Argentina Quarterly Growth Slowed to 3.6% Before Peso Crisis

(Bloomberg) -- Argentina’s economy slowed in the first quarter as high inflation and borrowing costs sapped investment and demand, sparking a crisis in confidence that pushed the government to negotiate a record IMF credit line.

Gross domestic product rose 3.6 percent in the first quarter from a year earlier, higher than the median 3.5 percent estimate from 10 economists surveyed by Bloomberg. South America’s second-biggest economy expanded 1.1 percent from the previous quarter, the national statistics agency said Tuesday. Construction, retail sales and banking propelled growth at the beginning of the year while agriculture barely grew due to a historic drought, the agency said.

The economy’s performance at the start of the year showed signs of the drag from international investor jitters that since March have undercut emerging markets’ assets. In Argentina, the economy swerved off track, throttled by rising U.S. interest rates, credibility concerns and a widening budget deficit. The peso is down more than 32 percent this year, the worst performance among developing nations. It fell 0.7 percent Tuesday to 27.78 per dollar.

The turmoil forced President Mauricio Macri to ask for aid from the International Monetary Fund, which earlier this month granted Argentina a record $50 billion credit line. As part of the agreement, Macri’s administration will accelerate government spending cuts next year, a politically risky move as Macri seeks re-election. The IMF’s board of directors is expected to formally approve the deal on Wednesday.

Argentina will likely fall back into recession this year, according to government and private polls. The odds of a recession skyrocketed in May to 68.1 percent from 24.4 percent, according a poll from Torcuato Di Tella University. Most economists see a drop in gross domestic product for the second and third quarters of 2018, according to the central bank’s most recent survey of economists. Morgan Stanley, Goldman Sachs and other banks have also cut their 2018 growth forecasts for Argentina to 1.5 percent or lower.

©2018 Bloomberg L.P.