A lot of pressure rests on Argentine President Cristina Fernández de Kirchner's shoulders as the country faces the possibility of another financial crisis  

As hints of a global recovery begin to take hold, Argentina remains out of sync. The country continues to report declining exports in several key industries (see Fig. 1). With the IMF predicting that the exports will peak at 6.5 percent year-on-year growth in 2015, and then slip back to below 2013’s level of 5.7 percent growth, economists are once again highlighting the fragility of Argentina’s economy.

They are also calling into question the Kirchner government’s policymaking, and some of the decisions it has made regarding the country’s economy. Simply put, Argentina’s economy is all over the place: a wild frenzy of massive upswings and dramatic declines – a pattern that has repeated itself for much of the past century.

Persistent problems
Every week more pressure is piled on Cristina Fernández de Kirchner and her administration, which once again finds its country on the brink of economic disaster. Inflation is on the verge of spiralling out of control – in February the government admitted that it was increasing at a blistering 3.7 percent a month, leading to soaring food prices and putting the country’s most vulnerable at risk.

In Scotiabank’s most recent Latin America regional outlook report, Pablo Bréard writes that “Argentina is flirting with a very high inflation scenario… with adverse consequences for price stability.”

The spike in prices has also devalued the Argentinean peso. Moody’s Investors Service is predicting that the government will devalue the currency by as much as 50 percent by the end of 2014 in an attempt to curb the rapid draining of Argentina’s central bank’s dollar reserves. US dollars are being massively traded on the country’s black market because of their security. Some Argentines will pay almost 50 percent more than official prices, because of government restrictions, to buy dollars on the black market because of lack of trust in the peso.

Many older citizens will draw similarities to recent crises in 1981, 1989 and the major economic depression and debt default between 1998 and 2002. Argentina’s debt default in 2001 was so pronounced it effectively locked the country out of international capital markets, so the country has had to become more reliant on other sources of income.

Social unrest is also compounding the problems. Recent protests and strikes have rocked the country, mainly led by the country’s disillusioned farming and labouring population, who are looking for wage increases. Although the country enjoyed a period of growth in the last decade, some see increasingly protectionist policies as draconian and damaging. Recently, Kirchner dismissed this idea, saying that “the state is more efficient, or at least as efficient, as the private sector when it comes to managing the economy.”

Speaking to World Finance, Juan Barboza, Itaú Unibanco’s economist for Argentina, said that government measures were along the right lines but progress was being harmed by the political and social uncertainty. “Everything is in the right direction, but we see that, unfortunately, all these measures are taking place in a context in which the level of confidence in society and the capacity of government to implement the policy is weak… that could add a certain degree of uncertainty about the confidence [in the government] about what they are doing. But the fact is that so far the government is surprising [people] every day with a new measure in the right direction.”

Barboza, former principal reserve manager of Argentina’s central bank, also stressed the delicacy of Argentina’s position, adding that “this will be a harsh year for Argentina… the depreciation of the peso, the rise in interest rates and falling real wages will hurt the economy. For next year we expect that the situation will stabilise. The situation will not be one of economic recovery for the country; we expect zero growth for next year.”

Trading woes
In recent years, four of Argentina’s most in-demand goods have been in decline. Grain, textile and auto exports have all recorded poor figures. Even beef, one of Argentina’s most beloved and traditional foods, has found itself subject to reduced production. High taxes and government interference has made beef a less desirable export. Domestic consumption of the product has decreased thanks to the rising cost of food.

When the government found itself at loggerheads with farmers in 2008 after the imposition of an export tax, it refused to back down. This, combined with the fact that increasing tracts of cattle producing land are being dedicated to the production of soy, paints a stark picture for Argentina’s struggling beef trade. Most of the soy goes to China where, ironically, it is used to feed cattle.

Across the board Argentina’s traditionally strong agricultural industry – 50 percent of the country’s exports in 2013 – finds itself curbed by the government. The government’s demands are simple: it wants to take its share of the agricultural industry’s profits to replenish the depleted foreign currency reserves that it requires so desperately to pay its debts.

Argentina’s automobile production has also been affected. Although local sales have increased, a recent industry report shows that last year exports fell 6.5 percent. Many blame this on the slowdown of the Brazilian economy. Brazil is by far Argentina’s largest trade partner, accounting for a fifth of all exports. Declining demand for Argentinean products in Brazil, coupled with the uncompetitive peso, have all been factors in the decline.

What this shows is that Argentina is extremely vulnerable to the global trade market. An overreliance on certain countries for trade – in the first half of the 20th century, Britain; in the second half, the US – and a relatively undiversified trade portfolio compound its susceptible position.

In a recent trade forecast report, HSBC Global Connections said that slower economic growth will “hold trade back for the next few years, with exports and imports expected to remain subdued. Trade will not improve significantly in 2014.” The report also said that muted global demand would hurt short-term export prospects for the country. This, coupled with a relatively exclusive group of major trade partners, dramatically contributes to the slowed increase in export volume the country is seeing (see Fig. 2).

