Argentina’s Economic Woes Could Reduce Brazil’s 2019 GDP Growth by 0.5 Percent

SÃO PAULO, BRAZIL – The Argentine crisis is having a strong impact on Brazilian Gross Domestic Product (GDP). The reason for this is the forty percent drop in Brazilian exports to Argentina in the first eight months of 2019 compared to the same period last year, say economist at the Brazilian Institute of Economics (IBRE).

“If it were not for the Argentine crisis, Brazilian GDP could grow 1.6 percentage points by the end of 2019,” say economists Luana Miranda and Mayara Santiago, from the Getúlio Vargas Foundation (FGV) economic policy and public policy’s think tank, IBRE.

According to the study, the crisis in the neighboring country should remove 0.5 percentage point of national GDP this year, which forecasts predict will grow around 1.1 percent. Argentina is Brazil’s third largest trading partner, behind China and the United States.

Since the middle of 2018, the economy of our neighbors to the south has faced serious difficulties. With foreign financial conditions worsening, Argentina was hit particularly hard, due to its fiscal and external deficits and a large debt in foreign currency.

In the past 14 months, the country has experienced recession, a surge in inflation, currency devaluation, rising debt and an increase in unemployment. To make matters worse, a new shock occurred with the opposition’s broad leadership in presidential polls last month, which led to a total mismatch in asset values and a significant worsening of the country’s prospective macroeconomic scenario.

Data produced by FGV/IBRE, show that Brazilian exports to Argentina began to decline in the second quarter of last year, with the most significant impact being felt from the third quarter of 2018 on. The steepest decline so far was registered in the first quarter of 2019.

And although much is known about the importance of Argentina to Brazilian auto exports the authors of the study say Brazil’s export agenda to its neighboring country goes far beyond trade in the automobile industry.

According to the FGV/IBRE economists, possible new surges of tension associated with the political scenario in Argentina due to the upcoming elections and the possible worsening of the country’s macroeconomic projections should be closely monitored by Brazilian economists and exporters, given the relevance of Argentina to Brazil’s economic growth.

“A significant part of what is exported from Brazil to Argentina is composed of industrial components, like parts and pieces to enter the production chain of the Argentine industry,” say the economists.

According to them, around 90 percent of what Brazil sells to Argentina are industrial products, of which 57.4 percent intermediate goods used by Argentine industries.

While most economists believe that Argentina’s economic woes are likely to affect Brazilian economic growth due to the reduction of export demand, the Bolsonaro government is certain that Brazil’s economy will continue to show positive results in the upcoming quarters.

“I’m not afraid of either Argentina’s balance sheet or the eventual fall of a giant out there. I don’t think it will affect our growth momentum,” said Brazil’s Economy Minister, Paulo Guedes, during a seminar in São Paulo last month.