Outlook 2011: Argentina: The Boom Goes On

Argentina’s President Cristina Fernández de Kirchner and her son, Máximo (L), escort the coffin of her husband, former Argentine President Néstor Kirchner, after his state funeral on October 29.

In economics, the next year promises continued expansion. But politically, all bets are off after the unexpected death of the country’s political heir-apparent, former President Néstor Kirchner.

BUENOS AIRES — In 50 years of selling cars, Alberto Príncipe has gone through lean times and flush times in Argentina, notorious for its volatile economy.
The present is definitely an era of affluence. “This is one of the best years ever,” Príncipe said at his Hyundai dealership in the capital. New vehicle sales surged 40 percent in 2010 from a year earlier, spurred on by earnings from the robust agribusiness sector and higher manufacturing activity.
Across the country, restaurants and shopping malls are bustling with customers and new apartment buildings are rising in Buenos Aires and other cities.
“It is as if people all have a bottomless piggy bank,” said Francisco Dos Reis, whose company manufactures parts for the printing industry. “They can open [them] up to go out and shop.”
Thriving consumer spending is underscored by the economic forecasts. Financial analysts say the gross domestic product will expand by 7 percent this year and another 5 percent in 2011, extending a period of robust growth that began in 2003. But like Príncipe, Argentines have seen this movie before and wonder how it will end since past booms have ended in spectacular busts, most recently in 2001-2002.
“Growth will be sustainable if there are no big political errors,” Príncipe said. “But political errors are common in Argentina.”
The business sector insists that sustaining the economic growth depends, in large part, on the government moving away from partisan politics to create a national consensus for economic policies, a strategy that has helped prolong growth cycles in Brazil, Chile and Peru.
However, Argentine politics took an unexpected turn in late October with the sudden death of former President Néstor Kirchner of a heart attack.
His widow, current President Cristina Fernández de Kirchner, had expected to turn the country’s top office back over to her husband, who was considered a front-runner in the October 2011 contest. Kirchner pulled the country out from its worst crisis of modern times — one that included the largest sovereign debt default in history ­— by renegotiating the foreign debt, building up the country’s foreign currency reserves and boosting economic growth.
Under Kirchner, who served as president from May 2003 to December 2007, and his wife, who took office after him, the unemployment rate has fallen from a high of almost 22 percent in 2003 to its current 8 percent.
But the business climate remains unpredictable. Some sectors have soured on the government because of the increase in state intervention in the economy, including price controls, tax hikes on exports for farmers, inconsistency on regulations and taking control of private pension funds.
At the same time, union pressure for wage increases and other demands are on the rise. Under Fernández, the government has taken over private companies and her government now plans to break up the private media groups and give workers corporate profit sharing.
International and national investors have cut investment in response to the uncertainty. Argentina, which was once largely energy independent, is now channeling its oil to domestic demand instead of exports and is stepping up imports of natural gas to fuel its industry.
The boom economy has sparked concerns among some economists, who have suggested Argentine authorities should try to moderate consumption to put a brake on inflation and keep the economy from overheating.
But as presidents, both Kirchner and Fernández have focused on economic growth. Both also resisted any suggestions from the International Monetary Fund.
“Ciao IMF – we don’t want your recommendations,” Economy Minister Amado Boudou said in October during an event at the Museum of Debt. President Fernández has refused to allow the IMF to mediate a settlement of $6.7 billion in defaulted debt owed to the Paris Club. The group of wealthy nations in the Paris Club is demanding IMF oversight as a prerequisite oforthe settlement.
The growth strategy has benefited the government itself. High job creation and consumer spending have boosted tax revenue.
“The government has the money to pay the bills without borrowing,” said Federico Thomsen, an independent economic and political consultant in Buenos Aires.
During the 1990s, the government had to finance its deficit by borrowing.  The current drawback is inflation, which is expected to accelerate to an annual 30 percent rate in 2011 from 25 percent in 2010.
Kirchner’s death on Oct. 27 has complicated the situation for his widow. She lost her chief advisor. Her husband was an accomplished politician who was skilled at maintaining party loyalties and keeping opponents at bay.  Now she is planning to run for re-election.`
“Strong growth is an election winner, even if inflation is high,” said Thomsen, who is the head of E.F. Thomsen. Inflation is further spurring more consumer spending as it erodes savings power, he added.
But business costs are rising, as are wage demands. “Activity is up, that’s true,” said Dos Reis, the printing parts manufacturer. “But inflation is narrowing profits.”
Taking inflation into account, the peso is equal to $1.20, a far cry from the nearly four pesos to $1 exchange rate in 2002 and 2003, when exports started surging. The peso is expected to be trading on par with the dollar by the end of 2011 and this will eat into export revenue, said Eric Ritondale, an economist at Econviews in Buenos Aires.
Many executives want the next presidential election to bring a business-friendly government. But the opposition has failed to put aside differences to unite behind one candidate. A year after winning control of both houses of Congress, the opposition has voted only one bill into law, an increase in public pensions that Fernández immediately vetoed.
While new candidates more to the liking of the business sector are emerging in the president’s own Peronist Party, another rising Peronist heavyweight is the powerful union-leader-turned-politician Hugo Moyano.
The death of Néstor Kirchner has complicated the election outlook but is unlikely to alter economic policies in the short run.
“Most of the economic indicators are deteriorating, and we are accumulating problems,”  Thomsen said. But he predicted that “the government won’t tackle the problems before the election.”