LatinFinance - March/April 2014 - 24

ARGENTINA
ECONOMY

Argentina has so far dodged another long-predicted financial
crisis. Many believe it might just avoid the worst this time-even if
that means via the ballot box. By Charles Newbery

On a knife edge

hen argentina's
government said this february that inflation was higher than it previously thought,
bonds rallied by up to 21%.
that may be odd, but this is argentina.
the news came as a relief.
the government said consumer prices
rose 3.7% over the month of January compared with December, not far off some private sector estimates of close to 5%. many
analysts had feared less than 3%, which
would have been a sign that argentina's
president, cristina fernández de Kirchner,
would continue to downplay inflation as a
concern despite, some warnings it could
surpass as much as 40% on an annual basis
this year.
While higher inflation is a worry, the
cheer was rooted in argentina's admittance
of the problem and then coming clean - at
first glance - after seven years of underreporting consumer price data.
it may be too soon for applause, however. Some say a crisis is around the corner,
others say it's time to buy cheap assets on
the bet that a more market-friendly administration will come to power in 2015.
Both could be right - and therein lies the
dilemma.
for much of the past century, argentina
has endured currency collapses, defaults
and hyperinflation before rebounding,
at times robustly, and then falling again.
"argentina is a serial blunderer in economic
policy," says Steve Hanke, a professor of applied economics at John Hopkins University
in maryland in the US. "it careens from one

24 l atinfina nce.com - March/April 2014

©REUTERS

IN THE BALANCE: Argentina's
president Cristina Fernández de
Kirchner sticks to her script

crisis to the next."
Some say, like now, that the authorities inflict their own injuries by failing to
implement and follow a comprehensive
economic plan. others point at the lack of
institutions to sustain economic policies
through successive administrations.
all of it deters investment and growth
in productivity. "if businesses don't see a
long-term plan that will allow them to make
a profit in the future, they are not going to
invest," says mark Jones, an expert in latin
american politics at Rice University in
texas.
argentina, he says, sorely needs such a
plan now to move away "from the edge of
the cliff to a safer position."
liberal economists are clear on what
this plan should contain: measures to curb
inflation, public spending and monetary
expansion, including as part of this, raising
interest rates and reducing hefty subsidies.
this might slow capital flight and reduce
energy imports to sustain foreign currency
reserves that have plunged to under $28

billion from almost $53 billion in 2011.
it is this three-year decline in dollar
reserves that has sounded alarms about a
looming balance-of-payments crisis.
David Rees, an economist at capital
economics in london, says the reserves
are only enough to cover five months of
imports and likely will descend to the
three-month minimum level by the middle
of this year.
the decline is raising concerns about
argentina's ability to service its debts and
sustain the peso at a target of eight pesos
per dollar. Rees expects the rate to drop to
10 pesos per dollar by the end of 2014.
the government meanwhile is betting
that a surge in agriculture exports - in
particular of soybeans and derivatives,
which account for a quarter of total export
revenue - will stop the slide in the reserves
and the peso.
Rees says this may help in the short
term, but "it's very much a hand-to-mouth
existence". a bumper soy crop would bring
a large influx of foreign currency, but the
government is "going to have a tough job to
prevent hard currency from leaking out of
the economy," he says.
Blocking the exit points
capital flight became a major problem
in 2011 - and the rationale for a series of
economic decisions that have pushed the
country closer to the edge of a crisis.
When annual capital outflows more than
doubled to $21.5 billion in 2011, fernández
- wary of national debt repayments and
the need for energy imports to limit gas
shortages and blackouts - responded with
capital and import controls to preserve central bank reserves. Steps involved limiting
dividend payments abroad, making it illegal
to buy dollars for savings, and restricting
shopping abroad.
that did little to stop the flight, however,
as people still traveled abroad and turned to

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