By Kane Prior.

Argentina is currently the second largest economy in South America; it is rich in natural resources, has a diversified economy and importantly a democratic government.  It is a far sight from the Argentina of 2001, where in a similar situation to Greece now, they had to default on massive loans and start their economy again. They had recovered strongly and even fared well during the global financial crisis, with incredible growth of 9.2% during 2010, leading to the comfortable re-election of President Cristina Fernandez in 2011. She is Argentina’s first elected female president and is the widow of former president Nestor Kirchner (2003-2007). But once again not all seems right with the Argentinean economy.

Argentina themselves are sticking with the 5.1% growth they forecasted for this year, but many think otherwise as recent data shows a decline in the economy, with industrial production in May falling by  4.6 % since May last year. A more likely growth rate has been forecasted at between 2-4% with some pessimists even predicting a recession.  This is trend with Argentinean statistics however, as the government likes to manipulate numbers to its advantage, leading to many foreign analysts using unofficial data to evaluate Argentina’s economy. The biggest manipulated statistic is the inflation rate; the Argentinean government reports it at around 10%, but private sources put the number much higher at around 20-25%. The government has taken a stern approach to these numbers being reported, with analysts fired or even sued if they don’t come in line with the government’s figures. This has lead to the IMF giving Argentina a deadline to improve its national statistics or face sanctions, with a decision set to be made in early September (though the IMF has a history of backing down on such issues).

PriceStats, a Private sector index, shows how Argentina’s official inflation rate differs majorly from their figures, while most other countries have similar rates.

This isn’t all. The government has also become very involved with the private sector, with heavy subsidies and nationalisation a common sight. Cristina Fernandez, for instance, announced the seizure of a majority stake (51%) in YPF (the country’s biggest oil company), despite it being owned by a Spanish based company – leading to heavy criticism from Spain and the EU.  This proved very popular with the public; with the privatisation of the Argentinean company in 1990’s long resented. The main reason behind this move was to try and reverse the recent change of Argentina from an energy net exporter to an energy net importer, with the current energy deficit estimated at $7 billion this year, by developing very expensive oil fields in the country.  This move will only damage Argentina’s reputation more as a corrupt nation however, with the country rated 113th in the world for “doing business”. This has followed the nationalisation of Argentina’s private pension funds and its flagship airline, showing a trend of government interference in the private market. The management of these companies have been poor too, with the Aerolíneas Argentinas (the nationalised airline) costing the government an estimated $840 million last year, while the airline ranks very low in most rankings for performance. The subsidies have been just as bad, with inefficient firms being propped up by government money to protect them from the global market. Argentina has spent the money they should have saved during the good times on these subsidies and now they are struggling to find the cash to keep social programmes running during these bad times. Subsidies have helped make Argentina’s public transport the cheapest in the world, but they haven’t improved educational standards (with the Legatum institute rating them 39th in the world for education) or the attractiveness to big business that can create jobs for the Argentinean people. The subsidies remain a short term boost that can help Cristina Fernandez attract votes but they do little to help Argentina in the long term, something Argentina needs desperately to consider.

Graph showing Argentina’s energy deficit, which has since grown to $7 billion.

Another problem is one that Argentina has had to live with since the 2001 crash. The country faces extremely high interest rates and legal threats (from countries it defaulted on in 2001) when borrowing from the international markets, so the government finds it very hard to borrow money. This has lead to the government finding new alternative sources for its public spending. First up were the nationalised private pension funds, where the government siphoned off $6.8 billion during 2009-11 to spend on public projects. Next was the central bank, where the government has transferred $16 billion from the central bank’s reserves since 2010 to help service public debt and have even forced out the banks governor when he protested against the government’s decision. The central bank is now required to use its reserves (at around $47 billion) to help pay government debt and transfer the treasury cash equal to 20% of the government’s revenue. Now the government can use YPF to help finance their debts, with the company’s profits of $1.3 billion a year a useful bonus to the treasury.

Martin Redrado, the governor of the central bank, was forced out after disagreeing with the government.

Finally, the country faces problems with a devaluating peso. The country’s currency has dropped in value in comparison to the dollar, with $1 equalling around 4.5 pesos. This has lead to a capital flight as Argentina’s foreign reserves shrank by nearly $6 billion in the last few months, as the public become fearful of hyper inflation making the peso worthless. The government has responded by introducing currency controls, resulting in the limited availability of dollars in the country. This has had a negative effect on the housing sector however, which was mainly conducted in dollars. The lack of dollars in the market has been a major reason in the slowdown in the economy, leaving the government with a hard choice to make, keep restricting dollars and hope the slowdown helps bring inflation down, or stop and allow the economy to pick up but face the threat of hyper inflation.

Shows the drop in the value of the Peso.

All these problems are inter-related, they stem from poor governmental policies that have been far too short-sighted in the last few years to really help the economy. Heavy government spending wasted during the good times resulted in less cash for the bad times and the ever increasing inflation that Argentina suffers from. This inflation caused the capital flight problem which has restricted the amount of dollars in the economy and therefore caused the slowdown in the economy. The high inflation numbers also caused the government to start lying about important national statistics, which is costing companies billions and making the outside world lose faith in the Argentinean markets. The heavy government spending has had to be financed by alternative means to the international markets too, so domestic markets have been ruined by nationalisation and heavy subsidies making them inefficient and a drag on the economy.

So after years of incredible growth for Argentina, where they averaged above 7% growth each year, they now face an overheating economy and the threat of hyper inflation. Cristina Fernandez recently argued that Europe was failing due to their policies of austerity, Europe’s possible response: Don’t cry for us, Argentina.


Kane Prior writes about economic issues from around the world at the Economic Interests blog. His twitter is @econInterests.

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