ARGENTINA: Goodwill hunting

09/10/2010 | Vinod Sreeharsha

The Kirchners – the presidential spouses that have ruled Argentina since 2003 – are still governing in crisis mode, despite the recent debt swap and credit rating upgrade

 
The more things change throughout much of the developing world, the more they stay the same in Argentina. While its neighbour Brazil is now widely lauded as no longer being the country of the future but of the present, Argentina is still mired in the past.

Earlier this year, the country’s political opposition went for the jugular of its president Cristina Fernández de Kirchner and her husband Néstor Kirchner, also her predecessor and governing partner.

Enraged over Fernández de Kirchner’s use of an executive decree to transfer reserves from the country’s central bank to make debt payments and increase government spending, opposition leaders in Congress – where the Kirchners for the first time lacked a majority – threatened to overturn the orders. They only needed a simple majority vote to do so, but could not keep their numerous factions unified, and so failed to come up with the votes.

They also vowed to railroad the nomination of Kirchner-ally Mercedes Marcó del Pont to take over the central bank after its predecessor, Martín Redrado, was fired for not going along with Fernández de Kirchner’s wishes. The country was consumed by yet another political melodrama.

The opposition ended up failing to fulfil any of its promises. It has virtually no legislative accomplishments of which to speak. Marco del Pont took over the central bank and served out her term, which ended in September. (At the time that Emerging Markets went to press, she was expected to continue.) Her term was for the most part uneventful.

Argentina made its debt payments and still managed to accumulate a new record of $51 billion in reserves on September 16, according to government figures.

The government also completed its debt swap earlier this year with those bondholders that sat out the 2005 exchange. It has paid more than 90% of them, in its effort to settle accounts from the 2001 default.

SMALL STEP

This led to a minor improvement in ratings. Last month, S&P raised Argentina’s foreign and local currency ratings to B – five levels below investment grade. But that tepid market reaction is not what the government had hoped for. Argentina has the same rating as tiny Paraguay and Bolivia and is two ratings below neighbour Uruguay.

Rather than leveraging the minor boost in goodwill from the recent debt swap and rating upgrade, the Kirchners continue to govern in crisis mode. Fernández de Kirchner never tires of telling Argentines how grateful they should be to the Kirchners for steering the country out of its 2001 crisis. She often describes what her husband inherited in 2003 as a “hell”. There is a good deal of truth to this.

The Kirchners want credit for how far the country has come but continue to use economic measures meant for crises, such as price controls and export restrictions. They refuse to try out new approaches, such as long-term economic planning and establishing clear and predictable rules.

One example is next year’s budget, submitted to Congress last month. Fernández de Kirchner has allocated $7.5 billion for upcoming debt payments from central bank reserves again. Such a move suggests that Argentina remains in no hurry to tap international capital markets.

Alberto Bernal-Léon, head of research at Bulltick Capital Markets in Miami, says that the government is sending a clear message to investors: “We don’t care what you do. If you like us, fine. If not, whatever.”

Another sign of this apparent indifference to investors is the government’s decision in August to close the National Agency for Investment Development. It was headed by an internationally respected economist, Beatriz Nofal, one of the government’s few advocates for private investment.

Next year’s proposed budget also underestimates government expenditures, according to Argentine economist at Estudio Bein (and previously at the central bank) Marina Dal Poggetto. She tells Emerging Markets that, “this is a typical Kirchner pattern,” to underestimate costs in the budget Congress is required to approve, but follow that up with executive decrees that increase spending.

INFLATION NUMBERS

And once again, the government continues to underestimate inflation. It says it will be 9% next year – about a third of what the market expects. The Kirchners show no signs of fixing the widely discredited statistics agency.

It’s not just economists who question the Kirchners’ numbers, but also the provinces. Sante Fe governor Hermes Binner, who is considered a possible candidate to run against the Kirchners in the 2011 presidential elections, tells Emerging Markets that his province’s statistics agency uses the same methodology that the national Indec used prior to the Kirchners’ intervention.

He says that it is not only the private sector that questions the Kirchners, pointing out that “our statistics are official.” Binner says that Santa Fe gets calls each month from the other provinces as well as trade and labour unions, some Kirchner allies and businessmen, all wanting to know what the true rate of inflation is.

This is also why economists do not expect Argentina to pay off its Paris Club debt this year, which would require an Article IV review by the IMF. That would invariably audit the Kirchners’ records and statistics. Anibal Fernández, the president’s chief of staff, dismisses this, saying that the IMF was paid off because the government did not want it to have a hand in any of Argentina’s business.

Much of the opposition for its part can hardly claim to be advocates of fiscal discipline, says Dal Poggetto. In some cases, such as pension reform, it is attempting to outspend the government. But it continues to have trouble passing any of its proposals.

So the 2011 budget battle is expected to get ugly, says Dal Poggetto. “It is going be a long and noisy process.”

And once again, international investors and Argentines can expect more political melodrama in December, a month which curiously bears a disproportionate share of political conflicts.

Argentine political analyst Rosendo Fraga tells Emerging Markets that “Argentina continues to be characterized by institutional instability and political conflict,” in contrast with its neighbours Brazil and Chile.

The irony once again is that Argentina’s economic fundamentals remain solid. In addition to record reserves, the government forecasts 9% growth for 2010. This is in part due to a record soy harvest and boom in industrial production. And with the intent to use reserves to pay off next year’s debt payments, there is little talk of default here. Things look good for 2011.

Bernal-Léon says: “If people still doubt the Kirchners’ willingness to pay off the country’s debt, then they are missing the story.” He adds, “They are not as ideological as other presidents in the region. They will continue to pay debt. They understand that when Argentine presidents do not pay debt they are usually forced to resign.”

Other indicators suggest an improving economy. The University of Torcuato di Tella’s monthly Index of Consumer Confidence reported a 4.6% increase in August over July. It also showed a 12-month increase of 24%. And all sub-indicators increased: Argentines’ personal situation, intention to buy personal goods and property, and their expectations of the macroeconomy. All socioeconomic classes also saw increases.

Job expectations also appear to be improving. Manpower Argentina’s Survey of Employment Expectations for Q4 2010 showed that 22% of employers interviewed expected to increase the number of employees. Mining and construction reported the largest improvement and agriculture the lowest.

Yet Argentina’s growth remains highly dependent on commodity exports and domestic consumption. (One exception is in technology. Argentina’s budding entrepreneurs are creating a technology hub for Latin America in the country, and leading Silicon Valley firms routinely outsource much of their programming to these firms.)

Economically things are progressing well, but the political situation is complicated by the politicking ahead of the presidential elections next year, where the Kirchners are expected to focus on domestic issues.

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