Decoding the secrets of Argentina’s growth

Argentina, the Latin American giant, is once again defying the pressures of the world economy and growing at a rate few would have believed was possible after it defaulted on its payment of 90 billion USD almost a decade ago. Under President Christina Fernandez de Krichner, Argentina is treading a path that few would have supported. Krichner’s advice is simple to EU – keep spending and stuff the IMF.

Argentian is forecasted to have a growth of 8-9% this year which is huge if we consider the fact that its economy contracted by 2.25% in 2009. There are several favourable factors that is causing this growth- the drought has ended and the Argentinian car industry is benefitting from a booming Brazilian economy. The figures of growth though are a matter of debate since the National statistics institute ( know as INDEC) is often interfered in its working by the government. However the single biggest factor that is causing this growth is their President’s expansionary policies which are beginning to create a consumer boom. When the economy began to slow down, Kirchner offered loans to car making companies that helped save thousands of jobs. As the tax revenues were falling then, she used the lottery and national pensions to provide this loan by nationalizing them.  A move widely criticised back then is now being hailed as the reason for the growth.

The tax revenues are presently rising and a positive trade balance has led to a healthy growth in Argentina’s foreign reserves which are now over 50 billion USD. Moreover Argentina is converting a large portion of its reserves as Gold. However not everything looks rosy. Expansionary measures have led to rising fears of inflation. The official estimates show it in the range of 11%, however independent economists rate it much higher as there have been increases in wages by around 25% and tax collections have increased by 20%.

Though Argentina’s economy is twice as big as Chile, it barely attracts half of the foreign investment that Chile gets. The main reason attributed to this has been the unconventional policies of the government which has unnerved investors. The debt restructuring of Argentina’s sovereign bonds are also taking place so that Argentina can return to the bond market in a big way and the continuous better performance of its bonds shows signs that the economy is booming. The steel production of Argentina dropped in September, however official figures are still upbeat- could this be another misrepresentation ?

Asia’s demand for food has increased both the exports and prices of Soya beans and other agro-products from Argentina. This has resulted in higher tax collections which the government has used to pay for subsidies for urban poor population, thus completing the cycle. Any drop in demand may lead to sharp fall in prices,which in turn could spell doom for Argentina’s economy.

The president recently announced a 16.9 % increases in pensions which the President believes is a necessary social investment – increasing the burden on Argentina’s economy. Moreover the Argentinian congress is proposing a bill that will make the pension pay at 82% of the median pay of active workers, a move that will create a huge deficit of 8% in GDP and offset all the gains that Argentina has made since 2003 due to trade surpluses. 

The present government is following an equally vociferous industrial policy and is doing all it can to keep the car makers in Argentina and not move to Brazil. However, the populist measures might still be the undoing and prove the critics view of  doomsday for Argentina’s economy. However for now, the economy is doing fine, in fact booming !

Food for thought: Do you support Argentina’s growth strategy ?