In early July, Argentina hosted the Mercosur summit where trade negotiations with the EU were central to the agenda. But, of course, the current turmoil facing the Argentine economy could not be overlooked.
Full members of the Mercosur bloc include Argentina, Brazil, Paraguay and Uruguay – all nations that have had their fair share of economic instability. Currently, Argentina’s inflation is sitting above 100 percent and the value of the Argentine currency (the peso) is plummeting. Inflation is projected to average notably higher this year than in 2022.
In Q1, according to FocusEconomics, “inflation continued to spiral amid a plunging peso, while exports plunged, interest rates soared and the country was hit by a severe drought. Moving to Q2, higher inflation in April and three additional rate hikes on top of a tumbling peso paint a bleak picture.”
Over May, the country’s currency reserves continued to fall and Argentina faced a drastic shortage of US dollars – a major obstacle for international transactions.
“Unfortunately, this has affected the logistics operations in Argentina a lot,” said Dominik Keller, head of global development at freight forwarder Fracht Group. “Since the currency reserves of the country have reached the bottom due to various issues, the government has implemented stricter controls on money transfers – especially in the logistics sector – to abroad.
“These new regulations are very complex and difficult to understand/manage as they directly depend on the decisions of the finance ministry/authorities and the Argentinean government.”
”Many foreign investors have lost their confidence in Argentina and have postponed their investments.” – Dominik Keller, Fracht Group
He said that these difficulties massively affect Argentina’s role in global trade. Further still, “the projects that are currently taking place in the country are also affected by this new policy, especially due to the rising costs”.
Many operational costs are following the current rate of inflation, said Keller, which at around 114 percent places Argentina among the countries with the highest inflation rate globally.
“The more uncertainty exists, the worse the situation gets,” he continued. “The companies need to monitor their cashflow, the inflation is devaluing their savings. Many foreign investors have lost their confidence in Argentina and have postponed their investments.”
China solution
The potential solution for Argentina has come from China; it doubled the size of the currency-swap line to USD10 billion, while signing a deal to promote China’s belt and road initiative (BRI). Commercial banks in Argentina are now allowed to open deposit accounts in Chinese yuan.
Bloomberg reported that yuan transactions in the country’s currency market came to about USD285 million in the first 10 days of June – double the volume in the entire month of May – as companies look into paying for imports in the Chinese currency.
Keller was pessimistic about the use of the Chinese yuan, saying: “It could be a part of the solution, but it is not good enough. Argentina depends on the negotiations with the International Monetary Fund (IMF), and structural changes must be implemented; this will be a major challenge.
“Elections are scheduled for October this year and the incumbent president Fernandez has announced that he will not go for a second term – the depth of Argentina’s economic problems means that the upcoming elections are unpredictable. In any case, the winning party will have a very difficult job ahead.”
At the Mercosur summit, Argentina’s economy minister Sergio Massa – a presidential candidate – looked closer to home to relieve pressure on the country’s economy. He said that “in order to strengthen intra-Mercosur trade, it is essential to consolidate local currency agreements among our countries. Beyond the moment of crisis that Argentina is going through with the worst drought in history, the use of local currencies in bilateral trade relieves the pressure on the use of reserves and on the exchange rate issue.”
Naturally, those suggestions will do little to help the current situation.
Lithium triangle
Nevertheless, if Argentina can get the economic crisis under control, it could become a hotspot of future investment thanks to its location in the so-called lithium triangle – which along with Chile and Bolivia is home to some of the world’s largest lithium reserves.
The raw materials found in Latin America continue to attract attention from many governments around the world. The EU is hoping to have a piece of the pie and ratify a long-planned free-trade agreement with Mercosur, which would also cover Brazil’s huge reserves of nickel, graphite, manganese and rare-earth metals.
An agreement in principle between Mercosur countries Argentina, Brazil, Paraguay and Uruguay and the 27-member EU was reached in 2019 after two decades of negotiations. Since then, the EU proposed a ‘side letter’ to strengthen environmental commitments of the trade agreement, mainly in relation to the preservation of the Amazon and introducing penalties for nations that fail to comply with climate goals – a move that risks derailing the ratification process.
The Mercosur summit provided the platform for Argentina and Brazil to voice their reservations, with Brazil’s President Luiz Inacio Lula da Silva (Lula) commenting: “Strategic partners do not negotiate on the basis of distrust and the threat of sanctions.”
He added that, “we [Mercosur nations] are not interested in agreements that condemn us to forever be exporters of raw materials, mineral products and oil.” The sentiment was echoed by Argentine President Alberto Fernandez who said: “No one can condemn us to be suppliers of the raw materials that others industrialise and then sell to us at exorbitant prices.”
Lula said his government was preparing a counterproposal to take to Brussels, which hosted a summit of the EU and the Community of Latin American and Caribbean States (CELAC) on July 17 and 18. The contents of that proposal will become apparent in the coming weeks and months but it certainly seems as though the Latin American governments want to increase control over their commodities and favour producing high-value goods over exporting the raw materials.
”No one can condemn us to be suppliers of the raw materials that others industrialise and then sell to us at exorbitant prices.” – Alberto Fernandez, President, Argentina
Battery factory
Argentina, for its part, is already embarking on this agenda with the opening of its first plant for lithium batteries. Scheduled to begin operations in September using metal extracted locally by US company Livent Corp, the plant has been developed by Y-TEC, a unit of Argentine state oil firm YPF.
Argentina’s mining minister Fernanda Avila said she hoped it would be an example for future projects. “The development of the supply around mining activity is a priority for our government.”
As the world’s fourth-largest producer of lithium, one would expect investment interest should only increase. Whether the country can turn that interest into cash will depend on how and when its economic turmoil eases.
