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Argentina has 'good chance' to fall into technical recession, says economist

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Argentina has 'good chance' to fall into technical recession, says economist

A technical recession has a "good chance" to materialize in Argentina this year as the country faces steep interest rates, depressed wages and political uncertainty, the Financial Times reported, citing BTG Pactual economist Andrés Borenstein.

The Banco Central de la República Argentina attempted to stem a slump in the peso in early May by hiking the benchmark interest rate to a multiyear high of 40%. The depreciation in the local currency was driven by capital outflows amid still-high inflation and the country's large fiscal and current account deficits.

Last week, Argentina reached a three-year, $50 billion agreement with the International Monetary Fund to address its fiscal concerns. Aside from restoring the primary fiscal balance by 2020 and further tackling inflation, the IMF is pushing for increased central bank independence in a bid to prevent repeats of past instances where governments leaned on the bank to print money to plug fiscal holes.

According to Borenstein, high interest rates would discourage lenders from lending to companies as banks would instead prefer investing in short-term debt instruments offered by the central bank. The IMF deal means that high interest rates would remain, a situation that further debilitates business conditions in the country, the FT said.

Still, Borenstein expects Argentina to post overall growth of 1.3% this year.

Research company Capital Economics earlier said that it expects Argentina's GDP to contract 0.5% in 2018, even as the country had pursued talks with the IMF. "The news that Argentina has started talks with the IMF over a full-blown bailout has masked the fact that deal or no deal the economy is likely to fall into recession this year," Capital Economics said.