Argentina: Effects of Global Recession and Future Prospects
In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have also noted the remarkable recovery in Latin American stock markets relative to the rest of the world.
I am in the process of posting a series of country studies written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.
The Colombia and Chile studies have already been published. The Argentina study is posted below.
Argentina: Effects of Global Recession and Future Prospects
by Marcela Gonzalez and Elliott Morss
EXECUTIVE SUMMARY
The credit freeze had little impact in Argentina. While the stock market fell 65% resulting in asset loss of US$22 billion, that loss has almost been erased with the market down less than 1% from its earlier highs. But the reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall 12% with consumption lower as well. Unemployment in 2009 will approach 10% by the end of the year. 2010 looks better, with most forecasts predicting GDP growth of 2%.
IMPACT OF CREDIT FREEZE
The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down 40% for a loss of $22 billion, the Argentine market is now only down 0.26%.
Table 1. – Global Stock Market Losses (in mil. US$)
|
|
|
|
Index |
|
|
||
| Index |
Index High |
Index Low |
Hi-Lo % Loss |
Hi-Low $ Loss |
Recent High |
Hi-Now % Loss |
Hi-Now $ Loss |
| DJ Eurstoxx 50 |
4.543 |
1.810 |
60,20% |
7.210.000 |
2.763 |
39,20% |
4.700.000 |
| Nikkei 225 (Japan) |
18.239 |
7.569 |
58,50% |
2.590.000 |
9.844 |
46,00% |
2.040.000 |
| S&P 500 (US) |
1.558 |
683 |
56,20% |
10.350.000 |
1.059 |
32,00% |
5.900.000 |
| S&P Asia 200 |
6.749 |
3.145 |
53,40% |
6.850.000 |
4.540 |
32,70% |
4.200.000 |
| TSX (Canada) |
14.984 |
7.591 |
49,30% |
810.000 |
11.173 |
25,40% |
420.000 |
|
|
|
|
|
|
|
|
|
| Argentina (Merval) |
2.339 |
829 |
64,56% |
21.985 |
2333 |
0,26% |
159 |
| Brazil (Bovespar) |
73.516 |
29435 |
59,96% |
641.844 |
67413 |
8,30% |
133.079 |
| Chile (IPSA) |
3.499 |
2.101 |
39,95% |
149.307 |
3465 |
0,97% |
2.416 |
| Colombia (IGBC) |
11.439 |
6461 |
43,52% |
61.599 |
11693 |
-2,22% |
-2.422 |
| Mexico (Mexbol) |
32.721 |
16.869 |
48,45% |
227.146 |
31017 |
5,21% |
22.945 |
| Peru (IGBVL) |
23.790 |
6.054 |
74,55% |
23.970 |
15733 |
33,87% |
31.900 |
| Venezuela (IBVC) |
62.013 |
34172 |
44,90% |
|
54111 |
12,74% |
|
|
|
|
|
|
|
|
|
|
| Total 7 LA Countries |
|
|
|
1.125.851 |
|
|
188.077 |
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
28.660.000 |
|
|
17.550.000 |
| Total Adjusted* |
|
|
|
36.000.000 |
|
|
22.050.000 |
IMPACT OF DECLINING GLOBAL DEMAND
Argentine exports have been adversely hit by the global recession. They are down 26.8% in the first 3 quarters of 2009 as compared with the same period in 2008.
Table 2. – Argentina Export Performance
|
First 9 Months |
First 9 Months |
First 9 Months 2008-2009 |
|
|
2008 |
2009 |
% Change |
|
| Total Exports |
54.8 |
41.1 |
-26.7% |
| Primary Products |
13.7 |
7.3 |
-47.0% |
| Processed Agriculture |
18.5 |
16.2 |
-12.0% |
| Manufacturing |
16.3 |
13.3 |
-13.3% |
| Energy |
6.3 |
4.3 |
-31.0% |
Sources: http://www.bcra.gov.ar, http://www.indec.gov.ar/
A more complete understanding of export performance can be obtained from Table 3.
