Tuesday, March 5, 2013

Argentina's downward spiral

The government's mishandling of Argentina's economy has hit new highs recently with the implementation of price controls on food. It is a notoriously ineffective policy that tends to create shortages and spawns black markets.
International Affairs Review: - President Cristina Fernández de Kirchner's temporary price freeze on food products marks the most recent instance of her gross mishandling of Argentina's economy. The price freeze applies to all major food retailers, which account for over 70% of the market. Historically, these types of economic policies have never produced positive results. Most often, food importers stop importing because they would lose money by selling their food at the prices ordered by the government. Customers of large retailers who stand in line hoping to buy at the frozen price will then find the shelves barren. This scarcity of goods will spawn a black market, where food will be sold at actual market prices. While some law enforcement officials may tolerate these black markets, other will try to dismantle them, only to discover more tenacious entrepreneurs setting up shop the next corner over.

Unfortunately, the temporary price freeze is only part of an alarming trend towards financial mismanagement, which includes the expropriation of major foreign investments. Last year’s nationalization of Repsol YPF has infuriated Spain, one of Argentina’s largest foreign investors. Kirchner’s presidency has also been marred by accusations of falsifying CPI statistics (which provoked a strong rebuke from the IMF), a weakening of central bank independence, use of the nation’s currency reserves for political payoffs, and the threat of default on its debt - again. To most outsiders it would appear that Argentina is repeating many of the mistakes that resulted in its economic crisis of the early 2000s.
In a classic case of "wag the dog", Argentina's government is trying to focus the population on external issues. Argentine officials are now taking an aggressive stance with respect to self-determination in the Falkland Islands. Knowing that the upcoming referendum will likely result in a status quo, Argentina's government declared the vote to be "illegal". Tensions with the UK are likely to escalate further.

To make matters worse, fears of Argentina's technical default on its restructured dollar bonds (see discussion) are on the rise once again. That's in spite of recent hopes that Argentina may attempt to settle with the "holdouts" (see WSJ story). As a reflection of this uncertainty, the unofficial currency market is now pricing dollars at a 54% premium to the government's tightly controlled exchange rate.

Another troubling development is the relentless deterioration of Argentina's foreign reserves. Rumors persist that the government has moved dollars into "unofficial" accounts.
JPMorgan: - ... gross international reserves have fallen US$1.6 billion ytd, driven by a US$1.2 billion ytd fall of Treasury deposits at BCRA. What is odd about this is that the decline of the Treasury’s cash position of the past two weeks cannot be related to any scheduled external debt payment.
Some have speculated that the goal is to prevent official dollar accounts from being frozen by US courts if the legal case against the bond holdouts results in an unfavorable ruling for Argentina.

Source: JPMorgan

Whatever the reason, no one expects these reserves to stabilize. That's because the largest single source of hard currency for Argentina is the export of soy and soy products. And this year's soy harvest is projected to be weaker than originally expected, putting additional pressure on foreign reserves.
WSJ: - Hot, dry weather from early January through mid-February reduced soy yields across much of the central region of Argentina's agricultural heartland.

Exports of soybeans and related products are the South American nation's single largest source of foreign currency and a key contributor to the Central Bank of Argentina's international reserves.

President Cristina Kirchner has tapped those reserves to pay foreign creditors since 2010, and her budget this year earmarks several billion dollars of reserves to fund public works projects.
As conditions deteriorate, Kirchner's government will resort to more extreme measures in order to hold on to power. And largely because of government's actions, Argentina, with its significant natural resources, a relatively large middle class, and a fairly developed industrial base is unlikely to participate in the economic stabilization seen in Brazil (see discussion) and elsewhere in emerging markets.


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