Argentina | Analysis of Argentina's structural Current Account and its determinants

Summary

The Current Account of the BoP includes the trade balance and the net dividend and interest payments abroad. A current account deficit implies that the country is a net debtor to the rest of the world. An econometric model is used to estimate the structural Current Account balance of Argentina and its long-term determinants

Key points

• Key points:
• The Argentine Current Account exhibits a medium-term structural deficit estimated in a range between 2.1 and 2.8% of GDP. Its main determinants are private debt flows, the fiscal balance and trade factors (terms of trade and economic openness).
• Foreign direct investment has usually been insufficient to finance Current Account deficits, which had to be covered mainly with public and private indebtedness.
• When capital controls and FX restrictions are implemented, the structural current account balance improves 1% of GDP. This result is not only due to restrictions on imports and dividend remittances, but also because capital controls deter foreign inflows and investments, which in turn limit the financing sources of potential deficits.
• The long-term elasticity of the Current Account balance (as a percentage of the GDP) to real exchange rate variations is estimated to be 1.6. For example, a real FX depreciation of 10% would increase a Current Account surplus of 1% of GDP to 1.16% of GDP.
• It is found that the main factor behind the prevailing exchange rate misalignment in Argentina does not lie in the structural determinants of the current account balance, but rather in the financial account of the balance of payments. The fiscal-monetary imbalance, scarce capital inflows and the demand of foreign assets for saving purposes would explain the current exchange rate pressures.

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