Table 3. Export Details
|
Selected Exports |
Ten Months |
Absolute Difference |
|
|
|
|
||||
|
|
|
% Change |
||
|
US$ mil. |
|
|||
|
2008* |
2009e |
|
|
|
| Total Exports |
60.971 |
45.965 |
-15.006 |
-24,6% |
|
|
|
|
|
|
| Planted Products |
22.597 |
14.679 |
-7.918 |
-35,0% |
| Soy Flour |
6.099 |
7.028 |
929 |
15,2% |
| Soybean Oil |
4.231 |
2.739 |
-1.492 |
-35,3% |
| Soy Derivatives |
4.381 |
1.674 |
-2.707 |
-61,8% |
| Wheat Flour |
389 |
261 |
-128 |
-32,9% |
| Maize |
3.263 |
1.220 |
-2.043 |
-62,6% |
| Wheat |
2.228 |
789 |
-1.439 |
-64,6% |
| Barley |
237 |
136 |
-101 |
-42,6% |
| Sunflower Oil |
1.322 |
606 |
-716 |
-54,2% |
| Sunflower Seed |
59 |
83 |
24 |
40,7% |
| Lemons |
388 |
143 |
-245 |
-63,1% |
|
|
|
|
|
|
| Meat |
1.170 |
1.250 |
80 |
6,8% |
|
|
|
|
|
|
| Wine |
431 |
470 |
39 |
9,0% |
|
|
|
|
|
|
| Other Agriculture |
937 |
547 |
-390 |
-41,6% |
| Fertilizers |
379 |
186 |
-193 |
-50,9% |
| Leather |
558 |
361 |
-197 |
-35,3% |
|
|
|
|
|
|
| Gold |
610 |
738 |
128 |
21,0% |
|
|
|
|
|
|
| Vehicles and Parts |
4.473 |
3.659 |
-814 |
-18,2% |
| Autos |
2.414 |
2.156 |
-258 |
-10,7% |
| Trucks |
1.551 |
1.131 |
-420 |
-27,1% |
| Gear Boxes |
508 |
372 |
-136 |
-26,8% |
|
|
|
|
|
|
| Fuels |
5.474 |
3.987 |
-1.487 |
-27,2% |
|
|
|
|
|
|
| Metals |
1.837 |
1.487 |
-350 |
-27,2% |
| Steel Pipes |
1.107 |
856 |
-251 |
-22,7% |
| Raw Aluminum |
523 |
389 |
-134 |
-25,6% |
| Iron Products |
207 |
242 |
35 |
16,9% |
|
|
|
|
|
|
| All Other |
23.442 |
19.148 |
-4.294 |
-18,3% |
Source : INDEC
As can be seen from this Table, all major exports fell sharply in the first ten months of 2009. Only meat, wine and gold increased over this period.
THE DOMESTIC ECONOMY
Consumption growth slowed by 6.3% in the last quarter of 2008 and first quarter 2009 when compared to the same period in the 2007-2008 year. Consumption is expected to fall by 1.4% for all of 2009. Investment is down by 11.5% in the last quarter of 2008 and first quarter 2009 when compared to the same period in the earlier years. Investment is expected to decline by 11.6% for the entire year. It is estimated that the unemployment rate will increase to 9.9% in 2009 from 7.3% in 2008.
EXTERNAL SECTOR
As Table 4 indicates, Argentina’s trade balance remains strong, even with the fall in exports. International reserves have fallen a bit, but they are still quite adequate.
Table 4. – External Sector (in millions of US$)
| Item |
2007 |
2008 |
2009 Est |
| Trade Balance (US$ billion) |
11,1 |
12,7 |
13,6 |
| Exports (US$ billion) |
55,8 |
70,1 |
54,1 |
| Imports (US$ billion) |
44,7 |
57,4 |
40,5 |
| International Reserves (US$ billion) |
46,2 |
46,4 |
43,4 |
| Total External Debt (US$ billion) |
124,6 |
124,7 |
122,8 |
| Total External Debt (% GDP) |
47,8 |
37,9 |
51,1 |
| Current Account Balance (US$ billion) |
7,1 |
7.0 |
7,1 |
Source: LatinFocus
The country’s primary problem here concerns its 2001 default. After defaulting on $95 billion of debt, holders of approximately $75 billion settled in 2005 at 35 cents on the dollar. Argentina has had on and off talks to settle up on the remaining $20 billion, but there is nothing definitive yet. Since then, the country has relied on local markets and loans from Venezuela to meet financing needs. Last year, it seized about $24 billion in pension assets possibly to compensate for falling tax revenues.
