Ask an Argentine economist these days where the South
American economy is heading, and most will tell you it will
probably blunder through.
I see no explosion on the horizon but a muddling
through economically, says Mario Brodersohn. This is a
country where inflation is five times the international
average, unemployment is in double digits, investment levels
are among the lowest in the region, the national account
statistics are regarded as a joke if not a fraud
and capital flight has been hovering around $20 billion a year
for the past two years.
The government admits to a shortfall of close to $1 billion
in its debt obligations for 2009, the primary fiscal surplus
has collapsed to 1% of GDP from 3% in 2008, and the country
currently lacks access to international capital markets.
Yet the capital is trickling back in, the currency is stable
and sovereign bonds have staged a rally.
The feel-good factors
Why are markets regaining confidence? The main reason is
that Argentina has had it worse and not so long ago. The
collapse of the convertibility regime, the banking freeze and
the enormous debt default that followed Argentinas 2001
crisis did not take place during a worldwide slump one
that today provides a range of scapegoats and some sense of
shared misfortune. Moreover, there are signs the government may
move however tentatively towards normalizing
relations with international creditors.
As a result, more and more investors are downplaying
Argentine sovereign risk and assessing the country on mainly
There are concrete grounds for optimism, too.
Argentinas foreign exchange reserves, at around $46
billion, are plentiful, with an estimated $2028 billion
in disposable reserves. And the central bank, under its
president Martin Redrado, has kept the exchange rate both
steady and competitive.
Despite the adverse local conditions that have marked the
last 18 months the worst drought in a century, volatile
prices, and, above all, a continuing brawl between the
government and the agricultural sector Argentinas
year-on-year trade surplus has jumped by around a third.
To cap it all, local economists say, the banking system is
in good shape, with significant amounts of liquidity in both
pesos and dollars.
Not so fast
Yet while largely spared the full brunt of the global
recession, Argentina has not escaped unscathed. By the end of
last year, output had begun to shrink, after more than five
years of roughly 8% GDP growth.
The consensus view among economists is that the economy will
contract by between 1% and 2.5% this year with all that
implies for tax collection. Next year doesnt look
much better, says former economy minister Roberto
Argentinas borrowing requirements rose to $10.73
billion this year from $5.9 billion in 2008 as the global
financial crisis choked demand for commodity exports, according
to a report by Credit Suisse. The nations borrowing needs
will reach $8.24 billion in 2010.
The outlook for Argentinas fiscal accounts is
opaque, at best. The official figures, as economist Miguel
Kiguel points out, are hard to believe, while the
governments likely approach to public spending cuts
remains a mystery.
To reduce its financing needs, the government has moved to
swap some of its debt as part of a plan to replace
inflation-linked notes, while extending maturities and reducing
its financing needs to lower the chances of a second default.
But more urgently, Argentina needs to reach an agreement with
the holders of debt not tendered in a 2005 restructuring and
resolve doubts about inflation reporting.
The new economy minister, Amado Boudou, seems to have come
closer to making progress than any of his predecessors
after suggesting the country was prepared to start talks with
the IMF, which would pave the way for renewed international
capital market access.
The difficulty lies largely in the politics
particularly in the role of former president Nestor Kirchner
and his wife Cristina Fernandez, the incumbent president.
Kirchner who is widely viewed as the power behind the
throne has made no secret of his disdain for the IMF,
though he knows he must come to terms with the Fund if there is
to be any rapprochement with markets (and this would also
include paying the roughly $8 billion owed to the Paris
Yet the prospect for normalizing relations with global
markets seems a long way off. Kirchners attitude towards
the bond holdouts has proved even more inflexible: three
successive economy ministers have been censured for attempts to
create the space for negotiations on the issue.
Restoring credibility to the national statistics-gathering
organization Indec must be a first step towards normalizing
economic affairs. A 2007 scandal, reportedly understated, still
looms large. Yet if inflation has been underestimated, the
government may have ended up pocketing billions on payments to
those holding bonds indexed to inflation.
While inflation is declining in many Latin American
countries as the global economic crisis continues to take its
toll, prices in Argentina are on the rise. Moreover,
expectations for high inflation are ingrained in the economy.
Indec reported that Argentine inflation was a
higher-than-expected 0.8% in August, raising expectations the
government may bring price data closer to private
Such hopes were raised in July when Boudou launched a
programme to examine Indecs workings a move widely
interpreted as a commitment to bring the statistics
agencys numbers more in line with private-sector
estimates. But recent inflation reports have failed to calm
fears among the private sector, whose estimates of actual
inflation are two or three times higher.
The problem is that by publicly acknowledging past inflation
reporting errors, the courts could be avalanched by legal
challenges. About a third of Argentinas debt load is made
up of so-called CER paper that pays according to consumer price
Until meaningful progress is made, official statistics will
at best continue to be viewed with scepticism. Yet with
Argentina in another presidential election cycle one
which Kirchner wants to win few expect such conundrums
to be resolved any time soon.