The Argentine Economy After Midterm Elections

The forecast of the Argentine economic activity for 2009 has worsened since the onset of the international crisis, by mid 2008. Back then, it was forecasted that 2009 recession would be around 1% and 2%. The Argentine administration adopted a series of measures by the end of 2008 to reanimate the economy. However, they were hardly or not effective at all, and currently the GDP recession forecast is around 5% to 6% in 2009. Nevertheless, annual inflation remains high, (15.4% in May) therefore the government has to face a difficult stagflation process.

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After midterm elections on June 28, a change of strategy by the current administration will be required. Why? Because the recession is significant and is eroding tax collection, and public spending is still rapidly growing. When the administration sensed the scope of the crisis, three months back, it moved the original Election Day (October 25) forward, as early as possible, hardly respecting the 90-day period after having made the announcement, i.e., end of June. This means that the authorities foresee that the second half of the year will be more difficult, especially with the late crisis effects, i.e., the unemployment rate is expected to rise.

A need for funding to meet the administration cash flow amounting to USD6 billion for 2010, and a similar figure for 2011, is forecasted. For the time being, there is no voluntary funding, either local or international, to fund this difference. What can be done to improve this scenario?

In order to bring public spending down, the following can be done: 1) Increase utilities rates, thus subsidies to consumption may considerably decrease (ARS35 billion estimated for this year). 2) Give a moderate rise to public servants and retirees. 3) Normalize public works, exaggerated by the election period.

And to get closer to international funding from IMF or voluntary markets: 4) Restructure the defaulted debt with the Paris Club (USD7 billion). 5) Make an acceptable proposal to holdouts (USD30 billion) to finally regularize the default with Argentine bondholders. 6) Normalize the generation of statistics to reflect what is actually happening in the country with regards to inflation, product growth, CER-adjusted public debt (Argentine ratio for indexing purposes), poverty, extreme poverty, unemployment, i.e. normalize the INDEC (National Institute of Statistics and Census). 7) Reach an agreement with Argentine farmers, thus putting an end to the long-dated conflict with such sector.

We consider that the exchange rate, from the commercial point of view, is well handled by the Argentine Central Bank, thus this micro-devaluation policy should remain unchanged. The international reserves are at a good level, the monetary expansion is complying with pre-set guidelines of the monetary scheme, and the interest rate is the expected one under such monetary scheme. There are two currency financial swaps with China (USD 10 billion) and with Brazil (USD5 billion) that can start to quiet down the markets.

Thus, 2010 should be more acceptable for economic agents, both consumers and investors. Consequently, a slight recovery in the economic activity for the year of the Bicentenary of the country should be expected.