08 October 2008

Argentina's economy: what now?

Everybody's talking about the financial crisis, so I thought I could chip in with my two cents..., especially seeing how our own Argentine government continues to deny we'll face serious trouble. In fact, President Cristina Kirchner has devoted a lot of time to deride, with barely concealed glee, the proponents of globalized laissez-faire capitalism (we must acknowledge that "kicking them while they're down" never felt better) and to defend the Kirchnerist achievement of decoupling Argentina from international market shocks, which would be terrific — if it were true.

First of all, not to despair: we are, as Cristina says, better prepared than ever in recent history for the shock. The problem started outside our borders (we have different problems) and we'll just have to slow down and wait, hoping that they don't spill into our own economy. For example: we need money to pay our foreign debt next year (and it's a lot of money — more than we owed before Néstor Kirchner renegotiated it, because we actually exchanged debt for more debt), and it'll be difficult to get money from abroad or to refinance the debt once again, with interest rates being so high and everybody clutching desperately to their remaining assets; but we still have a fiscal surplus and a trade surplus.

The peso-dollar rate jumped a bit, too, and that will help the trade surplus. There's just one problem — we're dependent on imports of all kinds, so a higher exchange rate means inflation. And one more problem: the Brazilian real has devalued as well, only much more brutally, so Brazil will be able to sell cheaper stuff to us, they won't be able to buy as much from us, and they'll be much more competitive with respect to third parties. Brazil has a long-standing state policy of industrialization; we don't. Brazil can cope with lower or higher exchange rates; we can't.

Yet more problems: our trade surplus feeds our fiscal surplus, via retenciones (export taxes), especially on soybean products. The price of soybeans (as with other commodities) has taken a deep dive, so that means less revenue from exports. China buys most of our soybeans, but China, like all countries around the globe, will start buying less of everything. Less revenue from exports means less available money to (for example) cover the costs of subsidizing inefficient public services and utilities, and funding public works. The national government has already left the inner country to its own devices, delaying or altogether abandoning plans to build homes, schools and such (Minister De Vido lies, as usual); now it's Buenos Aires's turn. Natural gas, drinking water, domestic power, buses, trains, the subway — they'll go up and up, while construction (the engine of Argentina's economic recovery since 2002) will come to a halt. Tourism and foreign investment will suffer as well; people in the US and Europe simply won't have money to spend on Third World countries like Argentina.

There's a political problem as well, because 2009 is a legislative election year, and the Kirchners doubtless had plans to pour money into cheap, quickly-unveiled public works all over the country, as Peronists are fond of doing; that just won't be possible in this scenario. Least of all if the opposition gets to revise the budget, which contains certain provisions deserving a "best fiction" award, plus the infamous "superpowers" that let the Chief of Cabinet move around huge chapters of the budget under the excuse of an economic emergency that supposedly ended years ago.

All in all, it looks like the next months will bring a "plateau" in Argentina's so far swift growth, and the Kirchnerist government will have to deal, for the first time ever, with a tight budget. It's easy to play when you have cards, as we say over here. The feeling of opportunities for true growth, for industrialization, for true redistribution of wealth, wasted and lost and now unlikely to return for a few years, is almost unbearable.


  1. I guess Cristina confused Efecto Jazz with Efecto Mariposa ... But how the president could be so naïve as to imagine that a country that is so reliant on exports and tourism would be unaffected by a global economic recession is beyond comprehension.

    One thing that you may not be aware of is the impending presidential decree that will impose a visa/reciprocity fee on all tourists from nations that charge Argentines such a fee for entry (there are 116 countries that fall into this category).

    However most of the tourists that will be affected are U.S., Canadian, and Australian citizens. The Casa Rosada has denied that this is a retaliatory measure, merely another avenue to enhance revenue (estimated at some 40 million pesos per year - U.S. citizens will have to pay US$131).

    If the government really believes that tourist numbers will be unaffected given the global economic problems (let alone that tourism is a discretionary activity), I don't know what to think. I believe it plays into the general notion among many Argentines that tourists from North America and Europe are rich, and unaffected by economic conditions.

    Looking back to my comments on this blog at the beginning of April this year and last, even a simpleton like me managed to predict some of the likely problems that have now come to pass, namely:
    A weakening of the peso due to domestic inflation;
    A weakening in commodity prices resulting in lowered retenciones;
    Poor precipitation in north this last winter causing a drastic reduction in the wheat crop, and lowered beef production.

    Despite the government's recent announcements of finally addressing the Paris Club (and other outstanding bondholders), Argentina will find it virtually impossible to access the credit markets in the coming months when it needs credit the most. Only the country of last resort (Venezuela) has been prepared to loan money at usurious interest rates. And given the recent decrease in the price of oil and Venezuela's crumbling economy, even Chavez may be unable to bail Argentina out. Not to mention that Argentina's country risk is currently at 1268 - remember back in September 2006 when you blogged about how it had fallen to a record low of 306?

    As you have correctly pointed out, perhaps the elephant in the room is Brazil. Brazil is a major trade partner with Argentina, and a competitor. The devaluation of the real makes Brazil much more competitive in the global export market.

    Brazilians also contribute to Argentine tourism in a major way - in 2007 15.6% of arrivals at EZE were from Brazil. Given the turmoil in the Brazilian economy, and the increasing peso/real spread, tourism from Brazil is likely to plummet.

    There is obviously considerable pressure from the UIA and other unions for Argentina to devalue, so as to make exports more competitive (and keeping production and employment at sustainable levels). This is of course countered by the inflationary effects that devaluation would have on the economy given the import needs of Argentina.

    The mid-term elections next year would also make devaluation in the near term an unlikely scenario.

    The administration has been chastised for is its spending habits which will now have to curtailed. But how will they be able to win the elections without their usual largesse in rewarding favored constituencies.

    Lastly, I was astounded at the government proposal that citizens should repatriate their (undeclared) income from sources outside Argentina, and that they would get "favored" tax treatment from AFIP if they invested a portion of it domestically. Just another name for money laundering.


  2. Can't imagine the new entrance fee will be helping tourism too much either.


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