Argentina, South America’s second largest economy is presently making modest gains from the recession of year 2009 and moral rebound from the economic depression the country experienced in the early 2000’s. The Argentine peso (ARS) has traded steady since the economy stabilized in 2003 with modest depreciation to the US-dollar over the last 8 years, see currency details at end of the report. Currency crashes, hyperinflation and economic dislocations are no stranger to this country. Below is a snapshot overview of some of our research findings and comments about Argentina.
How did it all go wrong?
After the terrible hyperinflation of the 1980’s and early 1990’s, Argentina implemented a new currency regime, the “convertibility” system in 1991. From year 1989 to 1991, the economy was at hyperinflation levels with inflation near the 3,000 percent level. Under the leadership of a new centre-right President, Carlos Menem, the economy began to boom in the 1990’s as it grew by 40 percent. Massive levels of foreign investment, tax relief, industry privatizations brought a sense of economic renewal and strong GDP growth to Argentina. The government at the time financed budget deficits by issuing international bonds. In fact, Argentina accounted for 25 percent of the emerging bond market. This new so-called economic security was in large financed with borrowed money, as debt levels increased, so did the interest rates on the debt. Former President Menem during the 1990’s had the correct policies of lower taxes, higher levels of foreign investment, industry privatization and increased freedoms to its citizens.
Year 2001-02 Economic Collapse for Argentina
The tension in Argentina was building until it all collapsed like a deck of cards in December 2001 when Argentina defaulted on 95 billion USD of debt, making it the largest sovereign debt default in history. Argentina today remains in a somewhat weakened state from the devastating economic collapse in 2001 where unemployment reached 25 percent and upwards of 60 percent of its citizens were living below the poverty line. It was Argentina’s worst economic crisis in its almost 200 year history. Argentina has experienced the threat and reality of economic crises for decades. This nation of 41 million people has been governed from one unstable government to another. Real estate prices in Buenos Aires fell by 75 percent in direct correlation to the collapse of the Argentinean peso. Previously, the 1970’s witnessed military dictatorships leading to the Falklands War with Great Britain and hyperinflation in the 1980’s. This is indeed a very ironic outcome for Argentina reflecting the national mismanagement that has taken place as the economy has been stagnant from 1940 to 1992 considering that earlier in the 20th century, Argentina was one of the wealthiest countries in the world.
Former President Menem states that he inherited an economy when he took power that was loaded in debt at approximately 120 billion USD although much of this was disguised in voodoo accounting. As the good times endured during the 1990’s, Argentina’s debt load accumulated as stated to a massive level until it crippled the economy by 1999. The Argentinean economy with rigid labor laws became unproductive mixed in with low commodity prices and new tax increases under former President de la Rua.
Bad Luck and Failed Currency Policy
The devaluation of the Brazilian Real in January 1999 coupled with the Real’s steady depreciation during year 2001 greatly impacted Argentine exports aiding to Argentina’s five year recession. The IMF in December 2000 provided Argentina with a 13.7 billion USD loan coupled with an international rescue package of 39.7 billion USD. This relief package turned out to be a short term solution as Argentina defaulted on its debt in December 2002 making it the largest sovereign debt default in history. Since 1999, Argentina’s economy got caught in a currency jam as Argentina’s peso is pegged to the USD in a 1 to 1 ratio in a currency board arrangement. The prolong bull market in the USD that began in 1995 over time made Argentina’s exports uncompetitive particularly when neighboring economies currencies were depreciating versus the USD by the late 1990’s. Argentina under President Menem was correct to anchor against the USD to rein in inflation and bring stability and growth to Argentina. Where they went wrong is that they stayed on the currency anchor far too long, they should have abandoned it in the mid 1990’s to a floating exchange rate regime rather than hanging on.
POLITICS: President Cristina Fernandez de Kirchner representing the centre-left of the Front for Victory (FPV) party is currently in power. Argentina’s volatile political history was noticed in December 2001 which included 5 Presidents taking office after former President Fernando de La Rua was forced to resign after social protests and violence resulting in 30 dead. Now finally, a course of political stability has taken hold but political surprises have been popular in Argentina including military rule which ended in 1983. It should be noted that President Cristina Kirchner assumed the Presidency after her husband served one term in power. She is the first democratically elected female President of Argentina.
