Executive summary

The economy is in recession. A strategy of reducing the large fiscal deficit only gradually, the reliance on its foreign financing and high interest rates due to tight monetary policy opened up significant vulnerabilities (Figure A). In April 2018, markets reacted with a reversal of capital inflows, exacerbating a slowdown of currency inflows due to a record drought. The Argentinian peso depreciated and market sentiment deteriorated abruptly, generating severe liquidity challenges. Confidence and domestic demand declined markedly, putting an end to seven quarters of growth. As public debt is largely denominated in foreign currency, the peso depreciation raised it by about 30% of GDP, pushing it above levels observed in other emerging market economies.