The jacaranda trees are blooming on the streets of Buenos Aires but in some ways the Argentine summer is almost over. Amid the street demonstrations by piquetero [unemployed groups], an authoritarian, self-deluding government is using a recovery bounce to avoid confronting the deep-seated problems that will come back to haunt it in 2005. Argentina is going down the drain.
Even worse, for people like 57-year old Miguel Santangelo – a minicab driver who takes home half of what he did before the 2001 crisis, when the convertibility regime of one peso to one dollar collapsed – the summer never began.
His story is Argentina’s.
“I am impoverished to the maximum by the crises. My salary of 25 pesos a day is only enough to eat and pay costs – not for savings,’’ he says, dressed at all times with Argentine stylishness in a classic grey suit with suede shoes. “After 1975 I was never able to save again.’’
At one point in the past Mr Santangelo had enough capital set aside to enter the US with an investor visa and buy a second-hand car dealership. He returned in 1983 and his savings evaporated as the succession of economic crises that have knocked Argentina ever further back in the past decades took their toll.
Lack of action
The current government is deluding itself that its lack of action on a number of fronts will keep an incipient recovery going, while the increasing social unrest – as evidenced by the street protests by more than 2 million piqueteros – is an explosion waiting to happen. “The history of Argentina is that no-one renounces temptation. And thus we have cyclones rather than cycles,’’ says economic historian Juan Carlos de Pablo.
Falls in GDP
In almost half of the past 32 years, there has been an extreme fall in GDP. Mario Blejer, a former Argentine central bank governor and now advisor to the governor of the Bank of England, notes that average annual GDP growth for 1971–2002 was 1.3%, equal to zero growth in per capita terms. GDP per capita at the end of 2003 was 15% lower than in 1997.
Is there any chance that the current economic revival – growth of about 7% in 2003 and forecast at 4%-5% this year – will continue or is it just a repeat of the standard Argentine/Haitian-style economic cycles? After all, inflation is a manageable 4%, there is an historically anomalous primary budget surplus of 3% of GDP and foreign companies have announced investment plans.
But look behind the numbers and the whole construct collapses. The state is in default on its foreign debt of about $80bn (it has the dubious honour of being the largest defaulter in history) while government debt is an unsustainable 150% of GDP.
President Néstor Kirchner, a man who takes pride in announcing that he never travelled abroad before becoming head of state, relies on opinion polls to bolster his minimal authority (see box). The balance sheets of many of the banks are a fiction, or “an expression of desire’’ according to Ricardo Gutiérrez, former president of the Banco de la Provincia de Buenos Aires, the country’s second largest, state-controlled bank. (He was replaced in December as he was perceived as too close to former regimes). A record 19 million people – more than half of the population – are living in poverty with a consequent increase in crime.
Government stance
The government argues that the country is already benefiting from the devaluation allied to President Kirchner’s policies and will emerge from its troubles. The Banker was refused access to anyone in the government bar the non-political central bank governor, Alfonso Prat-Gay, who refused to comment on the administration’s policies. But these policies are relatively well known, so, in the interests of fairness, we have put them in bold type below as we investigate the economic and political scenario.
Foreigners have realised our economic policy is right, as evidenced by growing foreign direct investment (FDI) – look at the recent investment announcements from the owners of the privatised utilities, like Repsol YPF or Telefónica.
A more accurate perspective is to compare Spanish company Telefónica’s capital expenditure per lines of service in its different Latin American subsidiaries in 2002. This gives a clear indication of the local investment climate and the company’s view of the growth potential for each country. For Telesp in Brazil and CTC in Chile, the investment was $46 and $35 per line, respectively. It was $9 per line for Telefónica de Argentina. This is the bare minimum needed for maintenance.
“[In terms of] infrastructure, Argentina is going to start hitting bottlenecks quickly,’’ says Guillermo Mondino, who was an advisor to Economics Minister Domingo Cavallo in his last term in office. “We have problems with water, gas, electricity.’’
A climate of uncertainty, where the rules of the game have been changed in the past and look likely to change in the future, is not conducive to FDI. Freezing tariffs was a popular move on the streets but not in the boardrooms. “You have to seduce, as we are a small market that is not attractive. FDI is going to Brazil,’’ says Freddie Thomsen, a consultant formerly with Dutch bank ING.
Pedro Pou, a former central bank governor, puts his finger on the nub of the issue: “They are behaving as if capital is sunk and not free flow.’’
Not paying our foreign debt is a magnificent sleight of hand that has allowed our economy to grow. We will probably let this run to end 2004 using a number of excuses.
There is an element of truth to this. “If the government had paid interest it would have a deficit of about 4%,’’ says Mr Mondino. According to a study by consultancy Orlando J Ferreres & Asociados, there is a total of $94,300m of public debt (foreign and domestic) in default subject to restructuring.
“We have to be realistic. If we don’t have an important haircut, Argentina will go back to the old times,’’ says Jorge Bledel, president of BBVA Banco Francés.
