December 20, 2018 / 11:59 AM / 6 months ago

Factbox: Four reasons why Argentina's economy buckled in 2018

BUENOS AIRES (Reuters) - Argentina’s economy is ending a year of “endless storms,” in the words of President Mauricio Macri. The storms included a severe drought, the ripple effects of the U.S. Federal Reserve’s rate hikes, the crash of the country’s peso currency, and policy missteps.

The country is now suffering the worst of a recession that is expected to last until the second quarter of 2019, when the government hopes a strong recovery will take hold. But rising unemployment and high inflation remain serious threats to that rosy outlook. [L1N1YI0SW]

SCORCHED SOY FIELDS

A dry spell that set in a year ago on the Pampas grains belt continued unabated for months, scorching soy fields and withering Argentina’s top export. The country’s 2017-2018 soy crop was the poorest in nine years, and other key grains like corn also suffered from the lack of rains.

The drought contributed to a jump in agricultural market prices and left China without one of its main feed suppliers just as trade tensions soared with the United States.

EXPOSURE TO FED PAINS

Monetary policy in Washington was another source of pain for Argentina. The first Fed rate move of 2018, in March, triggered a flight from all emerging market assets. Latin America’s third-biggest economy was particularly exposed due to its bulging macro deficits and heavy load of dollar-denominated debt.

Investors turned to sell mode on the country’s sovereign bonds, making it hard for the country to borrow on international markets. Fears of financial instability prompted ordinary Argentines to begin exchanging their pesos for safe U.S. dollars, driving down the value of the Argentine currency.

1 PESO = $2.5 CENTS

Foreign exchange chaos ensued. The peso, which had been hovering at 20 per dollar ($5 cents) since January, lost its footing in a downward spiral that sent it to 30 against the dollar ($3.3 cents) in August and to 40 ($2.5 cents) in September.

The central bank reacted by raising interest rates and selling dollars, with little success. Macri turned to the International Monetary Fund for help, adopted a strict monetary plan to fight escalating inflation and passed an austere budget in Congress amid violent protests.

MISTAKES, CORRUPTION, POLITICS

Macri, whose approval ratings have tumbled, has acknowledged some mistakes, such as setting economic goals that were too optimistic and failing to coordinate policies. Economic confidence was further eroded by a corruption case that implicated major construction contractors and former President Cristina Fernandez, whose reappearance as a likely candidate in next year’s election has unnerved investors. Fernandez has denied the charges against her.

Reporting by Gabriel Burin,; Editing by Ross Colvin

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