Ending the trilogy of having a peek at the three leading economies of Latin America, it is finally the turn of Argentina, arguably the most controversial one of all. This coincides with the current official visit of Ms. Kirchner to Chile, but is fortuitous.

After 28 trips to Argentina in a period of 19 years, I noticed something was seriously wrong on the last two occasions, when three people in service industries provided me with rude and/or inefficient service. This was the first time it had happened in all these years, and as readers know, I can spot bad service even in my sleep, and will not stand for it. Sure, I had been mugged once in a Buenos Aires taxi, but what was stolen was only 1 % of what the nephew of a serving Chilean cabinet minister had done. In fact, going to Buenos Aires has always been a breath of fresh air after a period in Chile. Taxi drivers who not only knew where they were going, but who had more interesting conversation than “¿Ud. No es chileno, verdad?” (et ta soeur, elle est une “chilena”, n’est ce pas?”) . Waiters and hotel staff who provided real service, with a smile, supervised by management which really cares. Secretaries empowered to make appointments on behalf of their bosses, and even senior civil servants who would not hesitate to see you at home in the late evening because they had a full day at the office (the fact that they had never heard of you before, and you were just an obscure Armenian consultant from Viña del Mar did not appear to be an impediment).

Employees at the lower end of the scale would go out of their ways to try to find a way to circumvent some problem or obstacle to allow you to carry out your assignment, rather than imitate their Chilean colleagues, where even doorkeepers at Congress think they are the extension of the Pinochet dictatorship.

Let us not even mention the unparalleled variety of agricultural, energy and even mining resources it has on its territory, which is a quarter of the size of China with only 3 % of its population. Argentina was once a real First World country, which means that people lived well, not because it had a cosmetic membership card of the OECD. Its streets still have the feel of a modern society (as one Anglo-Argentine described Buenos Aires, “the capital of an empire that never was”). They still teach decent English in its better schools.

It is not particularly original to say that this potential paragon of virtue also has the habit of falling into constant mega-trouble, one of
the deep paradox situations of Country Risk Analysis. For that reason, in a symmetri cal position to that of Brazil, it is constantly observed by analysts and journalists with the expectation that something will go wrong and they can report the blood flow. A bit like junior reporters hanging around the emergency ward of a bad neighbourhood hospital.

Argentina is also looked at like some parents regard an unruly child, always expecting it to be up to no good, and therefore a permanent suspect, even when innocent. Others regard the country with the exasperation of a sympathetic teacher who knows the pupil is talented and has potential, but manages to waste it off.

As for previous country reports, this does not pretend to be a fully-fledged risk analysis exercise (I am fully capable of that too, but
too many people regard me as a sort of charitable analytical foundation which is fully funded and does not have any financial needs. If such times ever existed, they are now gone and anything further has to be paid for). I am just giving some pointers to relevant aspects of the country’s situation and prospects.

THE POLITICAL AND SOCIAL SCENE  

President Cristina Fernandez de Kirchner is just over the half point of her 4-year mandate, and her popularity is not very high (around 20 % positive evaluation in an early October poll). Before her, her husband had served just a bit over 4 years due to the political upheavals at the end of his predecessor’s truncated tenure. The game plan was that she would keep the seat warm for him to stand again in 2011. Sure, it looks more complicated now, even more so as the couple lost the unconditional control of both houses of Congress in the June 2009 elections. The main tensions are within the somewhat loosely defined Peronist camp itself, rather than an opposition which has never been able to really articulate itself, or deliver when in power. As my wife rightly remarked on our last visit to the capital, mayor Macri was not even able to repair the town centre pavements..

Ms. Kirchner herself, and her husband before her, have also managed to create powerful enemies by taking on the strong agricultural lobby, and the press, as well as renationalising some privatised activities. They are accused of being a fifth column for a Chávez-type road to Socialism (it is amazing how nobody remembers Carlos Andrés Pérez when criticising everything Chávez does). The latest proposal is an electoral reform, which includes compulsory primaries and restrictions on opinion polls. Former president Eduardo Duhalde has already announced his intention to take part in primaries against Nestor Kirchner, and is even flirting with some opposition figures for a joint platform.

In mitigating the criticism, one has to remember that whatever wrong footing the administration took on voluntarily, they were also the victims of events beyond their control, such as a severe drought, the international crisis, the ‘flu epidemic and the plundering of Aerolineas Argentinas by its previous Spanish owners, plus the abuse of the private pension funds about whom the Chileans are fully aware. In that respect, one has to congratulate Nobel winning economist Paul Krugman for having dared to rubbish the Chilean AFPs on his recent visit to Santiago, rather than follow the arse-licking pseudo-admiration of all other foreign visitors.

