Don’t Cry For Me Argentina

December 23, 2010

In the Peron tradition, Argentina continues to be governed by the few who charismatically engineer smokescreens that seduce its proletariat. For those of us who have traveled to Argentina and fallen in love with its charm, we also want to be able to believe the latest government figures. The charming people we meet there make us want to return and do more business, but the government figures defy belief and make it impossible for the time being to have the confidence to do so without considerable caution.

Superficially at least, Argentina appears to be re-emerging as a global player, providing its own indicators of creditworthiness.  It is a member of the G-20 club, ranks among the top 30 global economies, and it is a stable and peaceful democracy; many of its main economic indicators, including per capita income measured in current dollars (>$9,000), look very healthy for a developing country.

Urban unemployment is stated at around 8%, down from 20%, and many low value-added jobs in inefficient companies have disappeared. Commodity export price booms have created a significant trade surplus and stimulated higher investment and output, most notably in agriculture. Consequently, merchandise export earnings have more than doubled over ten years to $60 billion annually in 2008-2010.

Argentina has therefore seen an unprecedented expansion of government income with revenues at 33% of GDP from that of about 21% in late 1990s, witnessing higher private sector incomes and government spending. Unfortunately, Argentina does not have a market-based exchange-rate regime, as the Argentine Peso would have benefited from the flood of foreign exchange. The Central Bank of Argentina’s interference has weakened the currency by 36% in nominal terms while most Latin American neighbours have appreciated. Instead Argentina has been significantly building its dollar reserves, with $50 Billion in the first six months of 2010. Currently, external debt liabilities are at an all time low of two-and-a-half times the level of reserves, representing a foreign debt level which is compatible with higher sovereign credit ratings.

The problem is that the current administration is delusional if it believes that the rational among us, those not in the ‘Don’t Cry For Me Argentina’ camp, are convinced.  Argentina, for the present and immediate future, has lost its allure. When private pension funds are ‘nationalised’ to save them, effectively hijacked, what could foreigners expect? A rhetorical question and most of us don’t suffer from memory loss.

Argentina is the only G-20 member government that is in default on its loan obligations to its fellow members – and it has been in default to them for nearly a decade. Potential foreign investors in, and lenders to, Argentina are likely to get ensnarled in the claims as a concession to any future accord between Argentina and its official creditors. Argentina bears the burden of the debts to the Paris Club – $7 Billion, $1 Billion arbitration awards, with many pending through the ICSID (84% of all cases brought against any of the G-20 member nations) and $850 Million protracted arrears to foreign commercial banks and suppliers. It is the only G-20 member that refuses to abide by its treaty obligations to the International Monetary Fund (IMF), blatantly committing transnational financial crimes. Until debts are settled international credibility, as a trusted player, is a tarnished reality. Argentina has to step up and pay up.

The international comparative platform further supports the conclusion that Argentina remains a stealth operator and a relatively oppressed and non-business nor investment friendly place. Argentina ranks 115th in the World Bank’s “Ease of Doing Business” category, out of a total of 183 economies, 87th in the World Economic Forum’s Global Competitiveness Report 2010-2011, out of a total of 139, and 105th place out of 178 countries in Transparency International’s 2010 Corruption Perceptions Index and is 135th out of 179 countries in the Heritage Foundation-Wall Street Journal 2010 Index of Economic Freedom.

Therefore, there is clearly a great deal of country risk that is not captured by the Argentinean government produced indicators. Steady now in rushing to invest in Argentina! Argentina has been on a spending spree with this inherited revenue leaving little to meet the existing or what would become new public indebtedness. The IMF, producing more comprehensive figures, configured on an accrual rather than cash basis, has realistically included all payments due to be made by the government and revealing operating deficits not surpluses.

Then there are the serious accusations concerning the accuracy and integrity of official inflation data generated by Argentina. Notably, the IMF’s leading publication, the World Economic Outlook, refers to Argentina as the only country in the world whose inflation and GDP statistics need to be accompanied by a footnote explaining that the numbers cited have been challenged by private analysts.

Government inflation figures showing an average of 8.4% per year while independent analysts challenge them with an average of 20.5% and some suggesting as high as 30%. Argentina, being the only G-20 country to refuse inspection of its books by the IMF, does nothing to refute this. This translates to prices not having risen by 50% but 130% since 2006 and infers unsound and imprudent fiscal and monetary policies featuring unsustainable exchange rates which eventually, once the ‘Don’t Cry for Me Argentina’ camp has come out of its trance, will turn emotive tears and compliance into national social and political unrest.

Despite substantial market and default risks, Argentina has nevertheless managed to raise $3 billion through to the end of October 2010, offering bond yields mostly in the range of 9½% to 12½% while European and American bonds unattractively offer only 1 to 5%. The problem is that these attractive returns are based on high risk, single B rated credits. Replacing a culture of capital flight, some global investors are also making a showing in stock purchases and equity investments there, and should be credited with bravery as well as short term memory loss.

Santa Claus is apparently savvier than some, avoiding exporting to Argentina this Christmas, as he knows that he may not get his sleigh back and Rudolph might even become Christmas lunch. But, being a smart Santa, he’ll be keeping an eye on Argentina as Christmas has not permanently ended there; it will be celebrated again, just not quite sure when. Until then, we will indeed not forget Argentina. While we all enjoy the sentiment of the song, we are waiting for the Argentinean people to forego it, for its leaders to acknowledge that statesmanship is more than entertaining the masses and to open up to global opportunities that will give the country back its self respect.

Now sing along with Evita … I mean President Kirchner … err … whoever … (will bow out myself if you don’t mind!)

‘Don’t cry for me Argentina
The truth is I never left you
All through my wild days
My mad existence
I kept my promise
Don’t keep your distance

And as for fortune, and as for fame
I never invited them in
Though it seemed to the world they were all I desired
They are illusions
They’re not the solutions they promised to be
The answer was here all the time
I love you and hope you love me

Don’t cry for me Argentina’

(Lyrics: ‘Don’t Cry For Me Argentina’)

Author: Pam Mason

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