Argentina - What Is Driving Kirchner?
April 27, 2012
Introduction
Argentina is in the news. At issue is what is motivating President Christina Kirchner, and how will her policies influence the long run economic well-being of the country? To understand what is driving the country's recent policy decisions and what the future holds, I have asked Richard Rust, an American living in Buenos Aires to help me with this article. Richard has a keen mind and is an astute observer of Argentine developments.
Background
Elliott: While in Argentina during 2009, I was surprised at the vitriol directed at the Kirchner regime by both locals and expats. Well, yes, the government took over the pension funds. But why not? They were not performing well and there were rumors of corruption on a grand scale. An Argentine government economist (hereafter referred to as AGE) suggests that some of the pension monies are used to "award" provincial governors for political support.
And yes, the inflation numbers ARE being fudged. "Unofficial observers" estimate inflation this year at 23.5% while the government claims the rate will be 9.7% at the end of 2012. And AGE reminds me that the IMF is also concerned about phony GDP numbers.
Richard: Distrust of the Kirchner regime and fear of even greater inflation is a growing problem. The only logical reason for the phony inflation numbers are the inflation-pegged bonds. Understandably the government wants to keep its interest payments down, but Argentines know how much the prices they pay for goods and services have been escalating and how absurd the fantasy numbers claimed by the government are.
Recent policy changes announced by the government guarantee that the cost of living for most Argentines will go up regardless of what happens in the private arena. First, was the dramatic reversal of a long-standing tradition of federal subsidies for critical services including public transit and basic utilities that were a cornerstone of the Peronist populism championed by the Kirchner governments and the foundation of their electoral appeal. As soon as Cristina was re-elected, her government announced a phase out of many of those subsidies.
In addition, with no public announcement, the government has begun to impede imports coming into the country across the board, from sources near and far, ignoring a wide-range of regional and international trade agreements. These restrictions also mean higher prices for consumers and serious difficulties for manufacturers that rely on imported parts.
Elliott: Certainly, steps taken against certain media organizations that were not supportive of the government are problematic. But as is true of most Latam countries, Argentina has a history of military dictators with little regard for free market mechanisms. They like to issue commands to get things done. I remember trying to negotiate with military leaders in Ghana and Myanmar. Money changers normally worked on the streets near the central banks. If the military leaders did not like the exchange rates being offered by the money changers, they would put a few of them in jail and disperse the others. It did not work. After a few weeks the money changers would return ... and Ms. Kirchner seems to be carrying on this tradition.
Richard: Pressuring an unfriendly press is one thing, but the Kirchner team's approach could be called the "Tony Soprano Model of Economic Regulation". It relies on a kind of "drive-by-shooting" strategy to deal with government critics and opponents. The tactics include arbitrary interference in day-to-day business operations; outright harassment; real and potential threats of criminal prosecution; and more.
Examples include:
Elliott: In 2009, I co-authored a study on Argentina's future economic prospects. We concluded that despite Madam Kirchner's command approach:
"Like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The global population is growing and it has to eat. The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue. But at least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound."
But it is worth reviewing things now. How well is Argentina doing relative to other Latam countries?
At least by the numbers, things are not so bad. In the following tables, I use data from LatinFocus. LatinFocus is the best source of data on Latam countries, both because it synthesizes all economic data and develops consensus forecasts from as many as 20 financial institutions on future economic developments.
Consider first real GDP growth rates. In Table 1, averages for the last two years are presented along with the consensus forecast for the next two. Over the last two years, Argentina's growth rate has been higher than any other Latam country. It is projected to have a 4% growth rate over the next two years behind only Peru, Colombia, and Chile.
Table 1. - Real GDP Growth Rates
Source: LatinFocus
* Consensus Projection
Consider next government financial management. In Table 2, data on government deficits as a percent of GDP are presented. On this measure, Argentina ranks third for both periods behind Peru and Chile.
Table 2. - Government Deficits (percent GDP)
Source: LatinFocus
* Consensus Projection
For countries with a limited capacity to borrow overseas, having a positive current account balance helps. Data on this measure are presented in Table 3. For both periods, Argentina ranks second only to oil-exporting Venezuela.
Table 3. - Current Account (percent GDP)
Source: LatinFocus
* Consensus Projection
Greece is having credibility problems with investors. Why? Because until what was an effective default a few weeks back, its government debt was 160% of its GDP. Data on Latam countries' debt is presented in Table 4. It is extremely low by developed country standards where 100% of GDP is the norm. Argentina is in a middle group of Latam countries.
