CHALLENGING MARKET CONDITIONS

With high levels of debt and low investment the economic picture looks problematic, with construction seeing limited or even negative growth, writes Scott Hazelton

Argentina’s economic activity in the remainder of 2023 and into 2024 is constrained by domestic challenges – it has a wide fiscal deficit and external deficit with high inflation, an unstable currency susceptible to international contagion, and growing debt. The economy will likely shrink in the last quarter, while full-year 2023 will show a 2.0% decline.

Fiscal and monetary expansionary policies will put pressure on prices in 2024. Argentina’s government reached an agreement with the International Monetary Fund (IMF) to reschedule its IMF borrowings using a ten-year Extended Fund Facility worth $44.5 billion.

The program will not demand deep economic adjustment, but the gradual approach, intended to increase the likelihood of compliance, will likely keep the investment risk premium high. Financial uncertainty has increased. The Central Bank of Argentina has increased the monetary policy rate to 133% (from 118% in August 2023). Accounting for the inflation rate, the monetary policy rate is in negative territory, making savings in Argentine pesos unattractive. Tight capital controls and increasing taxes make the country even more unattractive for foreign direct investment. The complicated exchange rate system, inflation, and tax policies erode incentives to increase production, as the losses are not fully compensated by Argentina’s main exporting commodities prices.

The lack of confidence and economic management uncertainties will continue to exert downward pressure in fixed investment into 2024. The forecast for 2023 in gross fixed investment is supported by the lower cost of capital as a result of the lax monetary policy stance. However, policy uncertainty and the risk of a higher tax burden will discourage investment. The success or failure to implement the policy changes by the administration of Javier Milei will determine the level of investment in 2024 and beyond.

The outlook for industrial production is weak; external demand for manufactured products of agriculture origin is expected to subside as monetary tightening cools economic growth in Argentina’s main trading partners. Higher domestic-currency prices for imported goods, higher prices for intermediate inputs from abroad, and wage adjustments will combine to cause significant damage to the already ailing industrial sector. Investment should remain depressed as investors delay projects and curtail spending plans given the severe uncertainties.

Construction sector to struggle

The outlook for Argentine construction is negative. Real total construction spending in Argentina grew 6.0% in 2022. However, construction spending is expected to decline by 0.5% in 2023 with an accelerated decline of 5.0% in 2024. While residential construction grew 3.8% in 2022, the sector is expected to decline by 2.5% in 2023 and fall steeply by 9.9% in 2024.

Nonresidential structures spending should eke out a 0.4% rise in 2023 before falling 4.6% in 2024, with institutional structures performing most strongly in both years. Infrastructure construction spending is on track for just 0.5% growth in 2023 before, it too, declines in 2024 by 2.3. Water and sewer construction will be the growth leader with growth in both years. Construction spending will remain low, even for the long run. We expect just 0.1% compound annual growth (CAGR) between 2022 and 2027, and in the longer run, growth will improve to just a 2.5% compound annual rate between 2027 and 2032. Institutional structures are expected to feature the highest average growth over the next decade.

Argentina’s housing market is statistically improving yet remains weak. High interest rates, rapid inflation, tight credit conditions and poor consumer sentiment conspire against new mortgages. The poor job market, with the unemployment rate expected to surpass 11% in 2024, limits household formation to only about 100,000 per year, and few of these can afford a new home.

Nonresidential structures are also struggling for growth. The near-term problem stems primarily from the office segment, although all structure types are well off their pace. The office segment does improve in 2024 but, as with most economies, hybrid work limits potential. Commercial construction fares similarly with a tepid outlook. With the ending of Covidrelated constraints, consumer spending on goods, and especially services, has improved. Lodging is a primary beneficiary, as is retail space; Argentina has been slower to adopt e-commerce than other markets. Warehousing and logistics continue to offer potential, but they were least affected by lockdowns. Argentina sees the reverse of retail in this segment. Weak trade conditions limit export potential while the poor economy limits import potential, warehousing demand suffers.

Source: S&P Global Market Intelligence

Source: S&P Global Market Intelligence

Weak consumer confidence

The industrial construction sector had a strong 2022, but faces challenges over the medium term. Domestic demand will be challenged by weak consumer confidence and the restrictions of IMF loan parameters. Additionally, after 2022, most consumer spending growth will come from services, not goods.

The country continues to lose share to other Latin American markets given its investment climate and currency exchange issues. There is not a single major industry offering any construction growth in the near or medium terms, although in the longer run some opportunities can be found in food processing and transportation equipment.

Even the usually resilient infrastructure segment faces challenges. There was a surge in 2022, but that was due to one-time spending on major energy projects. Not only has that dissipated, but the base effect of retreating from that surge will create a contraction. With IMF limitations and weak demand, transportation infrastructure will not be able to pick up any slack. The best outcomes will come from water and sewer construction, which is necessary for public health, but even here, growth will be in the mid-single digits. iC