Argentina
Cinephiles of a certain age may remember the 1960
film, Fin de Fiesta[1]
by the Argentinean producer and director Leopoldo Torre Nilsson. I certainly
do, for its powerful script and black and white cinematography.
Ostensibly set in the 1930s, the movie recounted the
excesses of a provincial caudillo, his brutal and corrupt exercise of power and
his downfall. The fact that the film’s
opening was marred by public disturbances showed that, for many, this was not a
movie about an age long gone.
And why not, for it held a mirror to Argentine
politics where the reprehensible practices of the pre-WWII governments were
replicated by others of different stripes in the following decades, where
corporatism flourished, tinged later by populism, and where moderates always
failed to marginalize right-wing and left-wing radicals; Frondizi (1958-1962),
Alfonsin (1983-1989) and Menem (1989-1999) come to mind in this regard.
Almost seven decades after its eponym was elected
president, Peronism is again in power, alive if not all that well, in
Argentina. And as happened in the past,
another fin de fiesta is in the
offing.
Despite enormous natural riches, over the last
decade Argentina has managed to put itself in an economic hole by following a
populist ideology which has resulted in huge distortions of and burdens on its
economy and finances. It has
alienated almost anyone with money to invest or consume: foreign creditors were
rudely handled in a 2005 restructuring which looked more like spoliation;
retirees saw their private pensions taken over by the government and used to
plug budgetary holes and finance YPF; frozen energy tariffs threatened the
financial health of a whole sector of the economy; Repsol, the controlling
shareholder of YPF was initially expropriated without any compensation;
statistical data bases, essential for the management of private business and finance were
either tampered with, such as the inflation rate[2],
or simply not kept up to date.
The results have been telling: while it exported 20 million m³/day of
natural gas to its neighbors in 2004 (one year into Nestor Kirchner’s
presidency), in July 2013[3]
Argentina imported 16.9 million
m³/day from Bolivia and the equivalent of 27 million m³/day in LNG[4]. The picture is similar for oil: Argentina
turned from being a net exporter of US$5.2 billion in 2004 to a net importer of
US$3 billion in 2013[5];
these numbers understate the turn for the worse because 2004 oil prices were
less than half of those in 2013.
As for electricity, by freezing utility rates in
2002, the government triggered high demand growth [6]
while setting strong deterrents for investments in new generation[7]. It is also facing a mounting bill for rate
subsidies which currently exceeds 3% of GDP for electricity and natural gas
alone. In short, the reality is: pressure
on public finances and recurring blackouts in summer.
The erratic management of the economy and its
finances has led to general underinvestment, the effects of which go well
beyond the energy sector: a potentially high value-adding sector such as
industry has been forced into retreat; the local automobile industry is now barely
more than an assembly line where valuable components are imported from abroad. The overall result is a rising need to
increase imports when the country can least afford it, hence the never ending
import tariffs, taxes and other restrictions to try and keep the trade balance in the
black.
It is clear that the external situation of Argentina
is unsustainable. Official foreign
exchange reserves stand at US$29 billion.
The IMF estimates that the country will suffer a cumulative current
account deficit of US$29.1 billion over the next four years. It cannot access international markets to
raise debt financing. Assuming that
foreign direct investments were to remain flat at US$3 billion a year[8],
this would leave Argentina with reserves of US$12 billion by year-end 2018,
equivalent to a little over 2 months of imports. Needless to say, a financial meltdown would occur
well before that point.
It is therefore hardly surprising that the
government decided to depreciate the peso by some 18% last week. It is also hardly surprising that the
government blamed speculators for its miseries.
While this move may provide some temporary respite, it will not be
enough: the roots of the difficulties, excessive public spending, haven’t been
dealt with, the government has little credibility and seems to improvise as it
goes along[9].
In the end, these latest announcements show that the
populist peronist economic model is reaching its limits. The current government will likely be forced
to make further policy adjustments to try and attract foreign money[10]
and reduce public accounts imbalances; after coming to terms with Repsol in
order to permit YPF to develop shale oil resources, Argentina is likely going
to have to do the same with holders of its unrestructured foreign debt. It will then need to make peace with
exporters.
Real reforms will need a government that enjoys more
credibility and trust both at home and abroad.
That is for 2015/2016 perhaps, but the pendulum has started to swing back. More and more, the priority of this government
will be to reach 2015 without causing a massive economic and social breakdown.
[1] Literally, the end of the party.
[2] IMF issued a rare warning to Argentina for
its poor handling of official statistics.
[3] Up from 9.7 million m³/day a year earlier.
Bolivian gas imports are limited by pipeline capacity. They are planned to increase to over 19
million m³/day shortly. Current exports have plummeted to a few
hundred thousands of cubic meters
[4] Ource: Platts.
[5] IMF projections.
[6] CAMMESA, the wholesale market administrator,
estimated in 2008 that, on average, electricity tariffs in Argentina were 1/3
of the Latin American average.
[7] The government has made some tariff adjustments
since then.
[8] A puny number when compared to Colombia (US$15
billion, Mexico US$40 billion and Brazil US$50 billion).
[9] A 20% surtax on the newly but limited
purchases of dollars, was subsequently waived if these dollars were deposited
at a bank for at least one year. The
much hyped possibility for individuals to buy dollars for savings purposes
failed to convince as these dollars would have to remain in a bank account and
Argentines remember what happened to their dollar accounts in 2001-2002 with
the “corralito”.
[10] Including dollars held abroad by Argentines.
