inflation in Argentina to approach 100% in 2022 Reuters

On the other hand, “globalized capital flows in recent decades have exposed emerging and developing markets to rising interest rates, especially those with high proportions of dollar-denominated debt. Argentina, Colombia and Indonesia”. 67% of Argentina’s sovereign debt is denominated in foreign currency; Since the end of 2019, sovereign liabilities have increased by a record 72,000 million USD.

On the other hand, he opined that “social and political polarization may further reduce the space for collective problem-solving to address global risks.”

“The far right has been elected in Italy and is now the second largest party in Sweden, while the left has re-emerged in Latin America. Several G20 countries, including the US, South Africa and Turkey, will hold national elections in the next two years. Argentina, Mexico and Indonesia”Accurate.

“Electing less centrist leaders and adopting more radical policies among the economic superpowers could fracture alliances, limit global cooperation and lead to more volatile dynamics,” the report warned.

On external liabilities, he pointed out that “general government gross debt in advanced economies will reach 112% of GDP in 2022, compared to 65% of GDP in emerging and developing markets”.

However, “some emerging and developing markets are feeling the effects of monetary policy tightening and deteriorating economic conditions first and most acutely.”

In this regard, he noted, “Ghana recently reached an agreement with the IMF to bail out US$3 billion and Zambia earlier this year is trying to restructure its foreign debt of US$15 billion”.

“A general global recession within the year could moderate inflation and limit interest rate hikes, but with a medium- and long-term credit crunch, there is a high risk of a balance of payments crisis in the near term.”

Kristalina Georgieva and Sergio Massa
Kristalina Georgieva and Sergio Massa

In this situation, he has given this warning “Argentina is among the largest emerging markets that exhibit the highest risk of default, Egypt, Ghana, Kenya, Tunisia, Pakistan and Turkey”. The maturities of the Argentine debt, among the bondholders who accepted the 2020 exchange, the IMF and other international institutions, will increase from 9,900 million US dollars in 2024 to 13,523 million US dollars in 2025 and 14,419 million US dollars in 2026 and will grow from that year until 2032, they will be more than 21,000 million US dollars per year.

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“Recognizing the risks to broader financial stability, deep and timely debt relief will allow vulnerable countries to return to growth faster and reduce future defaults,” he said.

“The private sector can be encouraged to participate in debt restructuring through a variety of mechanisms, including stronger legal protections, loss-making obligations and value recovery instruments, which will allow private creditors to benefit from the debtor’s upward developments. In future countries such as GDP-Linked Instruments in Costa Rica, Argentina, Greece and Ukraine”. Indian. Argentina used coupons linked to economic growth in the past, which did not add much support from creditors, and in addition, during the Kirchnerism, made cases abroad for manipulating GDP data.

On the other hand, in the metals development sector, “several developing and emerging markets have become net beneficiaries of this increased interest from the public and private sectors, including the lithium triangle from Indonesia, Morocco and the Plurinational. Bolivia, Argentina and the State of Chile”. However, he opined that “these countries had to walk a tightrope as world powers exercised control through trade, investment and technology relations and sought to limit access to rival countries”.

The report is based on input from more than 1,200 experts, policy makers and business people; Most will attend this face-to-face edition of the WEF after restrictions created by the pandemic.

According to their conclusions, “the cost-of-living crisis is the biggest short-term risk, while the inability to mitigate and adapt to climate change is the biggest long-term concern.” In this sense, he warned, “geopolitical rivalries and closed positions will exacerbate economic constraints and exacerbate short- and long-term risks.”

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For this reason, the Global Risk Report calls for “countries to work together to avoid competition for resources”.

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