FIEL Panel: Outlook for the Argentine Economy

Speakers:

• Daniel Artana, Chief Economist, FIEL, Buenos Aires
• Juan Luis Bour, Chief Economist, FIEL, Buenos Aires
• Fernando Navajas, Chief Economist, FIEL, Buenos Aires
• Santiago Urbiztondo, Chief Economist, FIEL, Buenos Aires

Summary

On May 19, four economists from the Latin American Economic Research Foundation (FIEL), a leading think tank based in Buenos Aires, joined AS/COA to discuss the most recent economic and financial developments in Argentina. Panelists discussed the current state of the Argentine economy, focusing on inflation, domestic and international investments, government spending, challenges in fiscal policy and the potential for development. Panelists also examined economic prospects for the economy for the rest of 2009 as well as in 2010.

The Real Economy in 2009

According to Juan Luis Bour, economic indicators in Argentina point to a severe downturn. The country has experienced a severe decline in the volume of imports, projected to decline 45 percent in the second quarter of 2009, as well as severe contraction in investment in the manufacturing and production sectors. In addition, Argentina has experienced an increase in capital flight since mid-2007, totaling $26 billion in the last 12 months—or 8.2 percent of GDP. On another note, real wages in both the public and private sectors have increased by 2.1 percent as a result of expansionist wage policies and negotiations with unions. But this does not necessarily translate into a decline in unemployment, which is projected to increase for the third quarter of 2009, particularly among small- and- medium sized companies. Bour mentioned that inflation continues to be problematic as the numbers reported by Instituto Nacional de Estadística y Censos (INDEC, the government’s statistic institute) are not reliable. As measured by FIEL, inflation will remain at approximately 17.5 percent. Bour projects a 5.3 percent drop in total GDP growth in 2009, largely due to a 21 percent decline in investment in Argentina.  

What makes this cycle different?

Fernando H. Navajas highlighted domestic factors such as previous recessions, trade connections, capital flight, and the political economy, to explain why this economic cycle in Argentina stands out. He noted that the worst recessions in Argentina—specifically in 1929, 1987 and 1998—followed severe drops in export prices and quantities. Although these two components were also the starting point to the current crisis, this time around the country has been severely hit by 18 months of capital flight. When comparing Argentina to the rest of Latin America, Navajas pointed out that benchmarking is difficult due to unreliable official statistics. The country’s current situation is not only a result of external conditions but also domestic affairs which put Argentina in a disadvantageous position compared to the rest of the region.

Pension Reform

Economic policies in Argentina since 2003 have, in general, meant a return to government intervention in the economy. Santiago Urbiztondo stated that policies such as a lack of fiscal discipline, rejecting the role of pricing systems, and the manipulation of public statistics have resulted in economic opportunism and short-sightedness. He examined the reversal of the 1994 pension system reform to demonstrate such policies, noting that although the government described the private capitalization regime (AFJP) as unsuccessful, it actually produced higher net returns than the public regime the system had created. Specifically, Urbiztondo measured pension benefits to be 60 percent of the salary after 35-year contributions, as opposed to a 52.5 percent benefit from the public regime. Urbiztondo also said that the returns on equities have not been too high or increasing in Argentina, averaging 3.5 percent compared to the overall average of 21.1 percent for Latin America. The risk involved with capitalization can be reduced as has taken place in Chile. Still, he noted that although Argentina has potential for development, there must be a clearer consensus on basic principles such as the role of the state, the significance of the private sector, transparency, and property rights in order to prosper in the future.

Fiscal Policy

In real terms, and as adjusted by FIEL’s inflation estimate, Argentina’s revenues grew considerably from 2003 until mid-2008 thanks to increasing export prices and to a higher tax burden on the economy. Unfortunately, revenues earned during good times were spent both at the federal and provincial levels, leaving little room to maneuver in difficult times. According to Daniel Artana, between 2003 and 2008 the Argentine government also increased public expenditure in excess of 15 percent. The government is expected to implement Keynesian counter-cyclical policies, but does not have the financial backing to do so. The Argentine government has found a way to finance itself at the federal level thanks to the stocks it still holds at the Central Bank. But that revenue source will not last for long. Artana projected that if expenditures remain the same the government will be in need of $6.5 billion by 2010. Argentina can, however, avoid a default if the government improves its fiscal policies, negotiates wage policies with unions, and reduces its public expenditure—although this last measure could have a high cost for the economy. In addition, he proposed that the depreciation of the peso, an agreement with the IMF, and a reform agenda in the next government would help Argentina demonstrate transparency and strong fiscal policies.

Conclusion

Looking forward, fiscal improvement is needed for 2010. All panelists agreed that Argentina must demonstrate its ability to manage public expenditures in a reasonable way. In addition, they maintained that Argentina was not yet in an economic crisis as severe as in the United States, but they did acknowledge that continuing on the current economic path would increase the likelihood of a continued decline in investments as well as a deterioration in the potential to bounce back financially. Also, panelists highlighted the significance of the current political situation’s interconnectedness with economic policy. They agreed that there is a significant need to improve the primary fiscal position after the mid-term elections. Overall, the panel remained optimistic that if the government changes fiscal policy, the economy will be able to hold its own in the face of a severe recession.