Table 4. - Government Debt (percent GDP)
Source: LatinFocus
* Consensus Projection
The data presented above suggest that Argentina is doing quite well by Latam standards. AGE does not agree with my assessment. He points out that Argentina cannot tap international credit markets. Only Venezuela and perhaps Brazil would lend Argentina money in an emergency.
Richard: My concern is that a pure economic analysis of Argentina today may be less revealing than is usual in the business of forecasting. The major problem is that "official" Argentine statistics must be taken with a ton of salt. In addition, I suggest the volatile political dimension of the current situation is critical to understanding likely future economic trends. The following few paragraphs will give you a flavor of what I see going on in Argentina.
Despite statistical evidence from Argentine and independent sources, virtually every Argentine would counter the idea that things are relatively good. Things don't feel good and don't look good. Public services are being cut back, small shops are closing up, restaurants are half-empty and the crime rate is surging. Daily press coverage and man-in-the-street discussions of the relentless string of post-election actions by the government reflect wide-spread anxiety. A sense of impending crisis is in the air and to many Argentines it seems right on schedule, as there has been an economic crisis almost every ten years for that last century.
Throughout the Presidential campaign, CFK claimed that the Kirchner economic "Model" (never really defined) was a finely-tuned engine that guaranteed a strong economy far into the future. Her huge victory indicated the public believed her. However, starting a few days after the voting, the government initiated one radical change in economic policy after another, all of which impact negatively on both business stability and the future standard of living for the citizenry.
The arbitrary nature of the decisions and the rhetoric behind them display breath-taking governmental hubris and disrespect for the intelligence of the public. The illogical justifications of the decisions are staggering to a non-Argentine, but accepted with a shrug by cynical locals.
Dark Clouds
Elliott: Perhaps the most telling indicator of how a country is viewed by the international financial is its "EMBI Spread - how many basis points (1/100th of a percent) the country's debt over the US Treasury Rate is paying. These data are presented in Table 5, and here, Argentina is the worst of the Latam countries, worse than both Venezuela and Ecuador.
Table 5. - EMBI Spread
Source: LatinFocus
* Consensus Projection
This is a clear indication that despite the country's economic performance, Ms. Kirchner's government is not trusted by the world community.
What Worries Kirchner?
Elliott: Since Argentina cannot borrow on world markets, it appears that Ms. Kirchner is worried about keeping the country's current account in positive territory. Since February, policies have been put in place to make it more difficult to import goods (purchase from abroad must be approved by the national tax agency). In addition, it appears that the decision to put the government in control of Yacimientos Petrolíferos Fiscales (YPF) was motivated by the same concern.
Table 6 provides data on Argentina's imports of petroleum and its products. Note the growing share of petroleum. It is probable that the Kirchner government is concerned about this and the increasing demands of its growing middle class for imported products.
Table 6. - Argentine Imports (bil. US$)
Source: Legacy Intracen
AGE believes Argentina will need to invest US$25 billion to provide for all of its petroleum needs. Where will this come from? YPF made a profit of US$3.59 billion in 2011. Its debt is US$2.9 billion. Consequently, YPF could finance some of this.
The Planned Repsol (REPYY.PK) Purchase
Elliott: As Table 7 indicates, it is common for countries to own their oil companies. All of the top oil companies are owned by governments. You have to get to the 13th largest before a private firm shows up. Why is this? Because a country's energy strategy is fundamental to its well-being. If Argentina, is increasingly concerned about having to import foreign oil, it does not want decisions on domestic oil production made by a foreign firm. And the oil companies? No need to shed a tear for them - they make plenty of money in oil exploration and consulting. If oil companies want to claim ownership of oil reserves in foreign lands, good luck! Get insurance (if you can).
Richard: The YPR nationalization is the most dramatic and controversial change. The populist-leaning public supports nationalizing energy resources, but most people see the move as a sign of government panic about its financial stability.
Table 7. - Largest Oil Companies
Source: petrostrategies.org
Concluding Comments
Elliott: I can't feel too sorry for the Argentine people. They have a great country with tremendous natural resources. And unlike the Russian people who also inhabit a nation with a dysfunctional government, Argentines know how to enjoy life. This too will pass.
