Some (common knowledge) facts
- The inflation rate keeps on accelerating—there are suggestions that unions are seeking to renegotiate in H2 the ex-ante annual wage increases arranged around March (of this year!).
- Government bonds are being consistently rejected, their price decreasing; they would have fallen more if it weren’t for public institutions (e.g. public banks) aggressively purchasing them.
- Country-risk has increased.
- S&P put Argentina’s debt in “negative”.
- Government mismanagement, as expected, pushed the farm sector back into strike mode. This time, and to try to avoid food scarcity in cities, the farm sector will stop export products.
- The effect of the latter: reduced tax (export) revenues; if it also implies a reduction if expenditures (likely), it will imply a multiplier-type of effect in economic activity and thus overall tax collection.
- Argentina’s expected growth rate has already been reduced—and this does not take into account the renewal of the farm sector strike (see JP Morgan Research, by May 01, 2008: “2009 GDP forecast cut to 3% on mounting constraints”).
- In the mist of these inconsistencies, although within a small range, the domestic currency depreciated—despite central bank’s actions—i.e. there was small run against the peso, and is likely to continue, potentially accelerating. CD’s in pesos aren’t being rolled over and they are used buy dollars.
- Government expenditures are very high and are not decreasing. The amount of discretional redistribution from the poor to the rich has increased substantially, and it is expected to accelerate as the inflation rate keeps on increasing.
- Tax revenues increased; but this mainly explained by the inflation tax!
- Debt amortizations are very high and increasing for this year and the next ones—with very limited ability of the Argentine government to access international financial markets and at non-trivial high interest rate.
- Argentina’s national debt has not only increased in absolute volume (some estimates putting it close to US$ 200 billion) but it has increased as a percentage of GDP! Furthermore, this is a lower bound. If correctly computed, it is already in “Danger Zone” (see IDB’s report). No wonder that some other reports has estimated Argentina’s default probability to be the highest among emerging markets!!!
- Income distribution is deteriorating at an increasing rate (wasn’t this a “national and popular” administration?). For analysis I did early in 2007 see HERE (in Spanish).http://uoregon.edu/~magud/Redistribucion.pdf
- Price controls are still in effect. But they are totally ineffective.
- The latter, jointly with a (convenient) change in the measurement of the Consumer Price Index is the only inflation-reduction strategy of the administration!
- The number of bankruptcies is increasing.
- The housing market (one of the main engines in this “model’) is decelerating.
- Terms of trade bonanza is not such a thing, Jose Antonio Ocampo and Maria Angela Parra have shown. And the world economy is now slowing down.
- The Fed is already suggesting interest rate hikes could come sooner than expected to control U.S. inflation.
- The Euro area is slowing down.
- China and India are staring to be affected by higher inflation rates, which suggest that some decelerating of these overheating economies could be expected—and good for them. This, in turn, might impact on other parts of Asia.
- The commodities’ boom has slowed down in line with some small appreciation of the U.S. dollar. If the dollar continues to appreciate, this effect is likely to strengthen. The more so if the Fed increases interest rates and the economy, though slowly (as expected) progressively recovers some of its strength.
- Political acceptance of the five-month-old government is already very low (it looks more like a government about to finish its term in office, not an administration that has been in office for less than a year).
- The strategy of the current administration seems not to attack the source of the problems—the mismanagement of the macroeconomy—but to try to generate social tensions (e.g. t stimulate “class” divisions) to avoid the solution. Furthermore, I wouldn’t be surprised if the administration will eventually let things collapse and then blame “the market” for the problems (it is always “another one’s fault”).
Some Thoughts
The above were just a(n) (incomplete) list of facts. Interestingly, I would have written them in the early-mid seventies, most of them of have been true as well! (and a “funny” way to write a sad piece). So, we saw this picture, and how its ends. Would you put your money in Argentina? I won’t.
For a future posting: I am totally not surprised by the recovery of Argentina: the economy started from a huge collapse in 2001-2002 while its was favored by the so-called savings glut along with China and India (and the world economy as a whole) growing at high rates for a long time period—and the effects that these caused on commodities, the main source of exports in Argentina.
But now, in light of one of the worst macroeconomic admistration in Argentina’s history I am starting to think that the global context, instead of a blessing, it has been a curse. If so, the long-term costs of this will not be small.
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