MAP: Here's The Rising Macro Risk Emerging Out Of Argentina

The Argentinian government is becoming increasingly interventionist and recently removed restrictions on its access to Central Bank reserves. This move essentially threatens the central bank’s independence and could raise inflation risks.

Here’s the map and article from Maplecroft that look at the rising medium term macroeconomic risks in Argentina:

maplecroft map

Photo: Maplecroft

EventOn 22 March 2012, the Argentine Senate approved a reform of the Central Bank charter, effectively allowing the government unlimited access to bank reserves. The measure had been launched by President Cristina Fernandez de Kirchner and was swiftly approved by both houses of Congress, thanks to the president’s majority in the legislature. Under the new regime the government will be free to pay public debt using the Central Bank’s reserves, estimated to be around US$47bn. The bank will also be able to expand its lending capacity to the Treasury, effectively giving a boost to the government’s finances.


The Argentine government is becoming increasingly interventionist, creating significant regulatory risks and threatening the Central Bank’s independence. The charter – the latest example of this interventionist trend – effectively eliminates the requirement that reserves must be equivalent to the monetary base, giving leeway to the government in its quest to fund increasing spending commitments. Moreover, the Fernandez government will also have access to further funds made available through new authorization for the Central Bank to lend the federal government as much as 20% of its reserves – 10% more than before. This will undoubtedly translate into added inflationary pressure as the Central Bank is likely to react to the news by printing more money. Despite the short-term gains of the initiative in alleviating fiscal pressure on the government, inflation – already running at up to 25% according to independent estimates – is likely to become the new Achilles Heel of the government.


Although not a new problem, inflation has increasingly become a concern in Argentina, eroding the value of the peso and driving up local prices. As fiscal pressure on the government continues to mount, President Fernandez has begun to curtail subsidies, which could further increase the prices of basic foodstuffs and costs for companies relying on local suppliers. Inflation has been in the double digits since 2007 and is currently estimated by independent analysts at around 25%.

Meanwhile, downward pressure on the Argentine peso has increased, leading some to fear another currency crisis similar to the 2001 debacle, when the country defaulted on its debt and suffered a currency devaluation. The government has reacted by largely denying the problem and resorting to protectionist measures, such as increasing controls on imports. Since 2007 the National Institute of Statistics and Censuses (Instituto Nacional de Estadistica y Censos; INDEC) has been forced by the government to publish artificially low inflation figures (9.7% in late 2011, for example). Meanwhile, private consultancies and independent analysts have been threatened with legal action for publishing independent estimates.


Since the country recovered from the 2001/2002 currency crisis, Argentina has relied on an export-based economic growth model which has made the country increasingly dependent on Asian demand for commodities such as soya or beef. The government of Cristina Fernandez de Kirchner – who succeeded her late husband Nestor Kirchner (2003 – 2007) – has been characterised by its unorthodox economic approach and arbitrary monetary policy, inherited from her predecessor. Government intervention in the economy has become increasingly common as her administration has struggled to protect a shrinking trade surplus by implementing import restrictions.

As such, the government’s attempts to stabilise its trade balance through protectionist policy moves may have distortionary effects in the medium term. Argentina’s trade surplus totaled US$10.34bn for 2011, representing an 11.1% decrease on 2010’s surplus of US$11.63bn. This boom in imports relative to exports was provoked by high domestic demand in response to strong economic growth and currency appreciation. In February 2011, however, the government took steps to counteract further downward pressure on the trade balance – which it sees as particularly undesirable given high levels of capital flight. The government substantially increased the range of products liable to ‘non-automatic’ import licensing, in which importers are required to obtain official approval. The move provoked the consternation of not only China but also key Common Southern Market (MERCOSUR) allies Brazil and Uruguay which, along with other Latin American trading partners, have suffered the consequences of such measures. In the latest spat Colombia’s Minister of Commerce, Sergio Diaz, declared that the import controls ‘have affected Colombian exporters, who have to fulfil procedures that are an obstacle to the entry of their goods’.

Moreover, the situation for investors in the extractive sector has become more challenging with the introduction in October 2011 of a new requirement on companies in the sector to repatriate (convert into pesos) all of their export revenues. The measure was motivated by high capital outflows from the country, reaching US$9.8bn in the first half of 2011, in comparison to total outflows in 2010 of US$11.4bn. To the concern of foreign investors, such measures have been implemented on an ad hoc basis, creating policy uncertainty and fears over growing protectionism.

Resource nationalism?

While inflation targeting and fiscal prudence is accepted practice in other Latin American countries (such as Brazil), printing money has become routine as part of the Fernandez government’s expansionary fiscal policy. A deadly combination of pork barrel politics, protectionism and union clientelism has put Argentina’s economy increasingly at risk. Although the Central Bank’s latest forecast puts GDP growth at 6% this year, this estimate is considered too optimistic given that the economy is expected to cool off as Chinese demand for soya slows down and foreign investor confidence is harmed by the government’s interventionist approach.

In this context the government’s assault on Fiscal Petroleum Fields (Yacimientos Petroliferos Fiscales, YPF), the formerly state-owned oil company now controlled by the Spanish firm Repsol, has further damaged international perceptions of the government’s interest in delivering sustainable and investor-friendly economic policies. Repsol-YPF shares hit a record low on 2 April 2012 following announcements in March by a number of Argentine provinces, backed by the federal administration, that they had annulled YPF concessions in their territories. This came after growing pressure was put on the company from the government to increase its levels of production and investment. Investment levels had languished following the introduction of draconian export tariffs by the previous administration. Speculation is mounting that the government intends to renationalise YPF, and that current moves may be aimed at driving down the company’s price.


The reform of the Central Bank charter suggests that President Fernandez will continue with her interventionist approach during the remainder of her term in office. Re-elected in a landslide in October 2011, the president also recovered majority support in the legislature, giving her leeway to rapidly pass reforms that directly benefit her government. Her administration is likely to continue threatening private sector interests in pursuit of its short-term macroeconomic and fiscal goals, while benefiting those companies and interest groups supportive of or affiliated with government interests.

Unpredictability in regulatory policy will continue to be the norm rather than the exception. Moreover, a nationalisation of YPF – perhaps during 2012 – seems increasingly likely. Although Argentina is unlikely to approach Venezuela in terms of investor risk, the lack of strong institutions and checks and balances will allow the president to govern arbitrarily, threatening both democratic governance and business interests.

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