Richard: In many ways the Argentine people are the architects of their own economic and political failings. Their passivity in the face of blatant governmental abuses and political chicanery assures that things don't change. Given that the past several years have been good ones for the country and that Argentines, at least on the surface, do seem to enjoy life, one would not expect the current widespread undercurrent of dissatisfaction and defeatism. Confidence in the Kirchner team is rapidly fading. Younger Argentines are decidedly not optimistic about their personal and professional prospects. But, hopefully, you are right Elliott and this too does pass!
Investment Strategies
The prudent investor will avoid ARGT and all other Argentine investments until the next Presidential election in Argentina.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Argentina is in the news. At issue is what is motivating President Christina Kirchner, and how will her policies influence the long run economic well-being of the country? To understand what is driving the country's recent policy decisions and what the future holds, I have asked Richard Rust, an American living in Buenos Aires to help me with this article. Richard has a keen mind and is an astute observer of Argentine developments.
Background
Elliott: While in Argentina during 2009, I was surprised at the vitriol directed at the Kirchner regime by both locals and expats. Well, yes, the government took over the pension funds. But why not? They were not performing well and there were rumors of corruption on a grand scale. An Argentine government economist (hereafter referred to as AGE) suggests that some of the pension monies are used to "award" provincial governors for political support.
And yes, the inflation numbers ARE being fudged. "Unofficial observers" estimate inflation this year at 23.5% while the government claims the rate will be 9.7% at the end of 2012. And AGE reminds me that the IMF is also concerned about phony GDP numbers.
Richard: Distrust of the Kirchner regime and fear of even greater inflation is a growing problem. The only logical reason for the phony inflation numbers are the inflation-pegged bonds. Understandably the government wants to keep its interest payments down, but Argentines know how much the prices they pay for goods and services have been escalating and how absurd the fantasy numbers claimed by the government are.
Recent policy changes announced by the government guarantee that the cost of living for most Argentines will go up regardless of what happens in the private arena. First, was the dramatic reversal of a long-standing tradition of federal subsidies for critical services including public transit and basic utilities that were a cornerstone of the Peronist populism championed by the Kirchner governments and the foundation of their electoral appeal. As soon as Cristina was re-elected, her government announced a phase out of many of those subsidies.
In addition, with no public announcement, the government has begun to impede imports coming into the country across the board, from sources near and far, ignoring a wide-range of regional and international trade agreements. These restrictions also mean higher prices for consumers and serious difficulties for manufacturers that rely on imported parts.
Elliott: Certainly, steps taken against certain media organizations that were not supportive of the government are problematic. But as is true of most Latam countries, Argentina has a history of military dictators with little regard for free market mechanisms. They like to issue commands to get things done. I remember trying to negotiate with military leaders in Ghana and Myanmar. Money changers normally worked on the streets near the central banks. If the military leaders did not like the exchange rates being offered by the money changers, they would put a few of them in jail and disperse the others. It did not work. After a few weeks the money changers would return ... and Ms. Kirchner seems to be carrying on this tradition.
Richard: Pressuring an unfriendly press is one thing, but the Kirchner team's approach could be called the "Tony Soprano Model of Economic Regulation". It relies on a kind of "drive-by-shooting" strategy to deal with government critics and opponents. The tactics include arbitrary interference in day-to-day business operations; outright harassment; real and potential threats of criminal prosecution; and more.
Examples include:
- Fining independent research firms hundreds of thousands of pesos for publishing accurate facts;
- Punishing a media conglomerate/internet provider by trying to force an imminent shut down of their internet business, leaving millions of subscribers in the cold - only to rescind the order after a public uproar;
- Bringing a phony court case against the conglomerate owners claiming - with no evidence - that their adopted children had been kidnapped from their true parents thirty years ago during the military dictatorship.
Elliott: In 2009, I co-authored a study on Argentina's future economic prospects. We concluded that despite Madam Kirchner's command approach:
"Like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The global population is growing and it has to eat. The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue. But at least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound."
But it is worth reviewing things now. How well is Argentina doing relative to other Latam countries?
At least by the numbers, things are not so bad. In the following tables, I use data from LatinFocus. LatinFocus is the best source of data on Latam countries, both because it synthesizes all economic data and develops consensus forecasts from as many as 20 financial institutions on future economic developments.
Consider first real GDP growth rates. In Table 1, averages for the last two years are presented along with the consensus forecast for the next two. Over the last two years, Argentina's growth rate has been higher than any other Latam country. It is projected to have a 4% growth rate over the next two years behind only Peru, Colombia, and Chile.
