Argentine economy test looms for re-elected Fernandez

Argentina’s President Cristina Fernandez has breezed to re-election but she may need to make changes soon to the quirky policy mix that is behind the fastest economic growth in Latin America.

Fernandez won a second four-year term on Sunday with around 54% of the votes, about 36 percentage points ahead of her nearest rival. She also appeared to have regained a working majority in Congress.

The centre-left president owes her popularity to a nearly nine-year economic boom, sustained by high global prices for grains exports, and free-spending policies aimed at creating jobs and expanding welfare and pension payouts.

Growth this year is seen topping 8% but at a cost of high inflation, estimated by private economists at about 25%.

“I want Argentina to keep on growing, with more jobs and industry,” Fernandez told cheering supporters on Sunday night.

In her first term, Fernandez nationalised private pensions, fought powerful farmers over taxes and ignored international arbitration awards to private firms whose concessions were taken away or altered during a 2001/02 economic crisis, prompting retaliation from Washington.

Her “model” also includes arm-twisting. The government fines economists who put inflation at twice the official rate and pressures private firms to match imports with exports.
For example, luxury car maker BMW has had to agree to sell rice abroad.

This unconventional approach has worked so far—defying critics who have insisted for years that it would soon crumble—and Fernandez has vowed to “deepen the model”.

No major shift is expected but Fernandez may be forced to ease the breakneck pace of public spending, even as she seeks to bolster the state’s role in the economy.

“It’s a delicate situation,” said Mariel Fornoni, director at Management & Fit polling firm. “This system of social programs and subsidies ... requires a lot of resources to stay afloat and that is a very big challenge for the government.”

Shrinking reserves
Moreover, Argentina’s financing strategy could hit a wall in 2012 as the foreign reserves used to pay debt in the last two years shrink fast. Since August, the central bank has sold more than $3.5-billion of its reserves to stem the peso’s losses as capital flight picks up speed.

High inflation has hiked local production costs and surging imports and state spending are eating into the trade and fiscal surpluses that have been policy pillars since 2003.

An economic slowdown in Brazil is already showing signs of hitting Argentina’s auto industry. And the global economy could weaken further, reducing revenue from Argentina’s key soy exports.

Fernandez’s late husband and predecessor as president, Nestor Kirchner, helped restore growth after the devastating 2001/02 economic meltdown. That was when Argentina defaulted on $100-billion in debt, freeing it from huge borrowing costs but leaving it in the cold in international credit markets.

Kirchner forced bondholders to swallow big losses and Fernandez mopped up more of the outstanding debt. But “holdout” creditors could yet stop Argentina from selling new bonds.

Fernandez stayed out of global markets when high borrowing costs eased last year, saying she wanted to protect Argentina from financial turbulence and outside policy meddling.

Argentina’s global 2017 bonds, issued during the 2010 debt swap, are yielding about 11% now.

As its resources dwindle, the pragmatic Peronist government could make another cash-grab like the 2008 pensions takeover. It could also allow the peso to depreciate faster to boost export revenues and free up more reserves to pay debt.

Most analysts see some borrowing as inevitable because they see the government’s internal financing sources drying up.

Economy Minister Amado Boudou—who will serve as Fernandez’s vice-president starting in December—has said the country could issue debt to fund infrastructure projects.

‘Fine-tuning’
Government officials and economists of all stripes agree more credit is needed to spur investment. But high inflation has raised labour costs and compounded the shortage of long-term lending that is a legacy of Argentina’s default a decade ago.

A long-stalled deal to repay about $9-billion to the Paris Club of creditor nations could free up infrastructure financing from foreign export-credit agencies.

To tame inflation, Fernandez is urging unions to moderate wage demands. Many analysts think she will also trim costly energy and transportation subsidies to cool spending growth of more than 30%.

Artemio Lopez, an openly pro-government political analyst, says Fernandez will have to “fine-tune” some policies to ensure there is enough money to fund social programmes.

“Socioeconomic improvements are fundamental, and inflation will come up at some point because nobody in the government, nobody, fails to recognise it’s an issue,” he said.

Rising prices are hurting industry’s comparative advantage by strengthening the peso in real terms. Brazil, the country’s top trade partner, has seen its currency weaken, putting Argentina under pressure to allow a faster depreciation but without worsening inflation and capital flight.

“The market is concerned about Argentina’s lack of market access, the possibility of a hard landing and the likelihood of sudden [currency] weakness,” Boris Segura at Nomura said in a research note, summing up long-standing investor scepticism over Argentina’s unorthodox management of its economy.

“[But] we strongly believe that the necessary policy adjustments in Argentina are not insurmountable.”—Reuters

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