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The Argentine economy: “Thumbs down” writes The Economist

Friday, October 3rd 2014 - 06:20 UTC
Full article 38 comments
The resignation of the Central Bank’s governor Fabrega, adds to the gloom The resignation of the Central Bank’s governor Fabrega, adds to the gloom
Ask what ails the country and the answer will echo the rapper’s ode to the 100-dollar bill, “It’s all about the Benjamins”. Ask what ails the country and the answer will echo the rapper’s ode to the 100-dollar bill, “It’s all about the Benjamins”.

Those baffled by the Argentine economy could do worse than listen to Puff Daddy. Ask what ails the country and the answer will echo the rapper’s ode to the 100-dollar bill, “It’s all about the Benjamins”.

 Had the Argentine government resolved its row with “holdout” investors, rather than defaulting in July, it might now be able to tap international markets for hard currency. Instead it is struggling to manage its meager reserves, which hover at around 28 billion dollars. The economy is stagnant, the peso is falling in unofficial markets, and inflation is rising.

The chances of a happy outcome to this situation worsened on October 1st, when Juan Carlos Fabrega, the governor of the central bank, resigned after less than a year on the job. Mr Fabrega had long butted heads with Axel Kicillof, the country’s economy minister. Battling an inflation rate that is expected to reach 40% this year and seeking to conserve the country’s reserves, Mr Fabrega had supported moves earlier this year to raise interest rates and devalue the peso. Mr Kicillof complained these decisions froze economic activity.

On September 30th President Cristina Fernández de Kirchner intervened decisively, by in effect accusing Mr Fabrega of having released inside information to the country’s banks so they could weaken the peso. Mr Fabrega’s resignation soon followed. His successor is Alejandro Vanoli, a Fernández loyalist who was previously head of the National Securities Commission. Although he will enjoy a more genial relationship with the executive than Mr Fabrega did, his task will be no easier.

The prospect for dollar inflows looks grim. The price of soya, Argentina’s main export and its principal source of dollars, has plunged by nearly 35% over the past three months, to four-year lows. Partly in hope that this trend will reverse itself, and partly in fear that the government will devalue the peso further, farmers are stockpiling soya rather than selling it.

Meanwhile, the government cannot tighten outflows much more than it already has. Argentines have not been able freely to buy dollars through official channels since 2011, when the government plugged them in order to stem capital flight. Since January, when the government devalued the peso by 20%, Argentines earning more than about $1,000 a month have been able to change up to one-fifth of their salary at the official rate. Those who wish to swap more of their inflation-plagued, volatile pesos for stable currencies must do so on a parallel market, referred to as the “blue”.

The blue dollar rate, which is often viewed as an economic pressure gauge, climbed to a record high of 16 pesos to the dollar late last month. In response, the government has told people to simmer down. “Regarding the psychosis that there aren’t dollars and that you have to go to illegal markets to get them, it must be said: society needs to calm itself,” counseled Emmanuel Álvarez Agis, Argentina’s vice-minister for the economy, in one interview. The blue rate has since come down a little, to 15.60 to the dollar, but it is still far weaker than the official rate of 8.50.

With fewer dollars available, imports have fallen. Since Argentina imports mainly inputs, this has in turn dragged down overall economic activity. According to data collected by the Foundation for Economic Research in Latin America, industrial production was 9.7% lower in August than it had been in the same period of 2013. Orlando J. Ferreres and Associates, a consultancy, registered a drop of 3.5% in gross domestic investment over the same period. In a recent survey of 165 Argentine firms, 33% admitted to laying people off. Those in work are seeing their incomes eaten away by rising prices.

Faced with this ugly panorama, the government appears to have returned to its old trick of fudging the data. On September 24th the national statistics agency (INDEC) announced that the economy had grown by 0.9% in the second quarter, thereby exiting recession. Private estimates tell a different story. EconViews, another economics consultancy, reported a 0.4% contraction in the second quarter, writing in a report: “INDEC’s indicators have grown apart from ours again, in spite of new official methodologies.” Manipulating the numbers can work for a while but is not a long-term solution. The perspicacious Mr Daddy had it right. The album from which “It’s All About the Benjamins” was taken was called “No Way Out”.

Categories: Economy, Politics, Argentina.

Top Comments

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  • LEPRecon

    A good article telling us how it is in reality.

    It's about time the government in Argentina realised that you can't control an economy or market forces with political ideology. If you could then the USSR would still be in existence.

    Time to wake up and smell the coffee, but I fear it's probably too late. A complete economic meltdown is inevitable at this point, assisted along by the government's insane economic policies.

    Of course the government will not be affected. They'll quite happily be living off their stolen billions.

    Oct 03rd, 2014 - 06:42 am 0
  • 313toBioBio

    Nobody hates argentina like Cristina and Kicillof. Destructive. Don't make the mistake of calling them suicidal. They have enriched themselves with the hunger and misery of the country they swindled. It's not an accident. It's not a failed attempt at socialism. This woman with her ridiculous speeches praising Peron is satiring Argentine history, putting Evita's face on a bill during hyperinflation and exchange controls. Kirchnerism was made to generate destruction. It did. We soon shall see what ww3 will be like in Argentina. Its effects in Brazil are on hold with the media because of the fraud election taking place.

    Oct 03rd, 2014 - 07:12 am 0
  • Frank

    Coming into the austral summer... no $$ to pay for the gas..
    and for a bit of light relief

    Oct 03rd, 2014 - 07:23 am 0
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