How drought will impact Argentina's economy, banks, insurers

The severe drought that has afflicted Argentina will have a negative impact on the country's economy, according to Moody's.

Argentina is the third-biggest exporter of soybean and corn in the world and these commodities and their derivative products accounted for a third of total exports in 2017, said the ratings agency in a special report on the drought and its impacts.

The drought has been the worst in decades and Argentina's central bank recently estimated that soy and corn output would decline by 31% and 14%, respectively, compared to the 2017 harvest, according to the report.

Moody's estimates that the 2018 impact will be a 0.5% reduction in GDP.

The drought will also lead to lower federal tax revenue, which partly relies on farm export taxes, the agency said.

In another report on Wednesday, Moody's slashed its 2018 growth forecast for Argentina in half due to the severe economic and financial problems that the country has suffered in the past weeks. A currency crisis recently forced the government to announce spending cuts and seek financial support from the IMF.

When this week awarding Argentina a US$150mn loan to help small farmers manage climate risks, the World Bank said that during the past two decades about US$12bn-worth of crops have been lost because of extreme weather, including drought and flooding.

BANKING SECTOR EXPOSURE

Moody's does not expect a major negative impact on banks since their exposure to the agriculture sector is limited to 9% of total loans.

"While some farmers and agribusiness producers will have a harder time paying back their loans, we expect the impact on overall asset quality to be contained," said the agency.

INSURERS

The insurance sector should not be greatly affected by the drought, since most coverage sold to farmers is for hail damage, not droughts, said Moody's.

However, the smaller harvest will make it difficult for some agriculture clients to pay their insurance premiums or afford additional coverage, the agency added.

The government said in March it cannot subsidize agricultural insurance premiums, at least in the short term.