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Monday, May 07, 2007
Perspectives

Argentina: Running the Clock

Despite the economic boom, business sentiment is low ahead of the presidential elections this fall.
POWER COUPLE: Argentine president Nestor Kirchner and his wife, Senator Cristina Fernandez, with Brazilian president Luiz Inacio "Lula" da Silva in Buenos Aires in April. Fernandez may run for the presidency and win. (Photo: Argentine President's Office).

BY WALTER T. MOLANO

The calendar is clicking the days until the Argentine presidential elections. For many, however, the clock is not running fast enough. With only five months until the polls open, the presidential slate is not even known. No one knows for sure whether President Kirchner or his wife, Cristina will lead the ticket. The polls show that either candidate could easily win. Given Cristina’s recent trips abroad and contacts with the international business community, she is obviously broadening her appeal. Cristina’s election would leave the presidential couple in command of Argentina for the foreseeable future. In the meantime, the Administration continues to deploy a barrage of populist rhetoric that is sending shivers down the spines of the Argentine business community.

LOW BUSINESS SENTIMENT

There is a strange contradiction in the Argentine economy. On one hand, economic activity is booming. On other hand, business sentiment is at the lowest level since the start of the crisis. The macro numbers are clearly impressive. The economy will grow more than 8 percent y/y in 2007, with a similar pace in 2008. Retail sales are soaring and credit is expanding. Construction projects choke the thoroughfares. New highways are snaking their way through the provinces. The Argentine government is dedicating more resources for ports, rail lines and waterways. Fortunately, tax revenues are also increasing, with receipts spiking 32.6 percent y/y in April. Hence, the government is no longer dependent on export tariffs for its revenue base. Therefore, it is hard to imagine why the business community is so glum. However, the heavy-handed tactics of the Kirchner Administration provides the answer to the sentiment. 

The Kirchners are not leaving anything to chance. Even though they should sweep the presidential elections, the history books are full of last minute reversals. Moreover, Argentina’s fragmented party system leaves the presidential duo on the defensive. Therefore, they must constantly deploy a barrage of populist rhetoric that appeals to the lowest common denominator, but which also sends shudders across the business community. The use of price controls is rampant. Producers are summoned and threatened to reduce prices. The government blatantly tinkers with the inflation statistics. Ministers issue statements suggesting the possible nationalization of industries. Argentine business leaders learned that confrontation was futile, since the Administration sought combative situations in order to affirm their populist rhetoric. This is the reason why fixed investment in Argentina is at all time highs, despite the dearth of new project announcements. Everyone is trying to fly below the radar horizon.

INFLATION DILEMMA

Yet, the biggest dilemma facing the government is the inflation rate. The government is very sensitive to inflation. It is a regressive form of taxation. More than 20 percentof the Argentine population resides below the poverty line—representing a major chunk of the electorate. However, the rising inflation rate is the consequence of the economic recovery and the government’s heavy-handed tactics. The meat sector is a case in point. The government tried to control prices by restricting beef exports. As a result, many farmers switched to soybeans from cattle, slashing the supply of beef and pushing prices higher. One of the easiest ways to control the inflation genie is by allowing the exchange rate to appreciate. Consequently, the government could introduce new competitive pressures and drive down consumer prices—without implementing further distortionary measures. However, President Kirchner considers the competitive peso to be one of the key elements of the economic recovery, and a capitulation on the eve of the election would be a sign of weakness. Nevertheless, it is only a matter of time until the government lets the peso go. International reserves are soaring, approaching the $40 billion mark. The central bank is accumulating reserves at a pace of $130 million per day. The apparent capitulation by the Brazilian central bank will only provide further impetus for the Argentine central bank to do the same. However, we must first pass the elections, and that is a clock that does not seem to be running fast enough.

Walter Molano is head of research at BCP Securities.

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