The administration’s proposal of an effective 90% haircut – between non-payment of capital and interest – went down badly with creditors, mainly because of the attitude rather than the actual number, which they saw as a negotiating stance. Lectures by government ministers on the stupidity of the bond holders in lending to Argentina have not been popular. Nor is its constant procrastination. The market is now assuming a 70%-75% haircut.
However, come 2005 and 2006, the country will have to re-access capital markets as performing debt with multilaterals and domestic debt comes due. The government has $32bn of debt with multilaterals, which the IMF agreement assumes will be rolled over. Who is going to roll it over and how much more will Argentina have to pay are the two crucial questions. Or is a second default possible?
“2005-2006 will be more complicated years for Argentina,’’ admits Luis Cubeddu, the IMF representative in Buenos Aires.
Growth is here to stay.
“Even for the companies that are doing well here, all the growth has come from using excess capacity. But the next step is, will they invest? It is all a bet on how the government behaves,’’ says Mr Thomsen.
Consumer demand is the major growth area, a combination of some enforced salary hikes in the private sector, dollars coming out of the woodwork and more certainty than in 2001-2002 in the midst of the crisis, when “people were expecting war”, according to a local. In addition, some industries, such as import substitution, have done well.
Local tycoon Eduardo Elsztain, who heads leading shopping centre and real estate companies, says he is very optimistic about the economy. “We are starting to invest. For example, [we have started on] Cuidad Deportiva de la Boca, a $400m project that will take a decade to build,’’ he says.
But there is another side of the coin. The much-vaunted export performance is mainly due to record highs in the price of soya bean, as well as crude oil price at highs of $30 a barrel. Looking at other exports – those that are supposedly benefiting from the devaluation – these fell by more than 6% last year compared with 2001. The $17bn trade surplus is down to a rise in the value of exports – not their volumes – and no imports. The excess dollars created through this do not return to the country.
Capital flight was 17% of GDP in 2002 and 13% in 2003, according to estimates by some economists, although the numbers could be substantially larger. Long-term growth looks difficult when credit is not really expanding, except in consumer and related areas, partly because about 30 of the biggest companies are public service ones whose tariffs have been frozen. They are using this as an excuse not to pay the banks. In fact, more than two-thirds of corporate debt is in partial or complete default or arrears. This is one of many issues that needs to be solved to put the banks on an even footing.
Meanwhile, small and medium-sized enterprises have learned to finance themselves with their commercial balance – but they cannot expand on the back of it.
We have a budget surplus – unlike most preceding governments – which is sustainable.
The 3% primary budget surplus is a result of an export tax of about 30% and a financial transactions tax. Both are meant to be one-offs. The first has taken away many of the benefits of the devaluation for exporters, and is alone responsible for about two-thirds of the primary surplus, while the second drives people, and now even companies, away from the banking system as it is a charge of 1.2% on any financial transaction.
Also worth noting is the fact that the fiscal adjustment has been made through increased tax revenues but no cut in expenditure: not a good recipe for the long term, especially as both local and central governments have a record of overspending.
Admittedly the government is in a difficult situation. Tax evasion is a way of life in Argentina, with the black economy responsible for an estimated 30%-50% of the economy.
Inflation, despite dire IMF predictions, is under control at 4%.
This is due to one-offs. Tariffs for the privatised utilities have been frozen. But the government will have to renegotiate them this year, while it will also find public sector employees are no longer willing to continue with frozen wage packets when the economy is growing. The fact that the government has forced through salary increases in the private sector to boost consumer demand is an added incentive for strike action by public servants. Pensions will also have to be adjusted.
The Ministry of Economy’s worrying decision in late November to force supermarkets in major urban centres to inform them of the prices of 42 basic products was interpreted by the stores as the first step in possible price controls (this was denied by the government).
On the positive side, it could be argued that, with 20% unemployment, salaries are under control. A relatively stable exchange rate has helped. The dollar is reasonably steady at 2.97 to the peso but daily central bank interventions are not sustainable.
The government is finally reforming the institutions to allow proper checks and balances in the system.
“Argentina suffers from organisational and institutional disorder, and disorder in the rules of the game. The government’s main mission is to improve the institutions,’’ says Mr Gutiérrez.
President Kirchner has fired some police chiefs, dealt with some of the military and is facing up to the politically tainted Supreme Court, in moves welcomed by all. However, at the same time he is devolving more power and the ability to decide on projects to the public works ministry, headed by his ally Julio De Vido, which implies his reform may be limited.
“The call to institutionalise is useless. After years of tumultuous history we can’t be asked to be British,’’ asserts Mr de Pablo.
The real challenge is reform of the co-participation scheme. Provinces are not responsible for tax collection; instead the federal government collects it, so the incentives for high-spending provinces to save are low. A reform of the law is a condition of the IMF agreement.
