Will Argentina's impressive export growth continue? Two experts share their views.
(Latin America Advisor) - Question: Argentine exports, led by agriculture commodities, will grow 13 percent this year, perhaps surpassing $45 billion, Economy Minister Felisa Miceli told a conference earlier this month, adding that the country's trade surplus will exceed $11 billion. Is Argentina's export economy, long criticized for being under-developed, reaching its potential? What factors are shaping Argentine exports, and what's the outlook for the mid to long term?
Javier Tizado, President of Tubos Trans Electric in Argentina and former Argentine Secretary of Industry, Commerce, and Investment: World trade has had an important share in the notable growth of the global economy in the past four years. Key to this process has been the impressive development of China and India and their explosion into trade flows. In this context and in the framework of a domestic economy that operates with a sharply competitive exchange rate, Argentine exports have grown in this period at an average annual rate of 15 percent, energizing the economic recovery process of the country, whose gross domestic product has grown at an average annual rate of 9 percent since 2002. However, the total growth of exports, which reached 72 percent in those four years and to which prices (27 percent) contributed as much as volume (36 percent), is less than what was seen in Brazil and Uruguay, whose sales abroad grew 119 percent and 102 percent, respectively. Noteworthy during the period under analysis was the increase in the export of soy and its derivatives, which grew to $4.5 billion, and the strong growth of sales to China ($2.125 billion), which has become an important market for Argentine exports. The chances of maintaining the current surplus level of $11.0 billion appear difficult because of the decline in production of hydrocarbons, whose prices are fixed at levels clearly lower than international prices and have discouraged investment in the energy sector, exacerbating domestic consumption. As a result, it is believed that the contribution of the energy sector to the trade surplus, which is currently $6.0 billion, will disappear in 2008-2009. Nevertheless, the maintenance of an undervalued currency, with its effect of acutely competitive dollar costs in several sectors of production, has encouraged the sustained growth of manufactured exports, as much those of agricultural origin as those of industrial origin. Added to the continuance of good international prices for primary products, this will allow a continued increase in exports, which are estimated to total $50 billion in 2008, with a surplus of $6.0-7.0 billion.
Vladimir Werning, Vice President at J.P. Morgan Chase & Co.: Argentina's growth and the recovery of its export sector are an offspring of the marriage between the post-devaluation macro equilibrium and the pre-devaluation infrastructure investment. Conventional thinking still tends to place undue emphasis on the presumed support provided to Argentina's economy from favorable external conditions, when in reality cyclical external factors acted as a constraint on Argentina's export potential in 2005 (exports grew 16 percent—of which 1 percent reflected higher prices and 15 percent owed to growth in shipments). The drag then originated in Brazil's modest domestic demand growth and the normalization of agricultural prices relative to their 2004 peak. Fortunately, those external drags are being left behind and the potential for export growth has broadened. Unfortunately, actual export performance so far this year—a 12 percent rise in nominal exports, 8 percent due to price rises and 4 percent to shipment growth—is now being constrained by internal factors: tax disincentives are pushing down fuel shipments, export bans are doing the same with meat shipments, and less than ideal weather has limited the export potential of certain crops. Meanwhile, the administration's cheap peso policy favoring tradeable goods producers is providing more benefits to import substitution than to exports. This is a by-product of the simultaneous—but contradictory—policy objective of stimulating domestic demand through moderately expansionary fiscal and monetary stances. Consequently, shipments of industrial manufactures are rising at a 12 percent pace this year, practically unchanged from the 11 percent performance of last year. As long as domestic demand management fuels real GDP growth that doubles its potential rate, businessmen will not be motivated to deliver the qualitative export jump that the peso devaluation promised. Today, Argentine exporters are likely to be holding onto a lot of untapped potential: as a share of total world exports, Argentina's exports have fluctuated between 0.27 percent (in the stagnant 1980s) and 0.49 percent (in the peak of the 1990s boom), but this year they represent 0.40 percent of world exports, less than 0.44 percent prior to the peso's 2002 maxi-devaluation. That relative decline would be normal in the immediate aftermath of a balance of payments crisis, as the recovery of domestic demand and profitability leads goods producers to prioritize the supply of the local market. But after several years export performance should begin to move up in relative terms—as it did in Brazil. Today's high level of exports (relative to historical parameters) is a positive development in itself. But it is also a distraction from the more relevant fact, which is that the current global cycle is offering export opportunities which Argentina is not fully exploiting.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.