Could Argentina afford to pay off its international debts? At 35 cents on the dollar, it would cost $7 billion. The country is estimated to have over $40 billion in international reserves. It is not clear whether the creditors who refused 35 cents on the dollar earlier would accept it now. But settling this debt would allow Argentina to borrow again in international markets where it would probably have to pay less than the 15% charged by Venezuela now. It is reported that the government is at least talking to the IMF.
GOVERNMENT POLICY MORE GENERALLY
It appears that for some time, the country has not had a sound economic strategy. Instead, everything appears to be happening on an ad hoc basis. Argentina has some excellent economists. It is too bad one or more of them is not in a position of power. The country needs “a steady hand on the tiller”.
There is talk of corruption. Corruption exists everywhere. If it is predictable, businessmen will build it in as a cost of doing business. Unpredictability is another matter: if you don’t know whether your company or pension funds will be seized, you try to keep your assets out of the country. Unpredictability is in part the reason the country´s EMBI spread against the US Treasury rate approaches the spreads of Ecuador and Venezuela
LOOKING AHEAD
Does any of that really matter? Probably not. Like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The global population is growing and it has to have eat. Argentina now exports more wine than Australia – see http://www.morssglobalfinance.com/the-global-economics-of-wine-past-present-and-future/.
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.
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.
For the short run, consider first the projections made by World Bank. World GDP is expected to fall 2.9% in 2009 and increase 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.
Table 5. – World Bank Global GDP Growth Estimates
| Region |
2007 |
2008 |
2009 |
2010 |
| World |
3,8 |
1,9 |
-2,9 |
2,0 |
| High Income |
2,6 |
0,7 |
-4,2 |
1,3 |
| Developing Countries |
8,1 |
5,9 |
1,2 |
4,4 |
| South Asia |
8,4 |
6,1 |
4,6 |
7,0 |
| India |
9,0 |
6,1 |
5,1 |
8,0 |
| East Asia and Pacific |
11,4 |
8,0 |
5,0 |
6,6 |
| China |
13,0 |
9,0 |
6,5 |
7,5 |
| Middle East and North Africa |
5,4 |
6,0 |
3,1 |
3,8 |
| Sub-Saharan Africa |
6,2 |
4,8 |
1,0 |
3,7 |
| Latin America and Caribbean |
5,8 |
4,2 |
-2,2 |
2,0 |
| Europe and Central Asia |
6,9 |
4,0 |
-4,7 |
1,6 |
Argentina’s GDP is projected to drop only 1.5% in 2009 before growing by 1.9% in 2010.
Table 6. – World Bank Latin American GDP Growth Estimates
| Country | 1995-2005 | 2006 |
2007 |
2008 |
2009 |
2010 |
| Brazil |
2,4 |
3,7 |
5,7 |
5,1 |
-1,1 |
2,5 |
| Mexico |
3,6 |
4,8 |
3,3 |
1,4 |
-5,8 |
1,7 |
| Argentina |
2,3 |
8,5 |
8,7 |
6,8 |
-1,5 |
1,9 |
| Venezuela |
1,6 |
10,3 |
8,4 |
4,8 |
-2,2 |
-1,4 |
| Colombia |
0,7 |
6,8 |
7,5 |
2,5 |
-0,7 |
1,8 |
| Chile |
4,2 |
4,3 |
4,7 |
3,2 |
-0,4 |
2,7 |
| Peru |
3,3 |
7,6 |
9,0 |
9,8 |
3,0 |
4,3 |
LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Argentina –2.3% for 2009 and 2.2% for 2010. The LatinFocus Consensus Unemployment Rate Forecast for Argentina is 9.9% in 2009 going to 10.3% in 2010. That will mean some pain and increased political pressure on the government.
