Back to the Future for Argentina's Economy
Argentina has not been short of economic crises during the past decades. All of them came through default on the debt, inflation, or both at the same time. But the country is now enjoying the benefits of high prices for the commodities it exports – it shows twin surpluses and US$50bn in reserves at the Central Bank. This has led many to believe the country is immune to an international crisis… though probably not one of its own making.
Despite the strength of some fundamentals, the country is experiencing a capital outflow with the Central Bank losing reserves, a falling demand for money and an increase in the demand for dollars assets.
Price inflation seems to be running out of control and debt concerns are present again only three years after the country went through the largest debt restructuring in its history. Price and debt are also related through the new bonds Argentina issued after the default. They are adjusted to a price index, but one that ultimately relies on the consumer price index (CPI) and the government has found no better way to deal with increasing inflation than cheating on the index. No wonder the country risk has been going up since February 2007, the time when it started to become evident that the government was tampering with the statistical process and removing independent officials at the statistical agency.
Without an anti-inflationary policy, neither the government nor the media or analysts, for that matter, is paying attention to monetary policy. After the deep devaluation in 2002, the Central Bank was able to increase the supply of money in reply to an increased demand. But that demand was not born out of a sudden love of Argentines for their currency, but from the lack of local exchange media to facilitate exchanges at a new level of prices after the devaluation.
The economy began to recover rapidly and the Central Bank continued to increase M2 at rates between 25-30% a year, even after the economy reached full capacity and went beyond the peak before the collapse. Inflationary pressures became immediately evident, particularly at salary negotiations between business and unions. With real price increases around 20%, interest rates become clearly negative. No wonder money demand is falling, showing twin surpluses, while Central Bank reserves are not enough in a country such as Argentina, with a deep inflationary and default memory.
After three years of a debt rescheduling that turned Argentina into an outcast of the international financial community, public debt is larger than when it sparked the crisis in 2001. During the last year of the de la Rúa’s government, foreign debt was 54% of GDP (US$144.2bn) and today it is over 56% of GDP (US$144.7bn). Why is today’s debt a larger percentage of GDP than in 2001, considering the economy has been growing at an average rate of 8% during the last years? The answer lies in the deep devaluation that reduced GDP in dollars, a figure that it is now only recovering in dollar terms. And if we also include the amount of debt due to holdouts, the number goes to US$170bn, 67% of GDP.
Besides, there is a growing concern regarding future financial needs. Those of the coming years led the last minister to consider a voluntary swap, but the country’s defaulting past does not make things easy. Among others, the government wanted to reschedule the so called ‘préstamos garantizados’ the banks received during the 2001 bank run, but now Judge Griesa in New York has embargoed an account with a still undetermined number of global bonds, which act as a collateral for the préstamos garantizados, creating a difficult problem for such an exchange. The new minister, following an already traditional Kirchner’s administration line, is relying more heavily on Chávez from Venezuela.
As Figure 1 shows, this year the government needs to cancel or renew US$8.5bn of debt, to which US$6.1bn of interest must be added, for a total of US$14.6bn. Coincidentally, US$6.1bn is also the amount the government will need to finance after using the primary surplus (US$7.3bn), advanced transfers from the Central Bank (US$1.5bn), transfers from international organisations (US$600m) and from provinces (US$600m). These funds are supposed to be tapped through market placements among local investors, but there will also be direct placements among other agencies in the public sector and the bonds Venezuela is already buying.
It is generally assumed that, within a scenario of no international financial crisis, the government will be able to raise those funds (the government’s 2008 Financial Strategy and Programme estimates the market may have US$20.4bn available to invest, which, of course, does not mean it will, particularly considering the mood during the last weeks). In a way, this is the source of the present tension with the agricultural producers, since the fiscal surplus comes at the price of a tax exaction to the FOB price of commodities and an increased risk for the accumulated citizen’s savings at other government agencies. According to the Secretary of Finance, US$1.7bn was placed in agencies such as ANSES (Social Security) and the Central Bank of the Tax Revenue Agency during 2007.
The continued association with Venezuela’s Chávez does not come cheap though. The last issue of five-year dollar denominated bonds were placed at 13% and, although the government claimed that as a difference with the IMF there is no ‘conditionality’, at least the one with the IMF could be read by anyone as a Letter of Intention. The association with Chávez is increasingly conditioning Argentina’s foreign policy and it is also damaging the country’s consideration within international investors. During the last three years, Venezuela has bought US$6.416bn in Boden 2012 and 2015. The situation gets more constrained in the future, since financing needs will grow to US$11.8bn in 2009 and US$10.5bn in 2010.
It is usually mentioned that Argentina’s situation is better since the relationship of debt to exports or debt to foreign reserves is much better than in 2001, but we need to understand that debt is not paid with the income from exports (they belong to exporters and debt to government), nor with Central Bank reserves, which are already ‘in use’ supporting the local money supply (but with problems, as we have seen).
It also looks like such ratios are not quite convincing with markets. Mis-trust is punishing Argentine bonds, particularly those issued in pesos with capital adjustable for a price index, which has even led the Central Bank to buy them with reserves in order to sustain their prices. Manipulation of price indexes and concern about the future financial situation see GPD coupon bonds falling even when there is no recession forecasted. Two and five-years debt default swaps increase their primes reflecting growing concerns about a new default in the medium term.
And as the Argentine government increases its ties with the government of Venezuela, and keeps silent about the nationalisation of Sidor (the subsidiary of an Argentine steel conglomerate), Brazil has achieved investment grade, receives more than US$30bn of FDI every year and has just placed a 10-year bond for US$500m at a rate of 5.3%. The costs of not accessing international capital markets, particularly for not solving the holdouts issue, are huge.