ECONOMY: agricultural based, industrialized. mid 2002, the Argentine economy has stabilized somewhat after the massive currency devaluation at the beginning of the year. An inappropriate currency regime that remained in place for too long during the 1990’s was one of the factors that helped to cripple the economy by year 2001. From years 2003-2008, the Argentine economy rebounded strongly with the global rebound in commodity prices. The national debt is in the process of being renegotiated with international lenders, the IMF was paid out in full in January 2006 (9.8 billion USD) with negotiations still underway with the Paris Club on approximately 29 billion USD equivalents in defaulted bonds. Once finalized, Argentina will be in a stronger position to borrow money more at preferred rates on the world money markets.
Many Argentines view the IMF quite negatively as they blame the IMF’s support of free market policies during the 1990’s as the root cause for Argentina’s downfall. Former President Kirchner (husband) ended this tie to the IMF during his term in power. The downside is that is has isolated Argentina to some degree in the world capital markets.
The government over recent years has followed a recipe of maintaining an artificial cheap exchange rate to stimulate exports coupled with low interest rates and high government spending. If not realigned, the risk to the economy is an inflation spiral. The economy is in need of more investment into productivity has years of underinvestment has created capacity constraints.
Segments of the Argentine economy remain inefficient resulting in real wage declines. Argentina for the most part is a protectionist economy collecting huge tariffs on imports. Rising global commodity prices will help the economy grow especially in metals & mineral mining. Argentina does have modern first class mining laws as they do encourage foreign investment into mineral exploration, particularly gold and silver mining. The economy for the most part is dependent upon agricultural (beef, soybean, wool, grain) and energy resource exports for foreign exchange earnings. Major export markets include Brazil and China.
Economic Statistics
GDP as measured by purchasing power parity stands at 558 billion USD (2009) with equivalent GDP/Capita at 13,800 USD. Market GDP measurement has the economy at 301.3 billion USD (2009). GDP growth rates include year 2007 at 7.5 percent, year 2008 at 5 percent of GDP, year 2009 (recession) declined by 2.5 percent, year 2010 forecasted upwards of 1.5 to 3 percent of GDP. The reliability of these statistics is not a given as some thinkers believe that Argentina’s economy may have declined in total size from 2007-09; the official stats maybe fraudulent. Inflation quotes include year 2005 at 12 percent, year 2006 at 10 percent, year 2007 in the 15 percent range, year 2009 at 5.6 percent and year 2010 forecasted in the 5 percent range subdued by the recession in 2009. Other historical inflation numbers include year 2002 at 40 percent; inflation for year 2001 came in at 4 percent after a deflationary 2000 at 0.7 percent at a time when the peso was pegged to the USD. Inflation had peaks in year 1976 at 444 percent and in 1989 at 3080 percent. The current account is in surplus at 14.4 billion USD (2009) with the important trade account also showing a surplus of 17 billion USD (2008). The primary fiscal account is in surplus but the overall account is in deficit at 1.8 billion USD equivalents due to high debt payments. Total external debt has declined down to 108.6 billion USD (2009), public debt at 49 percent of GDP. Official unemployment now stands at 9.6 percent with 14 percent of the population living below the poverty line.
POSITIVE: rich in natural resources, well educated nation, new markets such as biofuel (soya oil) for export. CONCERN: populism policies, expropriated pensions, export taxes, rigid labor laws, credibility of government economic statistics, decimated mortgage market – real estate paid for in cash mostly, declining hydrocarbon reserves, price controls, government bureaucracy & regulations.
BANKING SYSTEM: recovering from the dreaded liquidity crisis and banking freeze as a result of the debt default in 2001. During the financial panic leading up to the debt default, Argentina’s banks experienced bank runs exceeding 20 billion USD with much of it in mattress money reflecting low confidence in the banking system. At the time, former President Duhalde implemented banking restrictions in December 2001 including a bank account freeze and ruled USD deposits to be converted to pesos. As a result, social protests and violence came to fruition.
Authorities have tried to keep Argentina’s inflation rate at around 10 percent per year. Critics have argued over the last few years that the government understates the true inflation rate. The actual inflation rate maybe upwards of 50 percent higher than the official rate. Banking system crisis dates include: 1980-82, 1989-90, 1995 Tequila Crisis, year 2001. As of January 2010, foreign exchange reserves were at a very respectable 48.1 billion USD equivalents.
