A photo exhibition in front of the Casa Rosada in Buenos Aires, where Cristina Fernández de Kirchner holds court as Argentina’s president, depicts the last eight years of political rule.
Fernández and her late husband and predecessor, Nestor Kirchner, are pictured with celebrities, world leaders and the poor, often at moments of seeming triumph.
Argentines have a lot to cheer about. The economy expanded by an average of 8% a year between 2003 and 2011, fuelled by high prices for its export commodities like soybeans. A steady rise in wages kept pace with fast inflation, spurring a boom in consumption.
This year, however, such good fortune may not befall the president. Fernández, now in her second four-year term, will have to govern while facing tighter finances and a slowing economy.
The challenge of keeping the books in order, a keystone of the economic platform engineered by her husband to help lead the economy out of the 2001–02 collapse, has led to blunders and has exposed a desperation to come up with more funds, says Sergio Berensztein, director of the Poliarquía polling and consulting company in Buenos Aires.
“It is a government that is showing a lot of improvization and a lot of in-fighting,” he says. “While the president’s image is still strong, it is deteriorating.”
Her vice-president, Amado Boudou, is under attack over corruption allegations. Unions are murmuring about a strike. Teachers walked off the job in March after Fernández suggested they were lazy moneygrubbers.
This is a setback for the president, who won re-election with 54% of the votes last October on the back of the strong economy and popular measures such as making professional football available for free on state television.
Her approval rating surpassed 70% in February after denouncing Britain for what she called a militarization of the Falkland Islands, a self-governing UK territory in the South Atlantic that Argentines claim as their own. It is an issue that touches a deep chord with the populace.
Her popularity then tumbled to 60% or less in response to a train crash that killed 51 and injured more than 700 at a central station in Buenos Aires on February 22. Many are blaming her administration for the tragedy, saying it failed to maintain services because hefty subsidies to the railway went only to cover rising wages.
Worse for Fernández, the economy is expected to slow this year. The government says output will expand by at least 5.1%, whereas private-sector forecasters put the number at 4% or less, a sharp drop from 9% in 2011.
This could cut tax revenue, while a November-January drought and a stalled Brazilian economy could do so on export duties.
TIGHTER FINANCES
Fernández is finding it harder to afford extravagant public spending and subsidies that for years have provided fuel for a consumer spending boom, behind which rests much of the country’s economic growth and her popularity.
“Fernández will have to learn how to rule with less money to throw around,” says Federico MacDougall, an economist at the University of Belgrano in Buenos Aires. “She has to reduce spending, but politically she must continue with the same agenda that brought her so much popularity.”
Fernández has won allegiance from the poor and most mayors and governors through public works and welfare programmes, leaving a weak and divided opposition seething on the sidelines.
Yet with the economic slowdown, the government started making cuts late last year. It has reduced energy and water subsidies on big companies and wealthy households and will extend them to the middle class and to bus, subway and train fares this year to save the state about $3.5 billion, says Luciano Cohan, chief economist at Elypsis in Buenos Aires.
More effort is focused on curbing capital flight, which nearly doubled to $21.5 billion in 2011 from $11.4 billion a year earlier, amid growing concerns about the impact of the global economic downturn on Argentina’s economy. That cut reserves by 11% to $46.4 billion last year as the central bank sold dollars to sustain an 8% depreciation of the peso against the dollar, faster than 4.7% in 2010.
To contend with this, Fernández tightened capital controls, ordering insurance, mining and oil companies to repatriate export dollars or foreign investments. She deployed tax inspectors to enforce a requirement on individuals to substantiate their purchases of dollars. Companies were told not to wire profits abroad and to get authorization for buying dollars to pay for imports. Hyundai, Porsche and other importers were ordered to offset their dollar spending on imports by exporting the equivalent in anything from peanuts to wine.
The tactics have helped. Capital flight fell to $3.3 billion in the fourth quarter of 2011 from $8.4 billion in the previous quarter. Imports are expected to expand 2.9% this year, far less than the 31% in 2011, says Cohan.
A REALITY CHECK
For Esteban Fernández Medrano, an economist at MacroVision Consulting in Buenos Aires, the moves are not a shift in economic policy but “a reality check”. The big challenge, he says, “is to avert a deterioration in the fiscal surplus at a time when the economy is slowing”.
And the options? Devalue the currency, borrow on capital markets or dip deeper into central bank reserves.
An obvious choice is to tap the ample liquidity in credit markets, but that may not be a cheap option for Argentina. Alberto Bernal-Léon, head of research at Bulltick Capital Markets in Miami, reckons that Argentina would have to pay 9% on a 10-year bond, more than double that of Brazil.
Not that selling debt is likely. Fernández is a vocal fan of debt reduction, helping Argentina to cut its debt to less than 45% of GDP, and holding only 13% in dollars. That’s down from the 54% the country had in 2001 when it defaulted on $100 billion in debt.
