Argentina:
History Repeating Itself?
“Attempts to deal with the economic meltdown
appear to have rendered the government untenable, and investors fear the
international repercussions of the country's apparent inability to meet its
debt burden.”
Time Magazine, December
20th, 2001.
Politics and Inflation
Over
the past ten years, Kirchner’s administration cultivated popularity and
consolidated power through high levels of public spending ($143 billion ARS in 2013 spent on economic subsidies alone[1]),
funded by unsustainable and irresponsible fiscal decisions. This increased spending was only partially
offset by an average GDP expansion of 1.7% from 2003 to 2012; it has caused
massive bouts of inflation. Prices have risen drastically (10.8% in 2012,
according to one estimate[2])
and the value of the Argentine peso has diminished. Argentines, skeptical that their government will get its finances in order and stem the fall of the peso, exchange pesos for
dollars at bloated rates on the black market (approximately 11.63 pesos to the
dollar as of January 2014) or for physical assets like televisions and cars, which
are hoped to hold their value better than the peso.
The
Argentine government now seems to recognize the potential fallout over its
rising inflation, and has recently taken a few small steps towards a remedy. In
January 2014, the government added strict controls for consumers, such as
limiting the amount of pesos Argentines can exchange for dollars (1/5th
of a worker’s monthly wage) and limiting international online orders to $25 USD.
The central bank, at the government’s behest, has bought pesos with dollars in varying
degrees since the 2008 global financial crises to support the value of the
peso. However, this strategy has its
limits as Argentina has limited foreign reserves. Argentina’s foreign currency reserves stood
at $52.6 billion in January 2011. As of
February 2014, total reserves amounted to $28.3 billion. When the government recognized this and quit
artificially supporting the peso on January 23rd, its value plummeted 16
percent in 24 hours, its steepest drop since 2002. Since then, the government has defended the
currency at around eight ARS per dollar, which has caused its reserves to continue
to decrease.
The
depreciation of the Argentine peso should help the Argentine economy somewhat
by making its exports, which represented 20 percent of its GDP in 2011,
cheaper, thus raising Argentina’s competitiveness. However, inflation is still estimated at 25% percent
by independent economists so this expected increase is unlikely to make enough
of a difference for Argentina’s finances.
Moving Forward
Argentine
leaders must make the hard decisions they have avoided for so long to avoid a
humiliating repeat of the 2001-2003 crisis. The government should reduce the money supply by curbing spending, raising taxes, lowering the price of inputs, raising
interest rates, or a combination of all of these tools. It could institute a
wage freeze for public sector workers or cut subsidies for oil and gas
(estimated to have cost $14.1 billion in the first 11 months of 2013). These pro-business
policies would increase the country's credibility in the eyes of investors,
despite lowering growth in the near term. Of course, all of these options
present severe challenges to the Kirchner administration, which gained and
retained power due in large part to its economic populism. The government likely fears the fury and
electoral rejection of angry citizens over economic adjustments witnessed from
Greece to Ireland over the past three years and hopes it can defer until the
October 2015 presidential elections. The alternative of economic free-fall when
international markets contract, however, will hurt the country, as well as the
administration, far worse, as the previous crisis proved. Kirchner would be
wise to recall those lessons.
Michael T. Putnam is a Senior Associate at Triage Consulting Group in San Francisco, CA. He has a B.A. in International Relations, with a minor in Business, from the University of Southern California.
