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What is the Prognosis for Argentina's Economy in 2010?
Latin American Advisor
December 08, 2009

Q: Argentina's unemployment rate increased to 9.1 percent in the year's third quarter from 8.8 percent the previous quarter, the government said Nov. 20. The country's gross domestic product is now forecast to grow only 0.5 percent in 2009, but consumer confidence is slowly recovering, according to an index compiled by Torcuato di Tella University. How hopeful are Argentines of an economic recovery? Looking ahead to 2010, what key steps need to be taken to get the country's economy firmly on track?

A: Robert Shapiro, chairman of Sonecon LLC in Washington and co-chair of the American Task Force Argentina: "The most important step Argentina can take to improve its economic prospects would be to resolve the outstanding conflicts with its lenders, coming out of the 2001 debt default and 2005 restructuring. This is the key to both restoring strong foreign direct investment in Argentina and regaining access to foreign credit markets. To begin, the default and unresolved restructuring, especially the formal repudiation of the debts owed to those who declined the restructuring offer, has cost Argentina as much as $6 billion per year in foregone foreign direct investments. Attracting healthy flows of direct investment from abroad is a central factor in driving rapid modernization and growth in developing nations, and a strong recovery for Argentina in 2010 and2011 will depend in part on reversing the sharp slowdown in those investments. Resolving this debt problem will also be a crucial factor in reducing Argentina's high inflation. So long as those debts remain repudiated and unpaid, legal judgments against Argentina will remain in force in every capital market in the world. The result is that Argentina cannot raise funds in foreign capital markets, forcing the government to depend entirely on domestic sources for all of its external financing. To ensure that financing, the government has created the credit it has needed by expanding the nation's money supply very rapidly producing the inflation which also dims the economy's prospects. President Cristina Kirchner has carried out other ill-considered economic policies, including her moves to nationalize $26 billion in private pensions and sharply raise fees on soybean exports. However, the intransigence shown by both Kirchners on resolving the outstanding debt issue has been the single most destructive policy to the Argentine economy. Opening serious negotiations with all of Argentina's foreign creditors from the 2001 default and 2005 restructuring would be the most critical step the government could take to promote a genuine economic recovery."

A: Miguel Kiguel, executive director of EconViews in Buenos Aires: "Most recent economic indicators show that the economy is quickly recovering from the recession, and that next year the economy is likely to grow by around 3.5 percent, after dropping around 3 percent in 2009. The recovery is mainly explained by three factors. First, the industrial sector is benefiting from the sharp recovery of the Brazilian economy. Second, agriculture will recover following the worst drought in half a century. Third, the improvement in the international financial conditions and the announcements of the debt swap and a possible deal with the Paris Club has stopped the capital outflows, improved liquidity in the banking system and created the conditions for an increase in aggregate demand. Despite this more favorable outlook, we do not expect a return to the 8 and 9 percent growth rates of the early Kirchner years. The economy does not present the slack in capacity utilization that it had at that time, especially in the energy sector, and hence it does not have the capacity to grow without additional investments. In the current business climate in which the government is frequently resorting to price controls, regulations and other forms of interventions, investment is unlikely to boom. Besides, inflation could become an important obstacle to growth. In contrast to 2003, prior to the previous expansion period when inflation was around 4 percent, inflation is now running at around 15 percent. This implies that if the economy faces rapid growth there is a clear risk that it could quickly move into the upper teens or low twenties, rates that are not acceptable as they would increase poverty levels and affect the government's popularity even more. Argentina will recover but it will not boom."

A: Gabriel Torres, sovereign risk analyst at Moody's Investors Service in New York: "Latin America turned out to be one of the regions least impacted by the world crisis. And within the region, Argentina has fared better than other countries, such as Mexico. For 2010 we expect a recovery, but a modest one (2 to 3 percent growth). Given strong growth in Brazil, which could grow closer to 6 percent next year, Argentina may surprise on the upside. This is the good news. The not so-good news is the still-lingering concerns about the sustainability of the economic model in the medium to long term. Argentina benefitted from high commodity prices and previously repressed demand to grow at very high rates from 2003 to 2007. But what will sustain fast growth going forward? Policy concerns weigh on investment, which makes faster growth more difficult. Despite all its problems Argentina remains relatively rich, with per capita incomes 50 percent greater than Brazil's, for example. But many of its neighbors are now seen as better investment options. And the fiscal accounts, another reason for the fast precrisis growth, remain another concern. Argentina needs to control the rate of spending, or risk a financial and fiscal crisis. Can this be done as elections get closer? Finally, no economy can function well without good data. Doubts about the reliability of official inflation data have now moved to GDP and other data. This needs to be resolved soon."

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