Another criticism of recent Argentine administrations has been the price freeze and subsidies on public services, which is held responsible for the lack of investment. However, one has to look at the alternative. The country was on the verge of a social explosion. The impoverishment of the middle classes, a situation harder to bear than those of the poor becoming poorer, and social indicators in some rural areas worthy of sub-Sahara Africa, meant a choice. Political economy is not just about figures, it is about people (not that they worry about such details in the universities where they teach ways to commit economic genocide). In any case,  the freeze policy is being reversed, though some subsidies that had been eliminated were reintroduced a couple of months ago.

The recent announcement of a monthly family allowance of U$ 47 per child under eighteen, for a maximum of five children, whose father is unemployed or working informally without receiving other family benefits, should also be seen in the same light. Payment will be conditional to the children being in education and up to date with requirements such as vaccinations etc. Social disturbances are still common, including road barriers by pickets, and strikes in among others education and urban transport services. Violent crime is another aspect to worry about. Buenos Aires, previously one of the safest cities of Latin America, is now one of the most dangerous.

Last but not least, Corruption, a prevailing problem which is probably somewhat worse than the regional average, though the redeeming feature in the case of Argentina is that you can see and read all the details with names and figures in books, magazines and newspapers. In Chile, every time you mention corruption, in public or in private, everyone goes into denial, and if you put in print or on the air, you are put in jail whilst the perpetrator has dinners organised in his honour (the “cena de desagravio”, a social ceremony where putas are declared virgins, is a purely Chilean institution). Corruption of course is no the preserve of the public sector. In a recent survey of marinas, 42 % of yachts moored were found not to have been declared to the tax authorities.

DEBT AND PUBLIC FINANCES
 
The main element of country collapses in recent years has been the fiscal situation, an area of country risk analysis which many nevertheless fail to concentrate upon, or ignore totally. Hitherto a developing world problem, the recent figures from the USA,  France, the United Kingdom and Spain show that it is a universal threat which is going to explode in the face of the world in coming years, making the past 12 months look just a passing cloud by comparison.

Following the controversial debt settlement of 2005, resulting from the 2001 default, one of the real achievements of the Kirchner era had been the improvement in public finances, even if sometimes there were a few accounting tricks to dress them up, or extraordinary revenues such as the controversial surtax on some agricultural exports when prices were riding sky high. Alas, that is not the case any more. The figures for September, excluding interest, showed the primary surplus plunging 93.6 % to just U$ 58 million, with the overall deficit for that month reaching U$ 570 million. For the first 9 months, the total budget deficit was U$ 1240 million. This is not a huge figure (in fact, piddling when compared to Brazil, a matter that I seem to be the only person in the world to worry about), but it is a distinct turn in tendency. Though figures do not appear to be totally reliable, and are inconsistent even within public sector publications, the overall debt as of end 2008 was put at U$ 146 bn. In the absence of international market access, local refinancing, debt exchange, the use of the (now gone) surplus and plundering the reserves of the Central Bank were among the methods use to face the U$ 26 bn of 2009 maturities.

On the principal repayment side, Argentina also has major maturities in coming years, whereas it has yet to reach agreements with the Paris Club, the hold-out bond holders (who deserve no sympathy as they were fully aware that they were speculating) and the IMF. The management of the public purse is going to be increasingly complicated as time passes.

ECONOMIC INDICATORS  

There is a fundamental problem in assessing some important bits of Argentine statistics, because of the unreliable inflation figure. Whereas it is easy to count the number of vehicles built and exported, or incoming tourists passing through the airport, and fiscal accounts, if properly kept, clearly indicate how much money is coming in and out of the Treasury, other figures are not so indicative.

These are the evolution “in real terms” of such things as economic activity, salaries and retail sales, to name but some. In any country with largely variable income levels and spending patterns, inflation figures are always fraught with distortions, but when we are talking of disparities of simple to double or treble, as to what inflation really is, it becomes almost meaningless.

According to official statistics, inflation was 7.2 % in 2008, and 5 % in the first 9 months of 2009 (6.2 % in the 12 months to September 2009). Private estimates say that the real figure is up to twice or even three times that. It is a fact that even though your dollar brings in some 25 % more pesos than last year, Buenos Aires is not a shopping paradise any more for the foreign visitor.

As for the locals, the fact that over the past decade, property prices have risen at three times the rate of wages is a real problem. Can we also believe that at a time of recession and unemployment, real supermarket sales increased by over 10 % between September 2008 and September 2009?

