© shutterstock | Nick Albi

04.06.2019

SOBERING NEWS ON ARGENTINA'S ECONOMY

German mechanical engineering companies had high hopes for business in Argentina. But large-scale projects have been put on hold pending the elections in October.

By Anke Henrich

The country has the choice between Cristina Kirchner and Mauricio Macri. Many in Argentina and further afield see it as a choice of the lesser of two evils.

South America's second largest country is currently on an emotional rollercoaster. Despite inflation of more than 50 percent, people were talking of a slight economic recovery as recently as March this year. The gross domestic product had been growing slightly since the start of the year. Record harvests were predicted and the economy of the most important trading partner, Brazil, also showed signs of recovery. This recovery in Argentina benefited industry. In 2018, machinery deliveries from Germany to the South American country, for example, reached a record level of EUR 690 million, driven in particular by projects in the energy sector. "Despite all the crises, trade with Argentina has remained stable at a high level since 2011," says Dr. Susanne Engelbach, VDMA Foreign Trade Department. "Many companies there see machinery as a useful investment."

But then came Cristina Kirchner - the left-wing Peronist and ex-President who led the country from 2007 to 2015 and paved the way for the current depression. Rumors that she might run for President again on October 28 began to circulate in April - swiftly followed by opinion polls that scared many investors away. The polls showed that Kirchner could beat the incumbent liberal-conservative President Mauricio Macri, who has been in office since 2015, in by eight percent in a run-off.

His romantic image shattered, Macri has been struggling to get inflation and recession under control for more than three years. Monitored by the International Monetary Fund, he has been forced to implement unpopular measures such as a program of austerity in order to get the economic consequences of Kirchner's presidency under control. It is therefore no wonder that, in late 2018, consumer confidence in Argentina sank to its lowest level since the major crisis of 2002.* Large parts of the population, which has been becoming poorer for many years, therefore see Kirchner as a glimmer of hope that their situation could improve.

The financial markets, on the other hand, reacted very negatively to the poll. The peso dropped a further ten percent against the dollar, while share prices fell by almost seven percent. The Argentinian Central Bank tried to counteract the rapid inflation with its interest rate policy, raising the base rate to up to 70 percent. But fighting inflation like that comes at a cost, much of which is paid by small and medium-sized businesses. Many are no longer able to afford to borrow money to invest.

Argentinian industry is also increasingly failing to make large purchases and putting large-scale projects on hold, as the latest "Branchencheck" study by Germany Trade & Invest (GTAI), the Federal Republic of Germany's business promotion company, shows. This is GTAI’s summary of the prospects of the most important sectors:

Argentinian mechanical engineering has been hit particularly hard by the current crisis. Recovery is only expected in selected fields in 2019. Only agricultural machinery is in a good position.

  • The chemicals industry is considered hard hit by the recession, although agricultural chemistry has the potential to catch up.
  • The expansion of renewable energies is progressing more slowly than planned.
  • Still booming in 2018, the construction industry is currently suffering major setbacks.
  • Environmental technology is a major priority for policymakers, but the stricken country does not have the money to invest.
  • There is a glimmer of hope in mining, which has seen annual rates of investment in exploration almost double since 2015. The trend appears to be continuing unabated.

And now everyone is waiting with bated breath to see what happens after the election in October. Andreas Fobbe, Senior Department Manager Export Sales Management North + South America at automation expert ifm electronic GmbH in Essen, is skeptical. "If Kirchner wins, we could see a ban on imports, as we did a while ago, or at least encounter problems with imports. Argentina could descend into chaos again, with strikes and even higher inflation," fears Fobbe.

But even if Macri wins, the situation will not necessarily improve. "If Macri or a similar candidate wins, the economic status quo could continue, but there is doubt as to whether the inflation or exchange rate would change. In my view, there would be no significant rise in willingness to invest and projects would remain on ice. We would probably expect stagnation with a higher rate of inflation and a weak exchange rate for the peso to the euro and the dollar," says Fobbe. Those manufacturing in Argentina may have to slow production, while those importing into the country will have to tailor their portfolios accordingly, he continues.

Higher demand than usual is expected for productions that enable optimum plant availability and optimization or Industrie 4.0 applications. A recession is a key time to optimize processes - not just politically. And there is another form of support, says VDMA expert Engelbach: Up to now, German deliveries to Argentina have benefited from the financing options offered by an active Hermes cover policy.

 

*Study by Universidad Torcuato di Tella, Buenos Aires

 

Further Information

VDMA Foreign Trade Department   |   GTAI   |   Universidad Torcuato di Tella

Contact
Dr. Susanne Engelbach, VDMA Foreign Trade Department.