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Argentina: Challenges Ahead

After impressive growth last year, Argentina's GDP is slowing down this year.

Inter-American Dialogue 


Argentine President Cristina Fernández de Kirchner was sworn in Dec. 10 to her second term in office. In her inaugural address, Fernández listed improving the country's competitiveness among her administration's main goals. Fernández also urged lawmakers to pass legislation limiting foreign ownership of land and cracking down on tax evaders, which they did later in the month. Does Fernández have good plans to boost economic competitiveness and build on Argentina's economic gains? How much support will her economic agenda win among legislators? What are the biggest threats to Argentina's economy in the period ahead? 


Bret Rosen, Latin America sovereign-debt strategist at Standard Chartered: Argentina's economy grew at a rapid rate in 2011, but the outlook for 2012 is a bit murkier and we look for a substantial slowdown of economic activity in the year ahead. Loose fiscal and monetary policy contributed to strong economic performance in 2011; however, the recent announcements of reduced subsidies on utility bills for certain citizens and businesses suggest that the government realizes that its flexibility on the fiscal front is limited. Meanwhile, improving Argentina's economic competitiveness will require substantial reforms in President Kirchner's second term. Namely, the tariff regime for utilities and energy still remains distorted and the recent capital controls imposed make it very difficult for certain economic agents to source hard currency. Additionally, greater transparency of economic statistics is urgently needed, as inflation statistics are not viewed as credible. The president's economic agenda and 2012 budget should gain broad support from lawmakers, however, given that the majority of Congress is in the hands of allied parties. Indeed, the recent election gave President Kirchner a very broad mandate. The greatest threats to Argentina's economy in 2012 are: 1) any marked deterioration in the international environment, especially one that impacts Argentina's terms of trade; 2) worse than expected slowdown in Brazil; 3) growing tension between organized labor and the administration; 4) inflation that continues to run at above 20 percent per year; 5) issues pertaining to the foreign exchange market and growing concern that the peso needs to depreciate at a faster clip to restore competitiveness.


José Octavio Bordón, member of the Inter-American Dialogue and former ambassador of Argentina to the United States: The Argentine economy has grown at an 'Asian' rate since 2002. High demand and prices for agricultural products have played an important role, especially in the past few years. Cristina Fernández de Kirchner has been strengthened after being re-elected with 54 percent of the vote, maintaining a majority in the Senate and recovering the Chamber of Deputies. Nonetheless, doubts and worries remain. The financial crisis of 2008 showed that Argentina and the region were better prepared to withstand external shocks than in the past. It was also evident the country wasn't shielded: in one year, growth slowed and the ruling party lost its majority in Congress in 2009. The economy remains dynamic but it does not have the macroeconomic consistency of the past four years; including high inflation, revaluation of the local currency, weakening of the reserves and a loss of the fiscal surplus, which was one of the bases of the economic strategy begun by Minister Roberto Lavagna a decade ago. The level of public spending is difficult to maintain and the government is taking measures to reduce subsidies. The important energy surplus has been converted into a growing deficit (though there are important new hydrocarbon reserves that will mature in the medium term if the policies are correct). The president, in her inaugural message, referred to the need to systematically improve economic competitiveness. In March, it will be seen if this is merely a shift in language or if her government is developing a comprehensive strategy to maintain growth with inclusion, taking into account the domestic and global challenges of the past years. The 2013 congressional elections will be a good barometer for evaluating proposals and results. Argentine citizens are showing a high sensibility towards the realities of the day.


Orlando Ferreres, president of Orlando Ferreres and Asociados in Buenos Aires and former vice minister of economy of Argentina: The main challenge for 2012 is to increase the prices of utilities without causing an acceleration of inflation or recession. In this context, it is expected that GDP growth will slow in 2012 with the risk of acceleration in prices due to increased natural gas and electricity tariffs. In addition, Argentina's economy faces a somewhat less favorable international scenario this year. Slower growth of the Brazilian manufacturing sector along with lower commodity prices and the international crisis limits the growth of exports. The trade surplus and high real exchange rate were the main pillars of Argentina's trade policy. However, the international crisis and real currency appreciation tends to hurt overseas sales. On the other hand, poor energy regulations are causing a rapid increase in imports of fuels and electricity. So far, the government has taken no measures to improve the productivity of the economy or to charm foreign investors. In fact, restrictions on the foreign exchange market and on land ownership by foreigners rather tend to scare them. These facts, together with a continuous outflow of capital would put a considerable stress on the balance of payments in 2012 and probably will reduce economic growth as inflation will continue to be high.

 Daniel Artana, chief economist at FIEL in Buenos Aires: Argentina has lost competitiveness in recent years basically because of soaring labor costs that were not offset by increases in labor productivity (for example, unit labor costs in manufacturing are today higher than in the 1990s) and soaring public expenditures measured in U.S. dollars. The impact on firms is through a higher tax burden that became one of the highest in
South America. The government has been 'creative' to raise taxes that fall on firms and are less visible to the average voter. It is not clear yet how the federal government will address the competitiveness issue. Apparently, the government will adopt more protections on imports, more controls and will try to convince unions to moderate their wage demands. Additional import protections would be inefficient, more controls usually create more (not fewer) burdens on firms and moderation in wage demands also requires moderation on fiscal and monetary policy because any heterodox price-wage agreement needs a minimum consistency from macroeconomic policies to have a chance at success. As the government has a majority in both chambers of Congress, it can win approval for any legal change. Argentina's economy had a reasonable performance in the past because positive external conditions more than offset the negative impact of bad domestic policies. As the external outlook will be negative at the margin (weaker commodity prices, lower growth in Brazil), good economic policies are more urgent than in the past. It is uncertain if the government will be able to provide the necessary improvement in economic policies or if it will rely on positive news from abroad.


Julio Burdman, president of the Observatorio Electoral Latinoamericano and director of the School of International Relations at the University of Belgrano in Argentina: There is an adaptation of Kirchner's economic policy to changes in the global situation. The first 'Kirchnerismo,' in fact, was also a response to the international conditions of the day. Today, the government is taking advantage of its political capabilities-expressed by its large electoral triumph, majorities in both chambers of Congress, leadership of Peronism and high rates of popularity-to implement austerity policies that are necessary and unpleasant for some sectors. We can see this in the 2012 budget law, which includes powers of the state to renegotiate the Paris Club debt, the renovation of the economic emergency and the check tax and the extension of the fiscal pact by decree. It also introduced regulations for the retail purchase of dollars, announced the gradual removal of subsidies to public services or transfer to the capital's subway concession, among others. More active policy coordination includes the unification of all trade policy and creating a sub-secretary of competitiveness to 'unblock' current account problems. Politically, we can see that the government is attacking problems, which is positive. It doesn't have a single recipe: some of the measures are of austerity and others of expansion. This does not indicate that the government will undergo a radical shift. In general, the horizon for the medium term are measures that are aimed at bettering the state's funding sources for 2012 and assuming that the duration of the global deceleration is uncertain. If global growth is reactivated by 2013, these measures will serve. But if Europe crumbles and the crisis is prolonged, Argentina will probably need to think about more 'adjustments.'


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter


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