October 24, 2011 6:29 pm
Turbulence forecast for victorious Fernández
Everything changes, so the lesson of the famous Italian novel The Leopard goes, so that everything can stay the same.
Cristina Fernández, Argentina’s newly re-elected president, has made clear that she does not want to change the high growth her country has been enjoying – and for which she was overwhelmingly returned to power on Sunday, with nearly 54 per cent of the vote.
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But keeping everything in Argentina the same – including ultra-lax monetary and fiscal policies, galloping public spending, vast subsidies on energy and transport, a blind eye to high inflation, and a determination to shore up the peso currency at the expense of running down central bank reserves – will be an almost impossible task for Ms Fernández.
“Doing nothing isn’t an option,” says Boris Segura, economist at Nomura Securities in New York.
The country has been losing competitiveness as the economy of Brazil – its top trading partner and a key market for its manufacturing exports – has slowed. But Argentina cannot make any sudden changes to the exchange rate for fear of stoking inflation, already widely believed to be running at about 25 per cent.
“I think it’s clear that Argentina is heading for a peso problem. There are two ways to deal with this – accelerate devaluation or reduce inflation. But there are problems with both,” said one chief economist at a large think-tank, who asked not to be named. The government has slapped hefty fines on economists for contradicting the official, discredited, inflation figures which show a much rosier picture.
Pessimists in the market see a recession as a possibility during Ms Fernández’s new 2011-15 term, and wealthy Argentines have been voting with their feet, buying dollars and sending them abroad in a capital flight avalanche that could top $20bn this year – more than double the trade surplus.
“There isn’t going to be a crisis, but there is going to be more turbulence,” said Miguel Kiguel, an economist. The global slowdown, which has put pressure on prices for Argentina’s key food commodities exports, coupled with slower growth in key trading partners Brazil and China, add to the domestic challenges.
Ms Fernández’s election triumph – the biggest margin of victory in four decades, and a landslide nationwide – proves that people backed her to continue delivering growth that averaged nearly 6 per cent annually for the past four years. Many are protected from inflation by equally high pay rises. Managing their expectations as the economy slows and the peso has to be revalued will not be easy.
And observers can expect few hints about future policy. Ms Fernández has a cabinet, but she does not consult it, preferring to make decisions after discussion with a couple of trusted advisers. After picking Amado Boudou, the economy minister, as her vice-presidential running mate, her choice of replacement will be key – and may not be swift. She will not be sworn in for her second term until December 10.
But there have been some clues about the direction she expects to take. The Badlar interest rate on large peso deposits has leapt in recent weeks to nearly 20 per cent, from about 11 per cent in the first half of the year.
That, combined with a faster-paced depreciation than the rate of about 7 per cent seen to date – currency futures suggest the market is pricing in a gradual devaluation of 15 to 20 per cent – could mark a shift towards tighter monetary and looser currency policy in future.
The government has also been quietly signalling possible cuts in the heavy subsidies it dishes out to keep public utilities’ rates at about a third of those in neighbouring countries, and public transport cheap – about 26 US cents for an underground train ride, for example.
Slowing growth – the economy is still expected to expand by 4 to 5 per cent next year, after about 8 this year – will help curb inflation, and Ms Fernández’s calls in her victory speech for consensus and unity could be interpreted as a message for wage moderation in future.
“Huge wage increases and enormous public subsidies were possible when export tariffs were pouring into the treasury. But this will soon be a distant memory and the government will need to mend its profligate ways,” said Walter Molano, an analyst at BCP Securities, in a research note.
Argentina, which remains cut off from international financial markets since its 2001 default on nearly $100bn, has financed debt payments with central bank reserves and receipts from the state pensions agency. Although it can keep doing so for a while, it is likely to need to return to capital markets during the new Fernández term, analysts say.
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