Saturday, October 29, 2011

Re-election of Argentine President Raises Concerns about Argentina’s Financial Future

FT: Argentina: A High-Risk Recovery
FT: Argentina Restricts Foreign Trade
FT: Argentina’s Economic Recovery
FT: Fernández Wins Re-election in Argentina
La Nación: Los votos no liberan de las leyes económicas
NY Times: Argentina Nationalizes $30 Billion in Private Pensions

WSJ: Economists Quake as Argentina Votes

Cristina Fernández was re-elected as president of Argentina by the widest margin in four decades. Critics suggest that this landslide victory resulted from the general sense of financial well-being many Argentines enjoy. Despite slow growth in the U.S. and Europe, Argentina’s economy is predicted to grow about eight percent this year. Since 2007, when President Fernández was first elected to office, the economy has grown an average of 5.6 percent per year. Although the country was in an economic disaster from 2001-2002 after defaulting on nearly $100 billion in sovereign debt, Ms. Fernández and her late husband, Néstor Kirchner, increased jobs, wages, pensions, and other benefits for the Argentine people during their consecutive presidencies that have helped restore Argentina to booming economic growth.

However, experts do not believe that the financial policies President Fernández has employed to develop Argentina’s economy can sustain economic growth in the long run. For instance, the government will not have enough money to continue spending on ever-increasing subsidies for energy and transport development. Following the 2001 default, Argentina could not borrow from the international financial markets to finance economic expansion because international lenders were unwilling to lend the country out of fear that it would default a second time; therefore, to generate revenue, President Fernández championed policies that led to a trade surplus through increasing exports and limiting foreign imports. As a result, Argentina became a major global exporter of food commodities, especially soy and soy oil, which led to a trade surplus of $11.6 billion in 2010. However, this number may decrease to $8 billion this year because of continued slow global economic growth. Critics also note that China’s unending appetite for raw materials—including Argentina’s commodities—is as much to thank for the current boom as is any government policy.

Skeptics also claim that the surplus has been funded in part by governmental use of pension funds and central bank reserves to present the illusion of economic health. The government nationalized private pension funds in 2008, claiming that it was trying to protect workers’ and retirees’ pensions from the effects of the global financial crisis as stock and bond prices fell. Critics believe, however, that the government made this move to gain access to funds that would give it “breathing room” as government revenue decreased due to falling commodity prices and tax revenue from agriculture. Critics’ final worry is that although Argentina is a leading producer of food commodities, its lack of productivity in many other areas, such as the development of its large oil and natural gas reserves, may keep it from growing economically, especially if global demand for Argentine commodities or commodity prices decrease.

There are still more issues that may hurt Argentina’s economy. A number of economists report that Argentina’s inflation rate is currently over twenty percent. The government, however, says inflation is only at nine percent and refutes accusations that it is misrepresenting the inflation rate. High inflation is problematic because it reduces exports (because inflation makes Argentine goods relatively more expensive). Additionally, although it restructured its debt, Argentina still owes about $9 billion to foreign creditors, and the international finance markets may remain closed to Argentina until that debt is paid. Argentina has also lost revenue as fewer foreigners have been willing to open businesses in the country in the past four years because of heavy government regulation that makes doing business in the country more expensive. Although experts agree that Argentina does not face a risk of default, they caution that Argentina compromises its continued economic growth by not controlling its debt and inflation rate.

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