Argentina’s Outlook: Political Issues Hurt a Favorable Economic Environment

From the economic point of view, 2010 should be a good year for Argentina’s economy. The agricultural sector will show a strong recovery, the industrial production is also growing, reflecting the performance of its neighbor, the Brazilian economy. Tax revenues will climb faster and debt services are lower than the last year. Nevertheless, we expect a year of continuous political conflicts that may generate uncertainty, some volatility in financial markets and may hurt the favorable economic environment. The conflict between the president of the Central Bank and the Federal Government is the first one but may not be the last one. 

The presidential approval is declining rapidly and the Kirchner’s administration feels it needs to spent more money in public investment and social programs if it wants to have a chance in 2011 presidential elections. Thus, the government decided to close a deal with bondholders that still own defaulted debt in order to have access to international markets. In addition, the Treasury plans to obtain additional financing from the Central Bank reserves in order to cover its financial needs for 2010 and increase the public outlays. If the Government keeps the public expenditure between the limits of the Federal Budget and it gains access to international markets there is not much need for the use of international reserves.

However, the law explicitly forbids the Central Bank to lend international reserves to the Treasury. The Urgency Decree (DNU) signed by the President Cristina Fernandez de Kirchner is a very questionable instrument to allow this operation. In fact, most jurists believe that it will need a law from Congress to permit it.  But after the elections the Kirchner administration lost the majority and the law probably would not pass. The weak legal framework forced Redrado –the Central Bank’s Chairman- to challenge the decree. These events led to a political and institutional crisis that has not been solved.

So far, Government had never met a Congress dominated by the opposition, thus the coexistence will probably be tough until end of 2011. This crisis demonstrates the high degree of political conflict in Argentina. However, the economic environment is relatively favorable and this political crisis is blown out of proportion.

In fact, during 2010 Federal Government fiscal deficit will remain around 1% of GDP with a primary fiscal surplus of 0.8%. Total debt services will fall this year to 4.5% of GDP which is low. Also, tax revenues will probably grow pushed by export duties and the recovery of the economy.

According to the IGA-OJF (General Activity Index) the GDP fell 4.5% in 2009. In 2010, the GDP may grow 4.5% reflecting the strong recovery of agricultural and industrial sector. Exports will probably grow 23% this year but imports will grow even faster (38%). Trade balance will still be positive around 4% of GDP. However, inflation is also climbing due to an excessive growth of government outlays and it can reach 20% annual rate by the end of this year. Clearly, the recent crisis in the Central Bank is not helping.

2 Responses to "Argentina’s Outlook: Political Issues Hurt a Favorable Economic Environment"

  1. wdm223   January 12, 2010 at 9:37 pm

    Argentina holds the record for most defaults of any sovereign debtor in the past 200 years–only Ecuador is close.They have major, persistent tax compliance problems and systemic corruption.To whom are they exporting…Mercosur?How many dollars/Euros do they earn from exports?Expect another default when commodity prices drop again.

  2. The Iron Maiden   January 15, 2010 at 6:51 am

    The article is misleading. Redrado was not forced to challenge anything. He simply is under a trade off: if he obeys the decree, that breaks constitutional clauses, opposition Congressmen will prosecute him; if he does not, will be kicked out of the Central Bank at risk of being prosecuted by Peronist politicians and pro Kirchners Congressmen. He simply promoted a scandal to survive as a future “trustable” economist for the Post-Kirchners years, at the cost of sinking Argentina in a new crisis. The longer the scandal, the longer the amount of public officers,charlatans and even TV talking heads adding more and more confusion. Further, real economy environment is not so positive. If imports and industrial production will grow so much, why should the Kirchners need to increase public expenditure even more, in order to avoid a tough defeat in 2011 Presidential elections?