February 18th, 2015
in Op Ed
by Elliott Morss, Morss Global Finance
Editor's note: The article posted previously inadvertently omitted some of the material included here.
News from Argentina seemingly goes from bad to worse. But there is one piece of decidedly good news - Presidential elections in October. In what follows, I review the damage done by "The Lady" and suggest a plan of action for the next government.
The Kirchner Legacy
When I visited Argentina in 2008, I became something of a Kirchner apologist. The Lady had just taken over the pension funds and the Argentine economists I talked to said she would probably use the funds for her political campaigns. I disagreed saying the funds were not being well managed off-shore and the government would do a better job of managing them if they directly controlled them. And then when she seized the Repsol oil fields, I supported her, arguing that Repsol was not developing them and Argentina needed the oil. That argument had merit: Argentina's petroleum imports are now ten times greater than they were in 2000 constituting 15% of total imports.
In retrospect, it is clear that I was far too supportive of the Lady and blind to other things going on. Over the last decade, her actions done great damage to the economy of Argentina and the country's reputation worldwide. Her only "allies" at this point are the imploding Venezuela and China who lends her money secured by future agricultural exports to China.
Kirchner's Destructive Acts
The following paragraphs provide details on some of the Lady's most destructive actions. The list is far from complete.
It has become almost a knee-jerk reaction for Kirchner's government to take action against anyone who criticizes government policy. And this intimidation policy has worked - academic and private Argentine economists have said very little about the Lady's wayward policies. However, her battles with the media have continued in public resulting in The Inter American Press Association (IAPA) condemning Kirchner' chief of staff for tearing up pages of the newspaper Clarín during a public meeting. IAPA President Gustavo Mohme said he regretted that:
"The President Kirchner's government involves the press in an alleged 'political confrontation,' discrediting the media as political opponents, instead of regarding them as an instrument watching over those in power as occurs in democratic societies."
And this policy of harassing anyone who criticizes the government runs deep. Government employees at all levels know harassment is what the Lady wants.
b. Falsifying Government Data
This would be comic if it were not true. Argentina is the first country ever to be censured by the International Monetary Fund for "not providing accurate data on inflation and economic growth." If Argentina continues to falsify data, it could lose its IMF membership. The Fund's Executive Board has given Argentina to the end of February to "address the quality of the official data ...for the Consumer Price Index and Gross Domestic Product (GDP)." In response, the Government has recently developed a new price index. However, outside observers believe the new series still underestimates inflation by an appreciable amount. For example, FocusEconomics publishes inflation estimates from a number of international private banks and research entities. The government, using its new series, estimated 2014 inflation at 23.8%. The FocusEconomic's Consensus was 26.3% with Oxford Economics estimating it at 36.8%. For 2015, the government is projecting a 14.5% inflation rate while the Consensus among 15 private entities is 23.0%. Needless to say, considerable skepticism exits concerning any data collected by this government. And this will continue as long as the Lady is in power.
c. Trade Barriers
In hopes of promoting domestic production to substitute for imports, the Kirchner regime has introduced a large number of trade barriers. The World Trade Organization (WTO) has ruled they are illegal: a panel of three independent arbitrators found that Argentina's licensing rules violated WTO agreements, and urged the government of President Cristina Fernandez to bring them in line with international trade rules. The real problem with such rules is that they create lucrative opportunities for illegal black markets activities. The "lady" appears to have no understanding of basic economic supply/demand forces and how trying to interfere with them creates incentives for citizens to become criminals.
What explains this behavior? As is true of most Latam countries, Argentina has a history of military dictators with little regard for free market mechanisms. They like to issue commands to get things done. It reminds me of my first trip to Ghana for the IMF when the military had just ousted Nkrumah and was running the country. The military had no understanding of economics and markets. They were used to commanding things to happen and seeing their commands followed. So if the exchange rate was not to their liking, they would tell the banks and the money traders what the exchange rate should be. Money changers normally worked on the streets near the central bank. If the military did not like the exchange rates being offered by the money changers, they would put a few of them in jail and disperse the others. It never worked. After a few weeks the money changers would return.... I observed the same behavior by Myanmar's military leaders a couple of decades later.