Table 1. - Real GDP Growth Rates
| 2010-11 | 2012-13 | |
| Country | Ave. | Ave. * |
| Argentina | 9.1% | 4.0% |
| Peru | 7.9% | 5.7% |
| Chile | 6.1% | 4.6% |
| Ecuador | 5.7% | 3.9% |
| Brazil | 5.1% | 3.9% |
| Colombia | 5.0% | 5.0% |
| Mexico | 4.7% | 3.4% |
| Venezuela | 1.4% | 3.1% |
* Consensus Projection
Consider next government financial management. In Table 2, data on government deficits as a percent of GDP are presented. On this measure, Argentina ranks third for both periods behind Peru and Chile.
Table 2. - Government Deficits (percent GDP)
| 2010-11 | 2012-13 | |
| Country | Ave. | Ave. * |
| Peru | 0.8% | 0.8% |
| Chile | 0.6% | 0.5% |
| Argentina | 0.1% | -1.5% |
| Ecuador | -1.3% | -3.6% |
| Brazil | -2.6% | -2.1% |
| Mexico | -2.7% | -2.3% |
| Colombia | -2.9% | -2.0% |
| Venezuela | -2.9% | -4.3% |
* Consensus Projection
For countries with a limited capacity to borrow overseas, having a positive current account balance helps. Data on this measure are presented in Table 3. For both periods, Argentina ranks second only to oil-exporting Venezuela.
Table 3. - Current Account (percent GDP)
| 2010-11 | 2012-13 | |
| Country | Ave. | Ave. * |
| Venezuela | 6.9% | 6.8% |
| Argentina | 0.4% | 0.1% |
| Chile | 0.2% | -2.2% |
| Mexico | -0.5% | -1.2% |
| Ecuador | -1.1% | -2.0% |
| Peru | -1.5% | -2.0% |
| Brazil | -2.2% | -2.8% |
| Colombia | -3.0% | -2.5% |
* Consensus Projection
Greece is having credibility problems with investors. Why? Because until what was an effective default a few weeks back, its government debt was 160% of its GDP. Data on Latam countries' debt is presented in Table 4. It is extremely low by developed country standards where 100% of GDP is the norm. Argentina is in a middle group of Latam countries.
Table 4. - Government Debt (percent GDP)
| Country | 2012 |
| Chile | 9.2% |
| Peru | 19.8% |
| Ecuador | 20.8% |
| Venezuela | 33.7% |
| Mexico | 34.6% |
| Colombia | 35.3% |
| Argentina | 35.4% |
| Brazil | 53.4% |
* Consensus Projection
The data presented above suggest that Argentina is doing quite well by Latam standards. AGE does not agree with my assessment. He points out that Argentina cannot tap international credit markets. Only Venezuela and perhaps Brazil would lend Argentina money in an emergency.
Richard: My concern is that a pure economic analysis of Argentina today may be less revealing than is usual in the business of forecasting. The major problem is that "official" Argentine statistics must be taken with a ton of salt. In addition, I suggest the volatile political dimension of the current situation is critical to understanding likely future economic trends. The following few paragraphs will give you a flavor of what I see going on in Argentina.
Despite statistical evidence from Argentine and independent sources, virtually every Argentine would counter the idea that things are relatively good. Things don't feel good and don't look good. Public services are being cut back, small shops are closing up, restaurants are half-empty and the crime rate is surging. Daily press coverage and man-in-the-street discussions of the relentless string of post-election actions by the government reflect wide-spread anxiety. A sense of impending crisis is in the air and to many Argentines it seems right on schedule, as there has been an economic crisis almost every ten years for that last century.
Throughout the Presidential campaign, CFK claimed that the Kirchner economic "Model" (never really defined) was a finely-tuned engine that guaranteed a strong economy far into the future. Her huge victory indicated the public believed her. However, starting a few days after the voting, the government initiated one radical change in economic policy after another, all of which impact negatively on both business stability and the future standard of living for the citizenry.
The arbitrary nature of the decisions and the rhetoric behind them display breath-taking governmental hubris and disrespect for the intelligence of the public. The illogical justifications of the decisions are staggering to a non-Argentine, but accepted with a shrug by cynical locals.
Dark Clouds
Elliott: Perhaps the most telling indicator of how a country is viewed by the international financial is its "EMBI Spread - how many basis points (1/100th of a percent) the country's debt over the US Treasury Rate is paying. These data are presented in Table 5, and here, Argentina is the worst of the Latam countries, worse than both Venezuela and Ecuador.
