Argentina’s economy has changed radically over the last nine years. According to official statistics, the economic growth since the end of the crisis in 2002 — from the year 2003 through 2010 — reached an impressive rate of more than 7.5 percent year over year, a rate that was also one of the most interesting among emerging markets during that time. Clearly, the country went from living a period of total chaos (readers may recall the image of a Korean store owner crying as a mob looted his downtown Buenos Aires shop or those of desperate account holders gathered outside banks, trying to get their money out) to enjoy an economy functioning at a pace consistent with full employment.
As readers who have had the pleasure of visiting Argentina recently know, the situation today is starkly different compared to a decade ago. Looking just at Buenos Aires, the shopping centers of the Calle Florida are bustling and the restaurants of Puerto Madero are packed with tourists and business people. Flights are full, and the Friday afternoon traffic from downtown to the airport is, frankly, ridiculous. These are all signs of great economic energy.
The economic success of Argentina since 2003 is tied to a series of endogenous and exogenous factors. On the endogenous side, it is important to recognize the tenacity of the private sector and politicians to overcome the social chaos of 2001 and 2002. Adopting emergency social measures and deciding to impose a tax on exports enabled the government of Eduardo Duhalde to stabilize the country’s economic and social situation in 2002-2003. The administration of Nestor Kirchner was able to maintain stability by implementing a sufficiently responsible fiscal policy, one that helped Argentina avoid a total collapse amid hyperinflation.
On the external side, it is quite clear that Argentina is lucky to abut a Brazil that was starting to grow (economically speaking) as well as to be one of the world’s most competitive countries in agribusiness. This turned Argentina into one of the biggest beneficiaries of China’s economic boom. High commodity prices and dramatically bigger harvests have enabled Argentina to increase the value of its exports from $25 billion in 2002 to an estimated $83 billion in 2011.
Now, as my father would say, “it is a sin to tempt fate.” The economic model adopted earlier has brought about great improvements in social welfare. But the model is not sustainable over time. Here’s the main reason. It is impossible for Argentina’s central bank to continue to intervene the markets with a “negative interest rate” policy stance. According to a consensus of private estimates on the current level of inflation, prices are rising by an annual rate of 25 percent, year over year, while the BADLAR rate (on bonds issued by the central bank) is low, at 11.3 percent (the average in June). Clearly, if saving implies that every day you have fewer resources, there’s no other option but to consume. But like everything in life, “nothing comes for free,” and this strategy of promoting growth to the point of monetary delusion will eventually collapse.
Today, Argentina can choose to make difficult decisions in order to return to a strategy of sustainable growth. It needs to restore the credibility of the central bank and of monetary policy. It needs to encourage investment at the expense of consumption, even though political leaders will face a backlash. Investors need to be able to have some trust in the statistics reported by the government. As some of my clients have commented, “If we cannot believe the official data on inflation, how can we have confidence in the future business environment?”
Whoever wins the next election faces an historic challenge. Build on what has already been built to ensure the future of the country’s children. Today you can. Before you could not.
Alberto J. Bernal-León is head of research at Bulltick Capital Markets. Follow him on Twitter
About the Author: Alberto J. Bernal-León is head of research at Bulltick Capital Markets. Follow him on Twitter @AlbertoBernalLe.