BY LATIN AMERICA ADVISOR
The government of Argentine President Cristina Fernandez last week announced a $3.9 billion economic stimulus package that would include low-cost loans for automakers, farmers and other exporters. How will the stimulus package affect Argentina's economy? What else should the government do in order to avoid a currency devaluation or debt default?
José Octavio Bordón, member of the Inter-American Dialogue and the former Ambassador of Argentina to the United States: Although late in coming, President Fernandez's economic program is a positive signal of realism in contrast to the risk of believing that we were immune from the global financial crisis. Some measures are seen as rigid and outdated, but in general they are a step in the right direction. The doubts about the program are whether the volume is sufficient to confront the magnitude of the problem, and if management by the government will overcome the inefficiencies and isolation it has shown lately. The Central Bank predicts a drop in GDP growth from 8 percent in 2008 to 3 percent in 2009 (private estimates suggest a lower level), and a reduction in the trade surplus and international reserves, which have grown at a sustained rate during the last six years. Although a good dialogue exists between the Ministry of Labor and businesses and workers, we are already starting to see the first problems and conflicts over job losses. Argentina in 2009 has significant debt maturities and limited access to external financing. However, with the means available to the government, it should be in a condition to distance itself from any risk of default. The difficulties will be in the real economy, with the international recession, an election year in Argentina and the deteriorated image of the administration. As a result, the government should maintain fiscal responsibility and improve the quality of dialogue with society, the opposition, agents of production and foreign governments. It should understand that moments of crisis demand imagination and at the same time predictability. Unlimited discretion is the biggest shortcut to failure.
Erich Arispe, Associate Director in the Sovereign Group at Fitch Ratings: The stimulus package is likely to have little success in reversing the economic slowdown underway in Argentina. External factors such as a global recession and the collapse of commodity prices combined with inherent weaknesses of the 'Kirchner model' and an inadequate policy response by the current administration could drag growth below 2 percent in 2009. Given deteriorating consumer confidence and low private investment due to the government's interventionist policies, fiscal stimulus will be less successful than in the past in boosting growth. Moreover, a marked fiscal expansion in recent years and the government's burdensome debt service, estimated at nearly 7 percent of GDP in 2009, leave little room for counter-cyclical policies. The nationalization of private pension funds and the possible expropriation of Aerolineas Argentinas have further increased policy uncertainty in the country. The government's sizeable funding needs will likely crowd out the private sector. In an effort to stem deposit loss and prevent a faster 'flight to the dollar,' domestic interest rates have increased significantly in 2008, compounding the effect of the global liquidity crunch in the domestic credit market. Less interference with market mechanisms, greater transparency in official data, fiscal restraint and a successful solution to the 'bond holdouts' situation could improve market sentiment for Argentina and open international financing sources. Nevertheless, short-term political calculations in the run-up to the 2009 legislative elections are likely to prevail and constrain the country's growth prospects.
Rosendo Fraga, Director of the Centro de Estudios Union para la Nueva Mayoria: President Cristina Kirchner has sent an economic stimulus plan to Congress whose objective is to prevent the consequences of the global crisis from accentuating a recession in Argentina and an increase in unemployment. The measures have, as a point of reference, the plan previously announced by French President Nicolas Sarkozy, which has a different focus than that of the US and has been criticized by Germany. It is aimed at boosting consumption, giving credit for the purchase of automobiles and electrical appliances. It is worth noting that the unions from these sectors-automobile and metalworking-have seen an increase in layoffs and worker suspensions. The plan includes measures to promote job creation by decreasing taxes on new posts in small and medium enterprises. There are also slight reductions in taxes (5 percent) on certain agricultural exports such as wheat. Added to these measures is a public works plan, which was previously announced. Up until this point, we're talking about measures that could be termed 'classic' for avoiding a recession. But the problem is that, at the same time, they're adopting measures like the privatization of the pension funds, which has generated strong economic uncertainty about Argentina, both within the country and outside of it. That has raised doubts about the efficacy of the plan, given that the flight of capital from Argentina continues. The most controversial part, and that which has received most criticism, is the 'laundering' of capital, which permits the entrance of money into the country without requiring a declaration of where it comes from. This initiative takes place in a moment when it is clear that Mexican drug cartels have begun to operate in Argentina. In all, the economic stimulus plan consists of reasonable measures, except for laundering, but it will be hard for it to succeed, given that today insurance against a default by Argentina is more expensive than that for Venezuela and Ecuador.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.