Argentina: the worst is yet to come

May 15, 2009
Argentina: the worst is yet to come
by Tyler Bridges. who covers the continent for McClatchy Newspapers

The global recession seems to be hitting the populist-governed countries in South America the hardest. The IMF expects Venezuela's economy to shrink in 2009 and 2010. Ecuador is having troubles. Bolivia only less so.

Argentina seems in serious trouble, according to this report By Juan Lagorio, Reuters

NEW YORK, May 12 (Reuters) - Argentina is confronting phantoms from the past, with a recession, capital flight and potential political turmoil looming as global economic uncertainty persists.

Unlike neighbors such as Chile, which saved part of its huge surplus in recent years to fund a counter-cyclical plan to cushion an economic slowdown, Argentina's bounty from record high prices for its plentiful grain exports has gone to finance subsidies and other government spending.

Now the government will be forced to tighten its belt as the worst global economic crisis in decades rapidly shrinks tax revenues and evaporates its fiscal surplus -- reviving the specter of the crisis in 2001, when the economy imploded, thousands of protesters took to the streets and the country had three presidents in a few days.

"At some point authorities are going to have to bite the bullet and go through a major recession there to get it going back in the right direction," said Will Landers, a portfolio manager at BlackRock who oversees $4 billion in Latin American equities.

"That's not going to be comfortable because that's what happened in 2001," Landers said.

In addition, next month's mid-term vote is seen as a referendum on President Cristina Fernandez's 17-month presidency. Polls show she could lose her majority in Congress, complicating the government's efforts to sustain the economy.

Argentina is already showing signs of stress, with industrial production falling in recent months. Foreign direct investment is expected to shrink 80 percent to $1 billion in 2009, a shadow of what it used to be, according to JPMorgan Chase.

Capital flight reached $5.7 billion in the first quarter, reflecting a lack of confidence in government policies, concerns over the country's fiscal strength and political uncertainties, Credit Suisse said in a report.
But Argentina is in much better shape now than it was in 2001 to weather a financial crisis, with strong international reserves, a stable and liquid banking system, and a primary surplus, which the government vows to sustain.

GHOSTS OF 2001

Fernandez suffered a sharp political defeat last year over export taxes on farm goods, and she could come out even weaker from a setback in the elections, said Christopher Garman, a political risk analyst at Eurasia Group.
"Argentina is probably where we're facing more of an acute crisis (in Latin America)," Garman said.

Former president Nestor Kirchner -- Fernandez's husband who heads the ruling Peronist Party and is running for Congress -- recently warned that if the government lost its congressional majority, Argentina could return to the chaos of 2001-02, marked by political unrest, the world's biggest sovereign default, a fierce devaluation, and soaring inflation.

"I can't say whether this idea of 'it's me or chaos' is an electoral strategy, or if it's a serious threat," said Alfonso Prat-Gay, a congressional candidate for the opposition Civic Coalition.

Some analysts speculate Fernandez might step down before her term ends in 2011 if she took a beating at the ballot, although that scenario seems unlikely for now.

IN DENIAL

Investors and economists stopped believing in Argentina's official inflation figures two years ago, when prices began soaring as the economy overheated but official numbers stayed low. Now, doubts have spread to most government data.

Many private analysts expect Argentina's economy to shrink in 2009 after growing by at least 7 percent in each of the last six years. Farm and industrial exports are already falling, domestic consumer spending has cooled, and some companies have delayed investments to await the outcome of the June 28 vote.

Fernandez has announced several initiatives to boost public spending and sustain the economy, but those plans look unsustainable.

The administration may be forced to further cut subsidies on transport, electricity and natural gas and suspend infrastructure plans, adding to a bleak economic outlook.

"Argentina probably needs to control spending; it needs to diversify its sources of financing; it needs to probably start to change its economic model by reducing the level of state intervention," said Shelly Shetty, Fitch Ratings' sovereign credit analyst.

She added the recession would extend well into 2010.

While domestic and external recessionary factors are moderating inflation, prices could pick up the pace in the second half of the year if the central bank allowed the local currency to depreciate quickly to help prop up exports.

JPMorgan and Standard & Poor's forecast the Argentine peso could lose up to 20 percent of its value to trade at around 4.50 per dollar by year's end.
In addition, Argentina, unable to tap financial markets effectively, is borrowing heavily from its state-run pension administrator and other public agencies this year. But the government has no clear plan for 2010 and beyond.

"Clearly there are question marks on the horizon for Argentina," Shetty said.