RaboResearch - Economic Research

Country Report Argentina

Country Report


Argentina flag

As her party is unlikely to obtain a two-thirds majority at the congressional elections of late October, Cristina Kirchner is becoming a lame-duck president. Meanwhile, foreign exchange reserves levels continue to decline.

Strengths (+) and weaknesses (-)

+ Competitive agricultural sector 

Argentina has a well-developed and dynamic agricultural sector. The sector benefits from the good quality of the Argentine soil, a favorable climate and good access to sea transport.

- Macroeconomic imbalances

Ultra loose monetary and fiscal policies result in high inflation and a deterioration of the current account balance. Argentina’s foreign currency reserves have continued to fall.

- Unpredictable and interventionist policy mix

In response to the growing macroeconomic imbalances, the government has implemented tight import and currency controls. It has also undertaken all sorts of other interventionist measures, such as the nationalization of Spanish Repsol’s 51% stake in oil firm YPF.

- Lack of access to external financing

Argentina lacks good access to external financing. A renewed sovereign default may worsen the situation, by for example further restricting access to foreign trade credit.  

Key developments

1.    Cristina Fernandez de Kirchner becoming a lame duck president

The FPV, the party of Argentina’s president Cristina Kirchner, suffered a big defeat at the primary elections of 11 August. As Argentine primaries are mandatory and the major parties had this time already selected their candidates before the primaries took place, the primary elections were in fact just a big straw poll for the actual October congressional elections. As the FPV received only 26% of the vote, it will be unlikely to secure enough seats in October to be able to implement the constitutional change needed to allow Kirchner to run for a third presidency in 2015. Meanwhile, high and rising crime and inflation, tight import and currency controls and lower growth have strongly reduced Kirchner’s popularity. Furthermore, in preparation of a post-Kirchner future, many politicians may now disassociate from Kirchner. Peronist Sergio Massa, who won the primaries in the province of Buenos Aires, is the man to watch. Meanwhile, Cristina Kirchner underwent successful surgery early in October. A blood clot close to her brain, that apparently was a result of a fall one day after the primary elections, was removed. She has been advised to take 30 days of strict rest and Vice President Amado Boudou, one Argentina’s least popular politicians due to his alleged role in a corruption scandal, is taking over her public duties. Kirchner’s surgery may allow her to get some get some sympathy votes, but it still seems likely that the end of Kirchnerism remains in sight. As President Kirchner risks becoming a lame-duck president, or has in fact already become one, her policy mix may become even more radical in the short term, although Kirchner’s ability to do so is constrained by her weaker power position. Furthermore, shifting alliances in the run-up to the 2015 presidential elections may Argentine politics even more unpredictable in the near future. Nonetheless, the medium-term outlook has improved, as there is now a good chance that government policies in Argentina will become less interventionist and more sustainable after 2015. In this respect, we note that the Argentine stock index has performed very well in 2013, especially since July this year.

2. Legal battles with hold-out creditors continue

Argentina’s legal fight with hold-out creditors over the restructuring of its 2001 sovereign default in US courts continues. In early October, the US Supreme Court refused to hear an appeal to overhaul a ruling by a US Appeals court. In 2012, this Appeals court ruled that Argentina is not allowed to make payments on USD 24bn in restructured debt unless it also pays the hold-out creditors. The fight is now likely to move back to New York, as Argentina is seeking reconsideration of a decision in the case at a federal appeals court in that state. If Argentina gets an unfavorable ruling, it could file a new Supreme Court appeal. President Kirchner suggested in August that the country would offer the holders of restructured debt to swap their existing debt, which has been issued under New York law, into local law debt. This way, the government would be able to continue to pay these debt holders, though it will leave debt holders at the mercy of the Argentine judicial system. The Argentine government is likely to use all the means at its disposal to fight the judgement. The legal fight could thus continue for months or even years. However, it could result in a new (technical) default, which on its turn could further restrict Argentina’s already limited access to foreign (trade) finance.

Figure 1: Current account
Figure 1: Current accountSource: EIU
Figure 2: External liquidity
Figure 2: External liquiditySource: EIU

3. Foreign currency reserves continue to fall

According to Argentina’s central bank, its foreign exchange (FX) reserves have fallen to the lowest level since 2007. Reserves decreased to USD 34.8bn in late September, down from USD 51bn in September 2010. In the first nine months of 2013, FX reserves fell by USD 8.4bn. Huge macroeconomic imbalances have resulted in a deterioration of the current account deficit and capital flight, which the government has tried to stem by imposing tight capital, currency and import controls. Furthermore, the government has allowed the peso to depreciate more rapidly; in the past 12 months, the peso has depreciated about 19% against the US dollar. However, this is still not enough to compensate for inflation, which continues to be above 20%. Meanwhile, the Brazilian real has also depreciated. As Brazil is Argentina’s most important trade partner and also an important competitor in many export markets, this had had a negative impact on the competitiveness of Argentine producers. Besides, Argentina is also affected by a deterioration of its energy balance. In the first eight months of 2013, fuel imports surged to USD 9bn, an increase of 122% on the same period of 2012. According to the government, one of the reasons to partially nationalize YPF was the unwillingness of Repsol to boost production, but it seems that energy production has only declined further after the nationalization. The government may try to halt the decline of the current account position by imposing even more restrictions, for instance on obtaining US dollars for tourist purposes. Even so, already elevated balance of payments risk may increase further, especially if the soy price would fall strongly. 

Factsheet of Argentina
Factsheet of ArgentinaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Argentina has experienced many political and macroeconomic crises. From the mid-1970s to the early 1980s, the military ruled, which ended when Argentina lost the Falklands war. In the 1980s, high inflation turned into hyperinflation. With a tight dollar peg introduced in 1991, the Menem government managed to bring inflation under control. However, in the late 1990s this peg left Argentina unable to deal with the combined impact of low commodity prices, an appreciating US dollar, substantial dollarization and pro-cyclical fiscal policies; the country was heading for a big economic, political and social crisis. In 2001/2002, Argentina had to abandon the peg and declared the, at that time, biggest sovereign default in history. Afterwards, the country managed to recover quickly and benefitted from the commodity boom. However, Argentina’s economic policies have become increasingly interventionist, ad hoc and unsustainable. Inflation has been high and severely underreported for many years, resulting in balance of payments pressures, which the government is trying to fight with tight import, currency and capital controls. Argentina’s institutions have remained weak and its politics are centered on persons, with party loyalties and, in particular, ideological leanings playing a much smaller role.  The country has a very dynamic and advanced agricultural sector which accounts for 58% of total exports and 14% of fiscal revenue. Soybeans and soybean products are the most important agricultural export commodity and account for roughly one-third of Argentina’s exports. Manufacturing is another important pillar of the economy. The most important export market for Argentina’s products is Brazil. With a nominal GDP of USD 11,556 per capita Argentina remains one of the richest countries of Latin America.

Economic indicators of Argentina
Economic indicators of ArgentinaSource: EIU, M&S consultores, Rabobank estimates *Official data, unofficial estimates may deviate.

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