Argentina Economic Recent Trends

HIGHLIGHTS

* Regional Importance - According to IMF estimates, in 2010 Argentina was the second largest economy in South America by GDP, trailing only Brazil

* Exporting Strength - Has developed trading ties with emerging and developed world powers. Countries, as a percentage of total exports: Brazil 18.8%, China 9.3%, Chile 7.1%, USA 6.4% (CIA Factbook 2010*)

* Agricultural Commodities - Second largest corn exporter and third largest soy exporter in the world, stands to benefit from increased food demand in the emerging world (CIA Factbook 2010*)

* Energy Developments - Natural gas reserves discovered in 2010 will help Argentina move toward energy independence, combined with additional investments in hydroelectric and nuclear power (Reuters 2010)

* Infrastructure Expansion - The government is moving to upgrade Argentina's railways, energy production and telecommunication capabilities with increased investment in 2011 (Wall Street Journal 2010)

* Foreign Reserves - Trade surpluses and debt reduction have allowed Argentina to increase its foreign exchange reserves and gold by nearly 20% per year over the past five years (CIA Factbook 2010*)

Key internal and external issues

Argentina started its economic recovery in late 2009, after escaping from recession in 2009, first fueled by global conditions, then by strong household consumption and investment. The rebound observed in 2010 will be followed by a pronounced moderation in the last quarter of 2011 and in 2012 as inflation continues to erode real wages because wage adjustments will lag behind and as strong imports undermine economic growth. At the same time, output in the agriculture sector is expected to decline as commodity prices are set to adjust downwards, thus reducing profit margins and incentives to increase production levels. Additionally, deteriorating public finances, social polarization, weak institutional framework, and large volatility in commodity prices are currently the major issues in Argentina. On the external sector, major risks come from a correction in commodity prices, for its impact on external and public accounts, and the current level of imports, fueled by strong local demand.

The government has continued to hide the problem caused in 2007 when the alleged manipulation of inflation statistics started, and there is no signal of improvement, despite the recent petition for technical assistance to the International Monetary Fund (IMF) for developing a new index. The likelihood of a responsible monetary authority fighting inflation is remote because the central bank is completely under the umbrella of the executive branch and policy transparency has suffered a major drawback. It is obvious that inflation inertia is affecting the decision-making process in Argentina, an unwanted condition.

Country's debt and financing resources trend

Fiscal balances are back into the negative territory, and the government lacks financing sources to cover an increasing public deficit, but still manageable. Until recently, the government has been borrowing from public entities showing some liquidity, including the Social Security Administration (ANSES). Unfortunately, they are also running out of money, making it compulsory that the government returns to the financial markets or shows some fiscal discipline. On the other hand, the government secured extra breathing space by sealing two debt-swap deals in 2009. The initiative, which initially included only local guaranteed loans, was extended to debt holders, which further improved debt scheduling in the short-to-medium term. Even after a successful exchange, the government has had a difficult time in returning to the financial markets at moderate costs, an unfortunate condition in times of abundant liquidity worldwide. On the upside, provincial governments, private companies, and banks have placed new bonds in the foreign markets, although offering higher yields than ambitioned by the government. The government has not yet returned to the markets one year after the debt-exchange process with debt holdouts concluded. The decision to negotiate with the Paris Club will further improve the country's prospects as a debt issuer.

While inflation differentials require a nominal correction in the exchange rate, large inflows of foreign-exchange earnings coming from high commodity prices call for an appreciation. The latter requires aggressive central bank intervention, injecting money into the economy that is barely sterilized. In fact, monetary authorities have revised up their money growth objectives repeatedly, revealing their preferences about inflation. The strong peso is creating problems for the external accounts, as well as destroying local businesses that are having a hard time competing with cheaper imports. Nevertheless, the peso is relatively stable.

Key taxation trend

After a poor performance observed in early 2009, tax-collection figures recovered in 2010 and remain solid in 2011. High commodity prices helped not only Argentine exporters but the government. However, containing the demand for higher wages is becoming a priority for the Argentine government as a measure to stop an inflationary spiral observed. Businesses are expected to pass such cost increases on to consumers, who in turn will be demanding larger wage adjustments. This cyclical phenomenon has been historically repeated by Argentine governments and defies effective management unless the government implements adequate economic policies to keep price rises at bay in the first place. The government projects tax revenues to jump significantly over 2011 after collection figures announced in July 2011 for the January-June period were 33% up year on year. However, unfortunately government policies do little to correct the distortions created by years of strong economic growth and large fiscal expansions. Instead of bringing observed inflation figures down, the government continues to manipulate official statistics and tax policies, releasing the Central Bank from its duty to maintain inflation at low and stable levels.

Key legal environment trend

Government economic policy in the 1990s led to Argentina