By Lorenzo Sigaut Gravina

Senior Economist at Ecolatina*

Buenos Aires, January 3rd. The economic recovery of 2017 (the GDP climbed almost 3%) boosted the expansion of most productive activities. On the other hand, last year the exchange crisis produced an intense recession (with a GDP decrease of at least 2%) that affected most of the productive sectors. In both years there were exceptions, but the rule was expansion in 2017 and contraction in 2018.

The outlook for activity for 2019 depends to a greater extent on economic stabilization. If the exchange rate calm is strengthened, inflation will tend to slow down and activity to recover (more than 3% between points). It is worth mentioning that, as a result of the high negative statistical drag that left 2018, this year the GDP would average a fall of around 1%.

In this scenario, the sectorial performance will be heterogeneous, with winners and losers. Among the first are tradable activities, that is, those that are traded internationally. The improvement in the real exchange rate encourages exports (despite the increase in withholdings) and import substitution. This will boost primary activities, extractive (mining and energy), industrial branches that export or compete against imports, local tourism and exportable services based on knowledge (IT, accounting, advertising, business, among others).

A separate paragraph deserves the agribusiness: thanks to better weather conditions and good international prices (from a historical perspective), it would recover from the harsh blow that caused the drought to the corn and soybean harvest. The improvement of the field will attract related activities: agricultural machinery, cargo transport, agrochemicals, and associated services. Even if the record harvest that the Government craves, the interior of the country and the treasury will benefit from the higher incomes of the producers.

Within these winners, there are specific niches that the Macri administration has been promoting since the beginning of its management. These include shale oil and shale gas (VacaMuerta), renewable energy and lithium mining.

Regrettably, Cambiemos’ ambitious infrastructure plan derailed in 2018. The strong fiscal adjustment and the financial problems of the national public sector (reflected in a country risk exceeding 800 basis points) led to a collapse of public works and the fall of various projects under the regime of Private Public Participation (PPP) due to lack of financing.

Likewise, no recovery is expected in those activities linked to domestic demand. In a process of adjustment of external and fiscal accounts, with a very contractive monetary policy (annual real interest rate higher than the digit), we expect anemia in consumption and contraction in investment.

Among the losing sectors of 2019 are the trade, the production of durable goods (except agricultural machinery and the automotive industry), the textile and clothing sector, the pharmaceutical industry and construction (with their related activities).

This last sector deserves a separate paragraph. A priori, the development of new ventures could benefit from the exchange rate jump: the cost of building in dollars was considerably reduced while the prices of real estate in hard currency hardly fell despite the height of the real estate activity. However, the cost of financing skyrocketed and the acquisition of real estate collapsed due to the sharp drop in wages in dollars and the collapse of mortgage loans. On the other hand, rents in dollars contracted, losing attractiveness for the real estate investor.

In the middle of these two opposite realities are diverse productive sectors that depend on the evolution of the internal market and external demand. These include regional economies, the automotive complex, the chemical industry and the rest of the food industry.

It should be noted that the performance of these activities will be heterogeneous at the level of companies. Those that have developed an export strategy can take better advantage of the situation. On the other hand, those that concentrate their sales in the domestic market will suffer from the anemia of domestic demand. This driver will affect the prospects of public services and most private services.

Last but not least, it should be noted that the sectorial performance would suffer if foreign exchange pressures reignite. The probability of this happening is not negligible: the country risk and the presidential elections are factors that undermine the stability of the exchange rate in 2019.

*Published in Clarín, January 6, 2019.-