Are informal workers really paid 4 times the inflation increase (+ 24.9 % to August according to official statistics), and even private sector employees, with queues of several hundred forming outside any office offering a vacancy, are earning 16.8 % more than in August 2008?  The minimum wage is rising by 21 % in two stages between 2009 and 2010, when it will reach 1500 pesos per month (around U$ 390). Is it normal in difficult times to raise the minimum wage by over three times the official inflation rate?

What about macro activity statistics? Is it true that Industrial production only declined by 1.3 % in January-September, when the production of motor vehicles dropped by 13.1 % (accelerating to 26.1 % for September alone)?  Is Construction activity really down only 2.8 % for the first 8 months? Did the economy really grow by 0.2 % in January-August, when the whole region is in recession?

The external sector also has some pregnant contents. Though the trade surplus for January-September was 31 % up to U$ 13.26 bn, exports dropped by 38 % (including a 15 % volume decline). The wheat crop is at a 32-year low, and exports have dropped by 90 % in two years. For the first 9 months of this year, they were 63.8 % lower in value, whereas corn dropped by 61.3 %. The soybean complex, which still accounted for a whopping 25.5 % of all Argentine exports, was 21 % lower in value. It would have been worse if the 46.5 % drop in soybean and oil sales had not been mitigated by an 18 % improvement in soy meal. Even service industries are hurting. Foreign tourist arrivals through the BAires airport were 31.8 % down in January-August, whereas the outflow of Argentines dropped by 10 %.

Despite some capital flight, there appears to be no balance of payments threat, as mid-October reserves stood at U$ 45.6 bn and the Current Account surplus for the first semester actually grew by 135 % to U$ 5.87 bn.

Though not inflation-related, how reliable is the 8.8 % unemployment rate as of August 2009, officially only 0.8 points higher than a year earlier, or is the answer in the fact that under-employment has grown from 8.6 to 10.6 % in the same period?

Despite the well publicised and criticised energy problems, the sector still accounted for 11 % of January-September exports, and even after deducting imports of energy products, there was still a surplus of U$ 2 bn or so. Argentina is thinking of reversing the flow of gas previously sent to Chile, by using the same structure to import LNG from the two plants (one of which just became operational) on the Chilean Pacific Coast. A cooperation agreement on nuclear energy was also signed with India.

WHAT NEXT?  

Paradoxically, the latest incumbent at the Economy Ministry, Amado Boudou, who took over last July 8, is known as a very orthodox, even neo-liberal, economist. Though he has never studied abroad, he graduated from CEMA, the hive of Argentina economic neo-liberalism, but he seems to be rather relaxed about that and many other things (a confirmed bachelor, he plays the guitar and has even been known to organise rock concerts in Mar del Plata, where he mainly grew up).

How does that square up with the populist socialism accusations that the Kirchner tandem is getting? Others say that Boudou is just a figurehead to appear good, as policy is made by the presidential couple and some close advisers.

Let us look on the basis of past crises, what could cause another Argentine “crisis”. Public finances, particularly in terms of debt refinancing, appear the most vulnerable, but hardly critical, after emerging from six years of balanced budgets. Negotiations with the Paris Club, hold-out bondholders, and the IMF, will be crucial. The authorities have opened another borrowing route by allowing once again provinces to contract debt, for the next 2 years. Considering the financial situation of most of them, there is unlikely to be a stampede.

The banking sector seems to have withstood the international and national situation pretty well. At the end of August 2009, its past due loans were 3.8 % of portfolio, only 0.7 higher than at the close of 2008, and 117 % covered by provisions. Earnings were 17 % up for the first 8 months, and the Capital Ratio, at 17.9 %, was well above the required national and international norms. 

The external sector appears healthy, and any capital flight seen has been minimal. The social scene is being closely monitored, as has been the case throughout the Kirchner years, though it does not mean that the lid can always be kept on or sufficient valves installed in time to let off steam. The new family allowance alone will cost U$ 2.6 bn a year. 

As for matters outside national control, such as the severe drought, the international crisis, regional tensions, etc..one can only pray for an improvement. Relations with Brazil, a perennial diplomatic and trade competitor, are also difficult, with trade restrictions in both directions, despite MERCOSUR. A mid-November presidential summit is expected to address the situation.

In conclusion, there appears no immediate reason to expect a mega-upset.

Armen Kouyoumdjian
Country Risk Strategist
Valparaiso, Chile

HUEVADA DE LA SEMANA    
At the risk of contradicting my earlier comment about the better quality of English taught in the country, it obviously does not apply to the owner of the restaurant you can see from the motorway on the way to Ezeiza Aiport. Its name is “Piyuk”.

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