As President Cristina Fernandez de Kirchner sweeps into office for another term, there is a sinking feeling that the country is in for a rocky patch. President Fernandez de Kirchner enjoyed the spoils of a booming economy. With an unemployment rate of 7.1% and GDP growing more than 9% y/y, it was hard for the opposition to feed on any discontent. Moreover, the opposition was disjointed and ran a very weak campaign. Meanwhile, Cristina demonstrated a degree of charisma that never came natural to her now-deceased husband. Argentines are sentimental, and she was able to capitalize on that by portraying herself as the struggling widow who was trying to keep her husband’s legacy alive. Efforts to build a memorial shrine in his home province of Santa Cruz helped erase some of the bitter memories of his policies. In contrast to previous elections, the City of Buenos Aires was not plastered with the usual political slogans and advertisements. This was a “none-election” election, where the outcome was a forgone conclusion before the campaign even started. Unfortunately, the next four years are not going to be so pleasant.
The favourable conditions that allowed Cristina to employ a mix of heterodox policies are coming to an end. The European financial crisis, along with the slowdown of the Chinese economy, is putting downward pressure on commodity prices. Not only is this eroding the country’s external balances, it is hitting the Brazilian economy—the main destination for Argentine industrial exports. Automobiles, steel and processed foods are the sectors that are most at risk. Unfortunately, many of the companies are in the greater Buenos Aires area, and they are huge sources of employment. This will surely put pressure on the central bank to devalue the peso, in an effort to keep them competitive. The recent decline of the Brazilian Real was an omen of what lies ahead. Argentine households are not taking chances, and they are running for the door. Capital flight is on the rise, not because Argentines are concerned about domestic conditions, but because the currency is expensive and they have a premonition that the central bank will let the currency go after the elections. The central bank already spent $6 billion in defending the peso, at a moment in time when the current account is turning negative and it still has no access to the international capital markets. Likewise, the decline in export earnings will crimp the government’s high-flying life style. Huge wage increases and enormous public subsidies were possible when export tariffs were pouring into the treasury. But, this will soon be a distant memory, and the government will need to mend its profligate ways. With transportation and energy subsidies draining 40 billion pesos a year from the government’s coffers, it is expected to raise energy rates. Given the high rate of inflation, this should not be so difficult. Consumer prices are rising at more than 25% per year, and this is making Argentina as expensive as some of its Latin American neighbours. The increase in energy tariffs will be accompanied by a reduction in subsidies, but there will be winners and losers in the process. Probably the biggest subsidy reduction will be for imported energy from Bolivia, Brazil and overseas. This way the government can stem some of the drain on international reserves. It is clear that the Argentine government will soon reverse its antagonistic posture towards the international capital markets. Ironically, the government’s need to return to the capital markets could lead to a rating upgrade, at the very moment when its credit fundamentals are deteriorating. Access to the capital markets is an important criterion for the rating agencies.
The only silver lining for Argentina is the low level of consumer debt. Argentine bank credit to the private sector is the lowest in Latin America, representing only 16% of GDP. It is 80% of GDP in Chile, 49% in Brazil and 40% in Colombia. Mortgages are scarce and almost non-existent in Argentina. Most transactions for homes and automobiles are in cash. There are some shadow-banking activities with a few retailers offering in-store credit cards and credit promotions, but it is nowhere near the scale of other emerging market countries, such as China, Indonesia and Turkey. Therefore, Argentina should not face any financial sector problems. Nevertheless, much of the favourable conditions that boosted President Fernandez de Kirchner will soon disappear, squeezing the economy like an oversized plump lemon.