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Argentina’s worst drought in 50 years has crushed the country’s cash flow

Geoffrey McRae on 27/06/2018 - 14:55 in Argentine farms

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The economic activity in April fell 0.9% annualised and 2.7% in March, but with a production drop of 30% in agriculture and livestock. It is thought the degree of the drop could reflect the beginning of a short-term recession.

The worst drought in 50 years struck negatively with economic activity in April, which fell 0.9% year on year and 2.7% from March, seasonally adjusted, reported yesterday by the INDEC . The results of analysed data are conclusive. The agricultural sector showed a decline of 30.8% year on year. The data surprised many because none of the private consultants had estimated such a strong contraction. In fact, it dates back to six years ago to find a similar seasonal adjustment. It was in 2012 when a previous drought hit the country.

Jorge Todesca unveiled Monthly Estimator of Economic Activity (EMAE), an indicator that anticipates GDP development and that, despite the negative data, April reflected an expansion of 2.4% accumulated for the first quarter of the year. However, the outlook for the coming months is not optimistic because, in addition to continuing drought effect at least until this month, since May the impact of the peso devaluation adds financial pressure.

“The year’s decline explains the gross fall in the agricultural sector. There were other sectors that performed much better, such as industry and construction. The data was expected, but it was worse than most private estimates indicated, especially on-year, “said Gabriel Caamaño, chief economist at the consulting firm Ledesma.

For example, the consulting firm Orlando Ferreres & Asociados had projected an annual growth of 1% in April and a fall of 1.8% from March.

“The May data will be bad too. You have to see what happens with seasonal adjustments since the April figure is still provisional. Next month also will begin to see the effect on crushed soy, which is the sector holding the most weight in the food industry. In turn, macro instability is going to affect consumption of the automotive industry and the metalworking “said Caamaño.

The Ministry of Finance, meanwhile, noted: “Excluding agriculture, estimates that economic activity in other sectors rose in April by 3.3% over the April 2017 level.”

“The good performance of economic activity there is widespread, as 12 of 15 sectors showed annual growth,” added in the portfolio.

Fishing (10.8%), construction (10.2%) and financial (9.4%) were three sectors that had year on year expansion. Meanwhile, trade (5.5%), manufacturing (3.1%) and real estate (5%) also grew, and are the three sectors with the greatest impact on the activity, after Agriculture, hunting and forestry (having a weight in the EMAE of 3.78%.

“It is surprising to see this annual fall since April, which was not seen in private projections.  Still, for now it is the effect of the drought which is affecting other activities such as transport,” said Martin Alfie, an economist at the consulting firm Radar.

“I think the outlook for the year is more complicated than expected and the fourth quarter will finish the year close to defining whether it’s negative or positive.  Although at this point it is purely statistical”.

Meanwhile, Lorenzo Sigaut Gravina, director of Ecolatina, said: “The April figure showed a sharp drop, even in the seasonally adjusted variation, which anticipates that in the second and third quarter will be negative.”

“It’s the beginning of a recession. While there was already exchange-rate turbulence that month, the great architect of this result was the negative effect of agricultural production. The second quarter and values of soybeans and corn make for an individual low due to the direct impact of the drought, which affected production very strongly “, he said.

Both the government and private specialists announced that the coming months ahead economically will be difficult due to the impacts of tariff increases and the devaluation on consumption, in addition to the continuing drought effect on farming.

Federico Furiase, chief economist at EcoGo said that “in April there was the effect of exchange rate turbulence, acceleration of inflation on wages, the rise in interest rates, and the effect of the drought on exports”.

“It was expected, but it was a sharp drop, especially in the year with a low comparison base last year,” he said.

In 2017, the economy grew by 2.8% and this year, estimates in January projected a growth above 3%.

However, the drought and the two sharp devaluations of the peso collapsed these optimistic estimates earlier this year.  In the last Expectations Survey Market (REM) May, which released the Central Bank (BCRA) based on the average forecast of private consulting, growth projections for this year still estimate a positive note: around 1.3% of GDP expansion for the year.

I guess time will tell.

Source: La Nacion

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Geoffrey McRae

About Geoffrey McRae

Geoffrey McRae is the founder of GTSA - Marketing. He is a New Zealander with a strong Agro-business and Real Estate background spanning over 30 years both in his own country and South America. I hope you enjoy reading our news site. Please share it on your social media below.

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