Divisive policy
Protectionist policy and a small pool of countries who import from Argentina are damaging the country’s potential for growth. Argentina has vast natural resources, many of which remain untapped or underinvested. Mining’s share of GDP has risen from just two percent in 1980 to four percent today. A spate of recent nationalisations, however, has made investing in the country a tough prospect.

In 2012, the Argentinean government expropriated major Spanish oil producer Repsol’s YPF unit, an arm the company bought from Argentina in 1999, on the grounds that the company did not invest enough money into developing YPF’s energy operations. This damaged relations between Madrid and Buenos Aires, and sent a warning to would-be investors about the Kirchner administration’s proclivities towards nationalisation.

Any reputation hit that damages investment prospects is a big blow for the country, as recent surveys suggest that Argentina’s so-called Vaca Muerta, or Dead Cow – that is, shale deposits – could be a big source of income for the country. If estimates are correct, the deposits would make Argentina the world’s fourth-largest producer of shale oil.

The country’s shale gas deposits are believed to be the world’s third largest, behind China and the US. Although YPF have recently signed agreements with various companies to exploit the potential resources of Vaca Muerta, it remains unclear as yet whether the large reserves will be tapped fully. Government mismanagement, once again, could be diverting Argentina from long-term wealth in favour of short-term political gain.

The man behind most of the policymaking is Alex Kicillof, Argentina’s new Economy Minister. Many call Kicillof, who was a professor at Universidad de Buenos Aires, the most important political figure in Argentina. His swearing in ceremony in November 2013 marked a meteoric rise to power and if his initial declarations are anything to go by, Argentina can expect more of the same protectionist initiatives in an attempt to stimulate growth. Some suspect that it was Kicillof who orchestrated the renationalisation of YPF and the recent settlement between the Argentinean government and Repsol.

Many people believe Argentina’s complex political situation, both in modern times and historically, is the root of the problem. At the beginning of the 20th century, Argentina was one of the world’s most up-and-coming economies, but what some see as one hundred years of political failure has left the country in dire straits. A series of military coups have pockmarked the country’s recent history.

From 1974 to 1990, the country suffered a deep depression. Although the past decade has seen solid growth for the Argentinean economy, the depression of 2001 and the renegotiation of government bonds in 2005 underline the country’s wobbly economy.

Historically, Argentina’s governments have favoured short-term economic policies, instead of laying down a long-term economic plan for the country’s growth. The best example of this was the rapid financial liberalisation enacted during the 1976-83 ‘National Reorganisation Process’.

Argentina’s economy is all over the place: a wild frenzy of massive upswings and dramatic declines – a pattern that has repeated itself for much of the
past century

The military junta borrowed money from abroad for public works and welfare. High interest rates and an over-valued exchange rate sought to control inflation, which hurt Argentinean exports and industrial production. Some may draw comparisons to today’s situation, in which Argentina’s poorest are on the brink of real suffering as inflation continues to ramp up.

Argentina’s nebulous political situation is one that some claim informs bad decisions about the country’s economy – in particular trade policy. Kirchner’s government has sought to maintain a trade surplus at any cost in recent years. Mostly its strategy involves tariffs on importers, who are only allowed to export goods for the price they import them.

Unfortunately, this naturally leads to middleman behaviour, where a third party can profit from both sides of the arrangement at the expense of the exporter and the Argentinean Government. As a member of Mercosur, the South American economic and political agreement supposed to promote free trade, Argentina cannot directly impose tariffs on imports.

Instead, the country continues to broaden the amount of products that require licenses to import. This tightens the government’s grip on what comes in and out of the country and pulls the country further away from free trade.

Under pressure
There are signs that the Kirchner administration may be relenting a little under the political pressure; pressure that is increasingly coming from abroad. What remains to be seen is how much political power the government will manage to retain after erratic policies and declining popularity. A recent poll suggested Kirchner has an approval rating of just 27 percent – a massive drop from last year’s figure of 44 percent.

The potential is still there for Argentina to put in place real measures that will future-proof the economy. What economists are now calling the ‘Argentine paradox’ – decline despite so much potential – will no doubt go down as one of history’s strangest economic stories.

Juan Barboza feels confident about the future, however: “The other parties have a different mood; they have a different approach to the market. In other words, all the potential presidential candidates are definitely more market friendly… I do not expect Argentina will take a step backwards in the future with its economic policy.”

If real changes are made in Buenos Aires, with a government receptive to the free market, it can become a story of hope and the country can prosper. The history of the country’s economic management has the rare distinction of being completely unique. After all, as economist Simon Kuznets once said, “There are four types of countries: developed, underdeveloped, Japan, and Argentina.”