MercoPress. South Atlantic News Agency

Argentine economy gets good marks, risks remain

Argentina has managed to leave behind a nightmarish economic crisis in a relatively short time, with four years of an average yearly growth of about nine percent — and growth is expected to continue at a sound pace at least in the in the mid-term.

However, economists talking to MercoPress warned that risks lie ahead, namely an energy crisis, a controversial price controls policy and a poor salary policy that may further fuel an already high inflation, and a somewhat poor-quality foreign trade policy. The government of President Néstor Kirchner got good marks for having taken advantage of exceptionally good international growth conditions (including high prices for Argentina's main exports) and for turning fiscal surplus into a state policy. In 2002 the nation left behind a five-year recession that sent poverty, unemployment and crime skyrocketing. The crisis had blown up in late 2001 amid bloody riots, causing the fall of two governments and the country to declare the world's largest-ever debt default. In 2003 Kirchner became the first Argentine president in 20 years of democracy to take office with a growing economy. He forced creditors to swallow a haircut that drove the country's debt to 125 billion dollars from nearly 200 billion and repaid in advance the nearly 10 billion dollars owed to the IMF. Still, Central Bank reserves continued to grow at t astron page and stand now at 33 billion dollars. Poverty declined markedly and unemployment fell below 10 percent (although counting hundreds of thousands of jobless people who get state subsidies as being employed.) Not interfering with the world growth wave "The best thing that the government did has been not to put stumbling blocks in the way of a growth wave prevailing around the world," said Marcelo Lascano, a former finance under-secretary. Pablo Rojo, a former head of the Hipotecario mortgage bank during the tenure of Carlos Menem, agreed. Eduardo Conesa, a professor of economics at Buenos Aires University, said that Argentina's has attained an "extraordinary" economic growth on the basis of a "fairly acceptable management of exchange and fiscal policies." The government should be credited for exports growing at the pace of world exports. "This may not seem a great accomplishment but over the last 60 years Argentine exports grew much below the world average. In 1940 Argentina accounted for three percent of total world exports while currently it has less than 0.5 percent," Conesa said. Still, the experts agree that there are several red pending challenges that can harm recovery. Energy crisis looming The country is facing bottlenecks in energy infrastructure and has failed to set a clear regulatory framework or adopt a fee scheme consistent with investments necessary for the sector to improve, said Rojo. "There is a de facto re-estatization of the energy sector because, at the current fees, the only one investing in the sector is the state." The government should adopt a social fee for low-consumption clients and, above that level, start closing the gap between energy fees and generation costs. "Otherwise it will continue to be forced to subsidize power generators, which will cause enormous distortions which, in turn, could lead to supply shortages." The energy crisis forced Argentina to suspend natural gas supplies to Chile, sparking a diplomatic row with that country. Argentina was also forced to import energy form Brazil, Venezuela and Bolivia. "Argentina is facing an enormous problem," said Conesa. "Ten years ago it had some 25 years of reserves of gas and today it has only eight years, and it had 14 o 15 years of reserves of oil and now it has seven or eight because there is no exploration as a consequence of the tremendous mistake of having sold its YPF oil company to Spain's Repsol." When pointed out that YPF was privatized under Menem's administration, he replied: "But Kirchner can be blamed because he is doing nothing to force firms to explore oil. YPF used to explore 180 wells a year and today there are not even 20 exploratory wells a year. Also, Argentina is today exporting hydrocarbons, which will contribute to depleting reserves." Conesa said that the government is paying Repsol 30 dollars per barrel of oil when the price to produce it is five dollars "which entails enormous gains, but the company is reluctant to invest because it wants to be paid the much higher international prices." "The government should force Repsol to explore, to maintain the ratio of reserves that YPF had when it was sold. If Repsol refuses to do so, it should be forced to sell and leave the country. The same that reserves were used to paid the IMF, they could be used to buy back YPF." However, he also warned that that could not necessarily solve the lack of energy. "Buying back YPF would be good, only provided that it is well run, and today one of the key issues of Argentina's crisis is a patronage system that makes the state be inefficient in virtually every sector. The government has done absolutely anything to solve this," Conesa said. Lascano said that Argentina should start again tapping rivers as a transport means and also railroads which would be very good for some sectors despite initial investments may be high. Price controls and inflation The government was harshly criticized for its price-controls policy as a means of fighting inflation, estimated at 9.8 percent last year. "Price controls end up backfiring," said Rojo. "Every sector subjected to controls ends up investing much less than what would be necessary and therefore there will be price problems ahead due to a declining supply. "Furthermore, the government is also fuelling inflationary pressures by means of a wage policy that doesn't discriminate among different sectors. This idea of across-the-board hikes only leads to salary increases being transferred to prices, which contributes to more inflation," Rojo said. Conesa agreed. "The government is trying to give people the impression that it is defending them, but the truth is that prices will increase in the same percentage as salaries do, less the rate of productivity growth. "Unions are just interested in getting nominal wage hikes when what really benefits workers are real increases. There is no advantage for a worker in getting a 19 percent hike (such as many got last year) if inflation erodes an enormous chunk of the increase." Lascano said that the government should resort to an "import shock" to teach a lesson to some speculating sectors. As for the exports taxes, Rojo said that when a country adopts such a high exchange rate as Argentina does, tax exports are not necessarily bad, only that being so high as they are they should be stable to allow predictability and not be changed permanently. A poor foreign trade policyThe economic growth, a high-exchange rate and favourable international conditions â€" including a strong demand for Argentine products from Asian countries â€" contributed to a 12.4 billion dollar trade surplus on record exports of 46.6 billion dollars last year. The government expects exports to hit 50 billion dollars this year, something that Lascano said will not be hard to attain. However, the experts say that there are many pending tasks regarding trade policy. "The foreign trade is poor and prevents the country from taking full advantage of the exceptionally good international trade conditions," said Rojo. "Argentina should clinch accords with Europe and Mercosur and should follow what countries like Chile, or Colombia are doing towards the institutionalization of clear trade rules. "Brazil has the same problems, only that being so huge (among the ten largest economies in the world) it doesn't have the trade restrictions that Argentina has," said Rojo. The Mercosur trade bloc is formed by Argentina, Brazil, Paraguay, Uruguay and Venezuela and has some associate members. "If Brazil grew at rates of 9 to 10 percent like it did between 1964 and 1984 it could become the locomotive for the region. But it is following a policy of high interest rates and growth has been poor since 1984. Over the last 25 years it has lacked a growth policy that may justify Argentina's sticking to Brazil. Argentina should adopt a world integration model like Chile's Conesa said. Lascano said that the government should realize that exporting high-quality products, such as nuclear and spatial technology, is not incompatible with a growth of traditional exports. As an example, he said an enriched uranium unit costing 100 dollars produces the same amount of electricity that an investment of 7,000 dollars in oil. In another example of export know how, he said that in sites where there is arsenic in the water Argentina has managed to plant some plants that absorb the arsenic and render the water drinkable. Investment should be fostered by lowering income tax from 35 percent to 20 pert to companies reinvesting in the country, he said, adding that the Foreign Ministry should adopt a very active role to open up the way for businessmen abroad. Rojo, asked whether the three-peso exchange rate to the dollar was reasonable, said that although the about 3.5 percent fiscal surplus is very high for Argentina's historic average, fiscal surplus is still somewhat low if the government wants to maintain the current exchange rate. "Sustaining this exchange rate forces the Central Bank to issue an enormous amount of pesos and that causes inflationary tensions. If those tensions continue they will push the exchange rate down. Guillermo Háskel (MercoPress) Buenos Aires

Categories: Argentina.

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