Argentina Economy Falls Sharply in May
Drought, currency crisis cited as GDP contracts 5.8%
Argentina said Tuesday that the economy fell sharply in May amid one of the worst droughts in decades and a currency crisis that forced President Mauricio Macri to seek financial support from the International Monetary Fund.
Statistics agency Indec said the gross domestic product contracted 5.8% in May from the year-earlier month as the agriculture sector declined 35%. The manufacturing, fishing and telecommunications sectors also contracted, while construction and finance activity expanded, according to Indec.
Goldman Sachs said there is now a “very significant risk” that Argentina will enter into a recession this year after the weaker-than-expected economic results. The economy contracted in April by 0.6%.
“Beyond the weather-driven agricultural production cycle, we expect the economy to remain soft in coming quarters,” Goldman Sachs said. It says the economy will be hurt by tightening of financial conditions, accelerating inflation, and tighter fiscal and monetary policy.
The Argentine peso depreciated sharply in May amid rising U.S. interest rates and growing concerns from investors about Mr. Macri’s ability to cut public spending and reign in double-digit inflation. In June, inflation rose to nearly 30% as a weaker currency made imports more expensive.
The central bank hiked its key interest rate to 40% to stem the depreciation, while Mr. Macri’s government reached a deal with the IMF for a $50 billion credit line to provide the administration financial support as it looks to reduce the fiscal deficit.