d. Rampant Corruption
As suggested above, the Lady's "command and control" regime offers numerous opportunities for corruption. And apparently, government officials have taken full advantage of them. Transparency International ranks Argentina 107th out of 174 countries ranked. No country with Argentina's per capita income get such a low ranking.
e. Efforts to Set Peso Value
Ever since I started traveling to Argentina, there has been an "official" and "black market" rate for dollar to peso conversions. The Lady somehow thinks she can influence exchange rates by fiat. A couple of years back, she got a law passed that required all Argentine real estate transactions to be done in pesos. Of course, this is all complete nonsense and a nuisance for anyone hoping to visit or do business in Argentina. Since 2008, the official rate has gone from just under 4 pesos per dollar to about 8.7 pesos/$ today. There are now two unofficial markets for pesos - the "blue chip swap" market and the "black" market. In the blue market, you can get over 13 pesos/$; in the black market you can get nearly 15 pesos/$. And yes, as happens in military dictatorships, the money traders' offices are regularly raided.
The above gives only a partial picture of the economic malaise in Argentina today caused by the Kirchner regime. I turn now to what the future might hold.
a. The Economic Fundamentals of Argentina are Strong
In 2009, I completed a series of articles on the resiliency of Latin American countries following the global depression resulting from the US bank collapse. I did the series with then-Professor Diego Gauna and my students at the University of Palermo in Buenos Aires. I quote from the conclusions from the Argentine paper:
"With all that has been reported above, keep in mind that Argentina, like Russia, is a natural resource rich country.... "The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue. But at least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound."
This point can be made well with a few key statistics. We have marveled how rapidly China has grown, fueled largely by its export sector. Since 2000, China's exports have grown at a 9.6% compounded annual rate. Argentina's exports have grown almost as rapidly - 8.6% compounded annually.
Ave growth rate since 2000 = 3.88%, China 9.95%.
Since 1980 Argentina 2.42, China 9.89%
Exports: Argentina 8.56% since 2000, China 9.6%
But there are further reasons to be optimistic. Despite growing energy imports, the country runs a healthy trade balance. And because of the "loose ends/untidiness" of its 2002 debt default, international lending windows have been largely closed to the country since then. Exactly how much debt the country owes to Venezuela and more recently to China is not clear. However, FocusEconomics estimates its external debt (% GDP) at a low 26.6%.
b. What Should Be Done To Turn Things Around?
We start with the fact that Argentina has a solid base for growth. But to get back on track, Argentina needs a leader who offers a platform that the citizens and international community can believe in. And given what has happened since 2003 when the Kirchners came to power, that will be a tall order. Most Argentine citizens have lost any hope they can influence outcomes at the polls. And with the harassment resulting from criticism of the government, most citizens say nothing.
The political platform of the next President should emphasize legitimacy and transparency. S/he should tell the people what you will do and report back honestly on successes and failures. The President should start by:
- getting rid of all the nonsense policies in violation of international law;
- stop intimidation;
- stop falsifying economic data;
- drop the tariffs that violate WTO mandates;
- abolish "official" peso values, and
- reduce corruption.
How might all of this be accomplished? In the economic arena, the new President should start by creating a council of economic advisors (CEA) drawn from the excellent "stock" of Argentine economists working in government, academia, and the private sector. Their mandate would be to examine every major sector and identify all inappropriate and unnecessary restrictions on commerce, both domestic and international. The findings should be summarized in a published report for the President. The President should respond publicly and say what he will try do.
To provide more legitimacy and transparency, the CEA should appoint an advisory group of 5 - 8 international economists who review its work and offer suggestions and criticisms made available to the public.
In addition, an anti-corruption panel should be launched to investigate the alleged corruption and intimidation that took place during the Kirchner regime. Their findings should serve as the basis for legal actions against individuals and companies for corruption and financial damage resulting from intimidation.
But even if all this happens, it will several years for consumers and investors, both local and international, to feel confident about the Argentine economy and governance. And the next couple of years will be tough with most outsiders predicting GDP to turn down in 2015.
With all that is wrong in Argentina, the stock market (^MERV) and the Global X MSCI Argentina ETF (ARGT) are up over the last 12 months. I don't get it. And with the uncertainty about the immediate future, investments in Argentina should be left to informed (and wealthy) risk takers.
Author's Note: I want to acknowledge the assistance provided by Richard Rust, an American residing in Buenos Aires, with information for this article.