First the good news, the Fernandez de Kirchner Administration is keen on servicing its external obligations. After the debacle of 2002, the Kirchners took great pride in restoring economic, financial and political stability. In return for their stewardship, the two rulers expect the loyalty, adoration and support of the population. However, failure to ensure the continuation of this stability would break the social contract between leader and subjects—at least that is what they think. Therefore, the Kirchners will do everything they can to service their debt obligations, even if it means nationalizing the private pension fund system (AFJP). Unfortunately, they never appreciated the damage such a decision would have on the real economy or the reaction it would trigger in the marketplace. However, how could they?–if they ruled Argentina like their own personal domain. Unfortunately, this is a characteristic of populist leaders—be it on the left or on the right of the political spectrum. Colombian President Alvaro Uribe, another populist, never consulted the country’s many prominent economists before introducing capital controls. Why should he? By definition, a populist rules for the masses, eschewing all of the corporatist organizations and political parties that typify institutional regimes. Therefore, the fact that the Kirchners hatched up such an ill-conceived scheme late one night, without consulting anyone else, as a means to bolster market confidence should come as no surprise. Nevertheless, there is some good news in Argentina. The country’s macroeconomic indicators are impressive. GDP growth should top 6% y/y in 2008. International reserves are north of $47 billion. The primary surplus is 3.5% of GDP, and the current account surplus is 2% of GDP. Exports soared 45% y/y in September, while imports rose 34% y/y; thus bringing the trade surplus for the first nine months of the year to $10.2 billion. Last of all, there is virtually no leverage within the Argentine consumer sector. However, there is also bad news.
In addition to the fact that the government has no clue on how to communicate with the market, the Argentine economy is about to hit a brick wall. The collapse in commodity prices and the international credit crunch is taking its toll. Although the overall trade numbers recently improved, there were some troubling figures. Sales of agro industrial machinery dropped 5% y/y in September. An estimated 11% of the factories are reducing personnel. GM recently idled several hundred workers in Cordoba. Argentina has large assembly plants, and the contraction of consumer credit is squeezing the production of durable goods and automobiles throughout the world. Tourism is said to be off 40%, and many hotels are introducing discounts in order to bolster occupancy. The decline in tourism is adding to the slowdown in retail activity and the property market. Shopping centers reported a 12.8% y/y decline during September. The huge (50%+) devaluations in Brazil and Chile, Argentina’s main trading partners, put many sectors at a disadvantage. The Industrial Union of Argentina (UIA) is calling for a deep devaluation to gain competitiveness. It is against this backdrop that the government was trimming its 2009 GDP growth projections to 4% y/y. Unfortunately, the decision to nationalize the AFJPs turned the ill wind into a hurricane.
The decision to nationalize the AFJPs will be devastating. It will destroy the domestic capital markets. With $30 billion in assets, the AFJPs were the main source of liquidity for the local equity, credit and bond markets. The pension funds were a source of financing for local retailers and corporates. The nationalization of the pension funds gratuitously created a credit crunch in Argentina similar to the one that was raging in the U.S. and Europe, when the country should have been immune from the problems abroad. Likewise, it spells doom for the 12,000 financial sector workers who worked in the AFJPs that will ripple through the rest of Argentine economy. Retail activity and apartment prices will plunge as these individuals are forced to abandon their middle class lifestyles. Furthermore, service providers to the private pension funds, from restaurateurs to printers to local brokers, will be adversely affected. In sum, the 4% growth rate that was projected for 2009 now looks unrealistic. Unfortunately, the pathway to hell is lined with good intentions. The Kirchner’s intent to signal a deep commitment to service its external obligations only produced the opposite effect. However, how would they know that this would be the case if they run a country of 40 million people as if it was a small sheep farm deep in Patagonia.