FIEL Chief Economists: Argentina’s Economic Outlook

Argentina has grown at a rate of 8 percent for the past eight years, said Juan Luis Bour, yet the second half of 2011 saw only 3 percent growth. Due a severe decline in agricultural production caused by drought, growing capital flight, and other factors, 2012 could see a slowdown in growth. The result would be a drop in real GDP, warned Bour. Construction in Argentina grew at a high rate until 2011, when public works stopped and the dollarized real estate market suffered because of limited access to foreign exchange. Due to a vanishing trade balance and capital flight, the country is experiencing dollar scarcity, he said. Booming until 2010-2011, tourism has begun to decline. There are also signs of recession in manufacturing because of rising labor costs. Still, wages remain significantly higher in Argentina than in neighboring Brazil, despite the appreciation of the Brazilian real.

 

 

Fernando Navajas elaborated on the difficult and unsustainable energy situation facing Argentina. Thanks to artificially low energy prices, government energy subsidies have resulted in demand and supply imbalances, putting a greater strain on the economy, he said. If the energy market in Argentina is to improve, subsidies need to be reduced and the energy supply has to recover, Navajas explained. The expropriation of Argentina’s oil company YPF will not solve the country’s energy problems, he said, since it controls only 33 percent of the natural gas market. During the 1990s, Argentina was a net exporter of energy as the country ramped up production. Beginning in 2010, Argentina became a net energy importer, when oil prices spiked. Now, Argentina has a negative energy trade balance. Navajas pointed out that the drop in energy production has not been arbitrary, but rather a systematic response to the incentives of the Argentine market and the government’s energy subsidies.  

 

 

Daniel Artana warned that public spending is on the rise. “Argentina has one of the highest public expenditures in the region as a percentage of GDP—even higher than Venezuela,” he said. At present, net federal debt is 24 percent of GDP. As a result, the private sector has a high tax burden. Artana believed that considering the level of federal debt, the expropriation of YPF does not make sense fiscally and will not solve any of the immediate challenges faced by the government. “In fact, it will only lead to the deterioration of the business climate,” added Artana. If the government gets lucky and if major trading partner Brazil experiences higher growth, Argentina could alleviate some of its budgetary and macroeconomic challenges. “But you don’t want to bet your life on luck,” said Artana.

 

Questions for the panel focused on Argentina’s vast natural gas reservoir Vaca Muerta, property of YPF. Despite the hopes of the federal government, the viability of Vaca Muerta is “many years, many billions, and many institutions away,” cautioned Navajas. The economists said that, though it is difficult to determine the exact time and investment needed, it is far beyond the current capacity of the government. Vaca Muerta will not solve any of the country’s immediate energy, fiscal, or macroeconomic challenges, Navajas concluded.