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Elliott Morss | October 22, 2014

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Argentina: Effects of Global Recession and Future Prospects

© Elliott R. Morss, Ph.D.

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.

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