To go to the markets, Argentina still has to settle about $9.5 billion in defaulted debt with the Paris Club of creditor nations, exposing it to an IMF review of its economic data, which is widely thought to be doctored. The government says consumer prices, for example, rose 9.7% on the year in January, far below private estimates of close to 25%. The price data also exaggerates its GDP reports.
That puts it in a bind. While it needs money, it is snubbing debt accumulation and is adamant about the validity of its data, to the extent that it has harassed and fined economists daring to contradict its numbers.
Berensztein doesn’t expect a change. “Every time the president has faced a restriction or a problem, she has doubled her bet,” he says. “She has never questioned the fundamentals of her economic policy.”
This is fuelling expectations that she will pursue other channels for financing, chiefly the central bank.
When the government ran short in 2008, Fernández took over the private pension fund system to gain close to $30 billion in assets and $5 billion in annual contributions. Two years later she started dipping into reserves, using them to cover $6.6 billion in debt payments in 2010 and $7.5 billion in 2011. It will use at least another $5.7 billion this year.
On March 1, the president sent a bill to Congress that would grant the central bank a greater role in extending credit for economic development in addition to its mandate to preserve monetary stability. The reform is expected to gain speedy approval because the president has control of both houses.
Martín Redrado (who ran the central bank from 2004 to 2010) is warning against the project. He says this will lead to more monetary expansion and inflation, the same caution he gave the president two years ago before getting the sack.
The bank, he says, has become “a parallel Treasury” since he left, with the debt financing causing the expansion of pesos in circulation to increase 35%, up from 14% in 2009. This has weakened its capacity to sustain the exchange rate, with the spread between the official rate and the black market widening to 10–12% after his dismissal.
For Redrado, the reform is a sign of how the government’s pro-consumption objective is out of kilter with other cornerstones of sustainable growth: investment and trade. By not working on all three, he says, the country is running out of money and failing to attract investment to keep pace with demand.
To bolster lending, he says, a sounder option would be to form a development bank like in Brazil and Mexico.
Fernández thinks that the central bank can do both, saying that the reform will give it more leeway to print pesos for commercial banks to make loans.
However, Redrado says this doesn’t attack the root of the problem: a lack of confidence in the currency and economic policy. There is no long-term confidence in the peso for banks to capture the deposits needed to make long-term loans, he says.
The government, he says, is taking a shortcut to build long-term credit by throwing pesos at banks.
FERNANDEZ IN CONTROL
Even so, Redrado and others expect the president will get her way. The opposition is too feeble to pose a challenge, and few in her administration dare contradict Fernández.
“Everybody in the government wants to flatter her and take good news and tell her that she is the best president who has governed Argentina since Juan Domingo Perón,” says Redrado. “Nobody is prepared to bring her bad news.”
For him and others, this is a sign of the president’s excessive oversight of the economy. She operates from a small power base of three or four close associates, taking most of the decisions herself, even on the exchange rate and the level of reserves.
Fernández has said that by building up consumption, investment will follow. But with business conditions so erratic, few want to invest in new capacity and technology, keys for keeping the economy competitive over the long run, says Karen Hooper, senior Latin America analyst at Stratfor, a geopolitical analysis company in Austin, Texas.
“It doesn’t help investment when the government is sending out the message, ‘Do what I tell you or back off,’” she says.
Elypsis’ Cohan says that instead of concocting a well-organized and rational plan, Fernández is keeping her fingers crossed that a revival of the global economy and a boom in local shale oil and mining output will help the country ride through a period of financial scarcity to resume strong growth.
There is huge potential for these industries and they could prove lifesavers for government finances through a surge in tax revenues. Argentina has among the world’s largest resources of shale oil and gas, enough to allow it to replicate the US shale boom. The mining industry has the potential to emulate Chile, with its $50 billion in annual exports – compared with Argentina’s $5 billion this year.
But not many investors are biting.
To do business in Argentina, companies need to be agile, flexible and savvy, says Marcos Juejati, president of Northbaires, a real estate developer in Buenos Aires. “You have to adapt to the changes,” he says. “If you are rigid, you could easily go bust.”
To play better, foreign companies like Exxon Mobil and Shell are teaming up with shrewd locals.
“Companies can still make money in Argentina, particularly if they go in with a local partner that has political connections,” says Mark Jones, an expert on Latin American politics at Rice University in Texas.
Not all are keen, with more multinationals shifting regional bases out of Buenos Aires to Brazil and Colombia, according to head hunters.
To get Argentina back on track, many economists are calling for what Fernández eschews: a coordination of economic, fiscal and monetary policies, a clean-up of official data, a reduction in taxes and a return to the world. But few expect a transformation of Fernández to such pragmatism, saying that she will probably muddle along in an attempt to deepen her pro-growth policies, populist measures and social welfare programmes.
The question is how long this state of affairs can continue.
“Even if commodity prices remain high, the subsidies are going to overwhelm her at some point,” says Riordan Roett, who chairs the Western Hemisphere Program at Johns Hopkins University in Washington, DC. “Fernández will have to go on robbing what she can until there is nothing left to rob, and then the day of reckoning will come.”