(The government believes the IMF has had its claws removed as Argentina owes it so much money that it dares not tamper with the recovery. The country is responsible for 8% of the total portfolio of the Fund and more than 500% of its quota. The IMF’s programme for Argentina has limited conditionality but it is arguably realistic within existing political constraints).
“We need to consolidate our legal framework. We have broken all the rules. We have destroyed the legal system,’’ says Mr Pou.
Banks are awash with liquidity and are already starting to lend.
There is an excess of liquidity in the system. Interest rates have fallen from 30% at the beginning of the year to 5%, notes Mr Bledel. But an uptick in consumer loans – credit is growing at about 8%, albeit from a very low base – is not a trend.
“We have more dollar deposits in safe deposit boxes than in real deposits,’’ admits the head of one of the top five banks. The system has about $25bn of deposits. It is estimated that up to $50bn is in safe deposit boxes and people’s houses. If it comes back into the system, once confidence is back, it will help the system. But current government policy is not encouraging this.
“Private banking offices are working till 11pm because so many people are sending money abroad,’’ says Orlando Ferreres, a former vice-minister of economy who now heads a consultancy.
The government has toned down its anti-bank rhetoric. It is no longer saying the lack of credit is the banks’ fault and it has started to realise part of the problem is lack of demand. Some of the banks have been inventive in order to restore confidence. Still, the financial system’s lack of solvency is the problem. Net worth of the system was $16.3bn in December 2001, then $7.9bn after the devaluation. It is now a negative $92m because of non-payment of corporate loans and a host of other credit losses, according to Mr Ferreres’ consultancy.
The government does not seem to realise that until bank balance sheets are sorted, proper banking business will be on hold. In December 2001, the financial system had loans to the public sector of only 21% of their balance sheets. It zoomed up to 54% in May 2003. Meanwhile, loans to the private sector in the same period plummetted from 45% to 17%.
Our relations with the local press are fine, they are supportive of our endeavour, while the importance of the foreign press has been exaggerated.
Local newspapers are in debt and vulnerable to pressure, as the majority of their advertising comes from the public sector. “You have to be careful of what you say with this government if you want any work from them, not just economists but all companies see it, as the government is so sensitive to criticism,” says Mr Thomsen.
As for the foreign press, a policy of hermetismo (tight secrecy) is followed.
Facing reality
Economist Ricardo Arriazu has been quoted as saying: “Lo que aqui es viveza criolla en otro pais es delito.’’ It can be loosely translated as “what is native canniness here would be a crime in another country.’’
Over the years. Argentina has avoided taking harsh decisions on its finances, living as though it was a European country when it is not. Blaming foreigners and the earlier regimes may be easy, but it is counter-productive. President Kirchner needs to face up to a debt repayment agreement, to harsh measures that will dent his popularity and to dealing with the unrest on the streets. His unwillingness is setting Argentina on an ever more slippery slope. Argentina’s GDP is now $120bn, an improvement on $90bn during the crisis, but nowhere near the $300bn pre-crisis. It will probably never get back there unless he changes his tune.
Is Argentina’s decline the fault of the politicians? “Of course. But it is the fault of all of us, ‘’ admits Mr Blejer.
“We are betting in Argentina for common sense, although it is a scarce good and takes a long time to arrive,’’ says Mario Vicens, president of the Association of Argentine Banks.
The kremlinology of Kirshner President Néstor Kirchner – whose Senator wife recently undertook a European capitals tour that was a pale imitation of Evita Peron’s many years ago – vaunts his combative style.
But so-called fights with Inter-American Development Bank president Enrique Iglesias and other dignitaries may be fictions designed to bolster his popularity and the image of Argentina against the world.
This is because the president made it into office with 22% of the votes and has no large base of support within his split Peronist party, so that achieving his current 70% approval ratings was a crucial element in his ability to govern. Recent elections at various levels have also boosted his power base.
“Kirchner is at least stable and will be able to take less populist decisions once he is established,” the head of Latin America for one of the largest Spanish investors in Argentina told The Banker in October.
This wishful thinking has yet to be realised. Meanwhile, President Kirchner gives concessions to ‘piqueteros’ who cut-off the city centre, distances himself from Brazil’s President Luis Inácio da Silva when the latter proved not to be a left-wing firebrand after all, calls President Húgo Chavez of Venezuela a friend and shows a worrying lack of transparency and authoritarianism.
“He is ideologically inflexible. He has a high-risk, anti-foreign strategy of promoting anti-globalisation. But this is not something you can control,’’ says Pablo Guidotti, dean of the School of Government at Torcuato Di Tella university. “I am worried by the ‘piqueteros’ – he has difficulty controlling them when he is so popular. What happens when the economy gets worse? We could have a lame duck president.’’
Supporters who point to his fiscally orthodox stance when running Santa Cruz – a province with a small population and large oil reserves – as evidence of what he may do with Argentina, may be misguided.
“Running Santa Cruz province is like running Kuwait. You don’t have to be a genius,’’ says consultant Freddie Thomsen.