Table 5. - EMBI Spread
| Country | 2012 |
| Colombia | 141 |
| Peru | 150 |
| Mexico | 153 |
| Chile | 155 |
| Brazil | 183 |
| Ecuador | 790 |
| Venezuela | 955 |
| Argentina | 990 |
* Consensus Projection
This is a clear indication that despite the country's economic performance, Ms. Kirchner's government is not trusted by the world community.
What Worries Kirchner?
Elliott: Since Argentina cannot borrow on world markets, it appears that Ms. Kirchner is worried about keeping the country's current account in positive territory. Since February, policies have been put in place to make it more difficult to import goods (purchase from abroad must be approved by the national tax agency). In addition, it appears that the decision to put the government in control of Yacimientos Petrolíferos Fiscales (YPF) was motivated by the same concern.
Table 6 provides data on Argentina's imports of petroleum and its products. Note the growing share of petroleum. It is probable that the Kirchner government is concerned about this and the increasing demands of its growing middle class for imported products.
Table 6. - Argentine Imports (bil. US$)
| Item | 2006 | 2007 | 2008 | 2009 | 2010 |
| Total | 34.2 | 44.7 | 57.5 | 38.8 | 56.5 |
| Total Petroleum | 1.1 | 2.0 | 3.1 | 1.9 | 3.4 |
| Petroleum Share | 3.3% | 4.4% | 5.4% | 4.9% | 6.0% |
AGE believes Argentina will need to invest US$25 billion to provide for all of its petroleum needs. Where will this come from? YPF made a profit of US$3.59 billion in 2011. Its debt is US$2.9 billion. Consequently, YPF could finance some of this.
The Planned Repsol (REPYY.PK) Purchase
Elliott: As Table 7 indicates, it is common for countries to own their oil companies. All of the top oil companies are owned by governments. You have to get to the 13th largest before a private firm shows up. Why is this? Because a country's energy strategy is fundamental to its well-being. If Argentina, is increasingly concerned about having to import foreign oil, it does not want decisions on domestic oil production made by a foreign firm. And the oil companies? No need to shed a tear for them - they make plenty of money in oil exploration and consulting. If oil companies want to claim ownership of oil reserves in foreign lands, good luck! Get insurance (if you can).
Richard: The YPR nationalization is the most dramatic and controversial change. The populist-leaning public supports nationalizing energy resources, but most people see the move as a sign of government panic about its financial stability.
Table 7. - Largest Oil Companies
| Total Oil/Gas | ||
| Reserves | ||
| Oil Equivalent | ||
| Rank | Company | Billion Barrels |
| 1 | Saudi Arabian Oil Company (Saudi Arabia) | 303 |
| 2 | National Iranian Oil Company (Iran) | 300 |
| 3 | Qatar General Petroleum Corporation (Qatar) | 170 |
| 4 | Iraq National Oil Company (Iraq) | 134 |
| 5 | Petroleos de Venezuela.S.A. (Venezuela) | 129 |
| 6 | Abu Dhabi National Oil Company (UAE) | 126 |
| 7 | Kuwait Petroleum Corporation (Kuwait) | 111 |
| 8 | Nigerian National Petroleum Corporation (Nigeria) | 68 |
| 9 | National Oil Company (Libya) | 50 |
| 10 | Sonatrach (Algeria) | 39 |
| 17 | ExxonMobil Corporation (XOM) (United States) | 13 |
| 37 | Repsol YPF (Spain) | 2 |
Concluding Comments
Elliott: I can't feel too sorry for the Argentine people. They have a great country with tremendous natural resources. And unlike the Russian people who also inhabit a nation with a dysfunctional government, Argentines know how to enjoy life. This too will pass.
Richard: In many ways the Argentine people are the architects of their own economic and political failings. Their passivity in the face of blatant governmental abuses and political chicanery assures that things don't change. Given that the past several years have been good ones for the country and that Argentines, at least on the surface, do seem to enjoy life, one would not expect the current widespread undercurrent of dissatisfaction and defeatism. Confidence in the Kirchner team is rapidly fading. Younger Argentines are decidedly not optimistic about their personal and professional prospects. But, hopefully, you are right Elliott and this too does pass!
Investment Strategies
The prudent investor will avoid ARGT and all other Argentine investments until the next Presidential election in Argentina.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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