REGIONAL: Brazil, Uruguay, Chile
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KNOWLEDGE: Minerals
Argentina is rich in natural resources including large areas of fertile agricultural farmland. Mining investment is an important source of capital inflows representing 7 billion USD during the 1990’s and up until 2010 Argentina is projecting to attract another 8 billion USD. Mining reserve wealth alone for Argentina is estimated at 50 billion USD in the areas of silver, zinc, copper and gold production. In the energy sector, Argentina is the 4th largest producer in Latin America including advanced nuclear production facilities with 3 nuclear plants. The nuclear industry is Latin America’s most advanced. In oil, Argentina’s offshore ocean shelf is said to be larger than the North Sea as minimal offshore oil exploration to date has been implemented in the southern Atlantic. Tremendous oil wealth lies ahead for Argentina. Oil production for 2008 came in at 792,300 bpd (Argentina is a net energy exporter). In addition, Argentina’s natural gas reserves are the 2nd largest in South America at 24 trillion cubic feet with Chile being an important consumption market. Finally, great energy wealth also exists in hydropower as with new dams Argentina has the capability to increase hydropower output for electricity production. Giant Brazil with its huge market will be an important energy export market for Argentina.
CURRENCY: ISO symbol ‘ARS’, Argentine peso(s), Argentinean peso. At time of review on March 23, 2010, the Argentine peso had an exchange value of 3.863 ARS to 1 US-dollar (USD) and/or 5.233 ARS to 1 euro (EUR). The peso is now under that of a floating exchange rate regime as of February 2002 when the currency board arrangement was abandoned in January 2002. Before convertibility law in 1991, Argentina has had a long history of peso devaluations. Argentina’s floating exchange rate is the appropriate currency regime in BankINTRO.com’s view. For decades, Argentina has basically operated with two currencies, the peso and the USD. Since 1935 when the Central Bank of Argentina was established, the peso has been decimated in value and holds a terrible record reflecting the competence of its politicians. In comparison to purchasing power parity, as of year 2009, the ARS was approximately 17 percent undervalued in relation to the USD. Argentine economy remains highly USD dollarized.
CURRENCY HISTORY: historical valuations include convertibility implemented in 1991 where the Argentinean peso was pegged at par to the USD (1.0), January 1, 2002 at 1 ARS to 1 USD, January 9, 2002 at 1.21, January 16, 2002 at 1.88, March 20, 2002 at 2.54, March 27, 2002 at 3.25, June 26, 2002 at 3.88, November 20, 2002 at 3.55, January 1, 2003 at 3.36, March 19, 2003 at 3.06. Low came in at 3.9 ARS to 1 USD in March 2002.
May 26, 2003 at 2.88 ARS, January 2004 at 2.889, January 2005 at 2.959, January 2006 at 3.073, January 2007 at 3.105, January 2008 at 3.17, January 2009 at 3.527, August 2009 at 3.858 and January 2010 at 3.874.
Alternative Currencies
When economies enter depressions and confidence is lost in the national currency, citizens often look to alternative forms of currencies to facilitate transactions. Argentina is no exception. Speudo currencies have included Patacons, provinces have issued paper promises with their own currency versions including federales, petroms, independencias as ‘quasi-currency’. Other currencies including barter have become very popular including creditos. At present, there are one million members in Argentina who belong to ‘Barter Solidarity Network’ with up to 5 million Argentines using various barter clubs. Shopping malls in Buenos Aires issued its own currency for shopping ‘pacificos’. These forms of alternative currencies are not a healthy sign to an economy and once the faith is returned to the peso, these alternative currencies will lose their appeal.
Possibility for Mercosur Dollarization?
A possible scenario is a currency union amongst MERCOSUR countries as Brazil and Argentina’s economy become more interdependent on trade rather than the Argentina’s small trade with the United States which finds itself in a precarious economic situation itself. Another currency option discussed is for a ‘Union of South America Nations’ (UNASUR) whereby 13 nations agree to a common market and currency in similar framework to the current Euroland Euro (EUR).
CURRENCY OUTLOOK: fluctuate in a trading range of 3.5 to 4.2 ARS to the US-dollar (USD) over the next 12 months as the USD makes steady appreciation gains with expected rising US interest rates. The most significant currency risk to Argentina is political and its history of managing the economy in a boom / bust manner. An inflation spiral is always a risk as the powerful unions may force unprecedented wage increases. Further, massive government spending increases during 2009 is adding fuel to the inflation fire.
With the negatives, the one large positive for support for the Argentine peso is the government’s commitment to maintain very large currency reserves to protect against a repeat of currency collapse 10 years ago. Overall, the currency as suggested by purchasing power parity remains undervalued, this is confirmed as Argentina remains an inexpensive place to visit for foreigners as reflected in the value of the local currency, the Argentine peso.
UPDATED: March 23, 2010
