Argentine economic woes hits Brazil amid limited alternatives

Amid turbulent relations between Brazil and Argentina, inflation control policies adopted by Argentine President Javier Milei’s government have adversely impacted Brazil’s economy.

Argentina’s recession has been a major factor behind a significant drop in Brazilian exports to its southern neighbor, traditionally Brazil’s third-largest trading partner. Until May this year, Brazilian exports to Argentina fell by more than 30%, with the Netherlands threatening to overtake Argentina’s position.

Argentina’s share of Brazilian exports has reached historic lows: in January, it was 2.8%, the worst level on record; in May, it slightly improved to 3.6%.

During an April visit to Argentina, Brazilian Secretary of Foreign Trade Tatiana Prazeres described the decline in trade as “natural” given Argentina’s recession but acknowledged that it remains a concern for Brazil.

In its latest report, the International Monetary Fund (IMF) downgraded its growth forecast for Argentina, predicting a contraction of 3.5% in 2024. This is a sharper decline than the 2.75% drop in Gross Domestic Product (GDP) forecasted in April. The IMF also warned of the risk of a prolonged recession.

Fabio Giambiagi, an associate researcher at FGV IBRE, notes that Argentina is experiencing a “long-standing crisis,” exacerbated by both the previous administration of Alberto Fernández and the current measures taken by Milei’s government.

The shock of the current government’s actions to contain skyrocketing inflation has severely impacted local demand. “The main concern in recent years has shifted from inflation to unemployment,” Giambiagi points out.

Welber Barral, a partner at BMJ consultancy, emphasizes that the recent decline in Argentina’s economic activity has been abrupt, suggesting that lower growth could persist for years.

Giambiagi highlights divergent views on Argentina’s economic prospects: some analysts predict a “V”-shaped recovery with strong rebound following the current downturn, while more pessimistic projections suggest an “L” shape, indicating a prolonged recessionary level.

Regardless of these projections, the poor performance of Argentina’s economy is being felt in Brazil.

Automotive Sector Hit Hardest

Giambiagi compares the impact on some sectors to the pandemic levels, noting seven consecutive months of reduced economic activity in Argentina, which has led to a 20% drop in industrial production in March 2024 compared to the same month the previous year.

The automotive sector is particularly affected due to its strong ties with Brazil, involving both parts for local manufacturing and the purchase of finished vehicles. This sector is the primary concern for Brazilian exporters regarding the situation in Argentina.

Historically, around 40% of bilateral trade between Brazil and Argentina is linked to the automotive industry, especially through factories on both sides of the border. Brazilian government trade data shows that passenger car exports to Argentina fell by 18% until May this year compared to the same period last year. Exports of automotive parts and accessories decreased by 23%.

The National Association of Motor Vehicle Manufacturers (Anfavea) confirmed that Brazilian exports have struggled due to the economic slowdown in neighboring countries.

Barral also notes that Argentina is Brazil’s main importer of manufactured products, which impacts other industries, particularly those related to agribusiness.

“Fated to interdependence”

To expand Brazil’s market access, Jorge Viana, president of the Brazilian Export and Investment Promotion Agency (Apex), recently cautioned Argentina to “take care” not to lose its position as Brazil’s primary partner in South America. However, the deep integration of the two economies and the commercial benefits of Mercosur (a bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela) make any potential replacement challenging.

Thanks to Mercosur, Brazilian products are exempt from various tariffs in Argentina. Moreover, Giambiagi highlights the significant “integration between industrial plants, which does not change overnight.”

The chart below explores container exports from Brazil to Argentina between Jan 2021 and Apr 2024. The data is from DataLiner.

Container Exports to Argentina | Jan 2021 – Apr 2024 | TEUs

Source: DataLiner (click here to request a demo)

Geography also plays a crucial role, as Brazil’s freight costs to its neighbors are lower, eliminating the need for new transport infrastructure that would be required if export destinations changed.

In this context, Giambiagi laments the weakening of diplomatic relations in recent years, noting that the two countries are “doomed to interdependence.”

This diplomatic plunging predates the presidencies of Javier Milei and Luiz Inácio Lula da Silva. Although they lack mutual enthusiasm—the two leaders did not meet during a recent trip to Italy for the G7 summit—the diplomatic strain began under their predecessors, Fernández and Jair Bolsonaro.

Expectations for Fewer Obstacles and More Foreign Currency

Experts agree that the past year was atypical for Argentina, contributing to its current problems. The country experienced its worst drought in 100 years, devastating agriculture and significantly reducing foreign currency inflows. The shortage of dollars made it difficult for importers to make payments.

Giambiagi underscores the crisis’s severity, including exchange rate issues Brazil hasn’t faced since the 1980s. The Argentine government created several specific currencies, such as the “agricultural dollar,” to provide exchange rate benefits for the sector.

Barral notes that there are still challenges in executing payments requiring foreign currency, but he expects this issue to ease in the coming months as the local economy stabilizes. Fernández’s government had implemented several licenses that hindered Brazilian exports throughout 2023 due to the foreign exchange shortage, but Barral indicates these have been lifted in recent months.

Source: Isto É

Click here to read the original news report: https://istoe.com.br/crise-da-economia-argentina-impacta-o-brasil-em-cenario-de-alternativas-limitadas/

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