MRO Magazine

Argentine president says ‘world is falling’ as storm clouds loom over its once booming economy

Buenos Aires, Argentina -- Argentina's nine-year economic expansion appears to be slowing sharply, according to analysts, who predict growth of 2.5% to 3% this year, half the 5.1% projected by the government's 2012 budget and down sharply from...

Buenos Aires, Argentina — Argentina’s nine-year economic expansion appears to be slowing sharply, according to analysts, who predict growth of 2.5% to 3% this year, half the 5.1% projected by the government’s 2012 budget and down sharply from last year’s 8.9% rise.

Some economists are even predicting recession before year’s end, saying recently imposed currency and trade restrictions, high inflation, price controls and capital flight are making it tougher to protect Argentina from the global slowdown.

“The tail wind has ended and there are storm clouds gathering. Argentina is more exposed,” said Ramiro Castineira, an economist with the Econometrica consultancy. He estimates 2.5% growth this year and worries the government’s economic interventions have left it too weak to respond to global pressures.

Argentina’s GDP averaged annual growth of 7.1% from 2003 to 2011 as President Cristina Fernandez and her late husband and predecessor, Nestor Kirchner, guided the country out of an economic abyss created by its world-record loan default and currency devaluation in 2002.


Key to the comeback was Kirchner’s refusal to pay back international lenders in full. The move made Argentina a pariah among many investors, but enabled the government to spend billions on rebuilding the domestic economy.

The government has poured money into industrial subsidies, public works projects, generous welfare payments and other popular stimulus programs collectively known as the Kirchners’ model for growing a more inclusive society.

The year-after-year growth has been a point of pride for Fernandez, who insists the US and Europe should learn from Argentina’s example rather than impose austerity measures that have so far failed to turn around failing economies.

Now, however, even Fernandez is acknowledging that the good times are running out, although she blames the problems on the global crisis, not her own policies.

“We’ve never fallen from the world; we have the problem that the world is falling on top of us,” the president said last week as she announced a new round of government-backed credits to Argentine businesses worth $1.8 billion.

“Today we have to focus on investment; that’s the key to surviving what’s coming,” she said, warning that business leaders who want her government’s support will be expected to make long-term bets on Argentina.

A wide range of factors is involved in the slowdown. Agricultural production dropped sharply due to low rains this past growing season. Industrial production also dropped despite high internal demand because trade protections make it more difficult to get parts for everything from smartphones to refrigerators to automobiles.

Brazil, meanwhile, has been devaluing its currency as its economy slows, making Argentine exports to its main trading partner less competitive.

Construction is usually a main economic driver, and Argentines habitually turn to real estate as a way to shelter their wealth against inflation. But new projects have slowed sharply as sales plunged 15% this year, due in large part to currency controls imposed by the government to stem capital flight. Nearly all Argentine real estate transactions are done in dollars, which are now scarce as people try to dump their pesos and move their wealth out of the country.

The smart money is rapidly flowing out of Argentina, said former economy minister Roberto Lavagna, who presided over the first years of the current expansion.

“If $23 billion that should have been invested in Argentina fled the country (in 2011), it was for a reason,” he told reporters.

For the first time in years, Argentina is now spending more than it takes in, closing 2011 with a budget deficit of 1.6%, according to official data.

Argentina has vast untapped oil and natural gas resources, but production hasn’t kept pace with the country’s economic growth. The government has only recently begun removing some of the price controls imposed nearly a decade ago. Cheap energy gave Argentine businesses a huge advantage, but dissuaded Repsol and other leading oil companies from digging hard for oil and gas that they would have to sell at a loss.

“These problems are beginning to reach critical mass,” said Fausto Spotorno, an economist with the Orlando J. Ferreres y Asociados consultancy. “The energy crisis, which holds back much of the productive capacity, is generating budgetary problems, which in turn create the need for currency controls and problems with the money supply.”

Meanwhile, annual inflation could reach 25% this year, nearly three times the official rate, private analysts say. Unions, once the government’s reliable allies, are pushing for even larger pay increases to keep pace, despite evidence of a slowdown.

Fernandez has urged both business and union leaders to avoid ruining an increasingly delicate economic balancing act.

“A very difficult world is coming,” she warned, urging unions in particular to act responsibly. “They kick up a storm and everybody shouts to see who can get more (but) when everything turns rotten, the leaders split, and those who are left without a job are the workers.”