Jaime Daremblum
On
October 8, Argentine President Cristina Kirchner underwent successful
emergency surgery for a chronic subdural hematoma that apparently
stemmed from a head injury she sustained in mid-August. It was her
second emergency surgery in two years: Back in January 2012, Kirchner
had her thyroid gland removed after getting a cancer diagnosis that
turned out to be inaccurate. She will now spend the next month
recuperating, which means she will be absent for the remainder of the
campaign leading up to Argentina's October 27 legislative elections, in
which her ruling coalition is expected to suffer big losses.
Even
Kirchner's harshest critics should wish her a speedy recovery. With any
luck, her health will improve significantly, and she'll be able to
resume her presidential duties sometime in November. The health of her
country's economy is another matter entirely.
A
few days before the public learned of Kirchner's brain hemorrhage, the
Mexican financial and retail giant Grupo Elektra announced that it was
ending all operations in Argentina. The company's official statement
represented a blistering indictment of Argentine economic policies: "The
exchange-rate controls and import and export restrictions limit access
to commercial goods, while controls on capital flows restrict
investment," it said. "High inflation hinders business planning, while
labor regulation allows union practices that affect the investment
environment. Similarly, there is a culture of nonpayment of debts that
makes credit business impractical."
Elektra
is only the latest corporate titan to pull back from Argentina amid
concerns over the nation's business environment. Back in March, the
world's second-largest mining firm, Brazil's Vale, froze all work on its
massive Argentine potash project, even though the company had already
spent $2.5 billion on the venture and completed over 40 percent of it.
Vale explained that the combination of Argentina's double-digit
inflation and its draconian foreign exchange controls had made the
project far too costly. Meanwhile, iconic luxury designers such as
Armani, Calvin Klein, Cartier, Escada, Louis Vuitton and Ralph Lauren
have all closed stores in Argentina, which is still Latin America's
fourth-biggest country.
How
dire is Argentina's economic plight? Just ask its farmers, who are now
hoarding their soybeans as a hedge against rampant inflation. The
numbers are quite striking: Agricultural economist Manuel Alvarado
Ledesma recently told Reuters that Argentine farmers are saving an
estimated 28 percent of their soy crop from the 2012-13 growing season,
an amount that is roughly equivalent to $7 billion worth of soybeans.
Their concerns are understandable: The online business journal Latinvex has projected that "Argentina is likely to have the world's highest inflation rate this year, surpassing Sudan and Venezuela."
While
the farmers hoard their soybeans, Argentinians of all stripes are busy
hoarding U.S. dollars. In late 2011, the Kirchner government tightened
foreign currency restrictions in hopes of slowing capital flight.
According to the central bank, capital outflows subsequently dropped
from $21.5 billion in 2011 to $3.4 billion in 2012. Yet the currency
controls -- which have since been tightened even more -- have also
stifled investment and fueled an enormous black market in dollars. "In
the heart of downtown Buenos Aires," writes Financial Times correspondent
Benedict Mander, "it is hard to walk more than 20 paces without being
accosted by hawkers buying and selling dollars." Not surprisingly,
Argentina is now experiencing a severe dollar shortage, which has
prompted Kirchner to extend a tax-amnesty program aimed at encouraging
people to invest their undeclared dollars in the national economy. It
has been estimated that those undeclared holdings amount to $160
billion.
As of September
30, Argentina's foreign exchange reserves stood at $34.8 billion, their
lowest level in six and a half years, according to the Wall Street Journal.
Since 2010, the government has used $39 billion worth of central bank
reserves to pay down its foreign debt, and it is planning to spend
another $9.86 billion on debt payments in 2014. Following its 2001-02
sovereign default -- which at the time was the largest in recorded
history ($100 billion) -- Argentina was virtually shut out of global
capital markets, and its exile has now lasted more than decade. This
means that Argentina's most important source of foreign currency is its
trade surplus. Unfortunately, that surplus has been shrinking
dramatically: It was 59 percent lower in August 2013 than in August
2012.
To make things even
worse, some of Argentina's former creditors continue to demand full
repayment of defaulted bonds -- and on August 23, a New York-based
appellate court ruled in their favor. In its decision, which upheld a
2012 district-court ruling, the U.S. Second Circuit Court of Appeals
affirmed that Argentina must put $1.33 billion into an escrow account.
The bondholders seeking that money have refused to accept the terms of
prior debt restructurings conducted in 2005 and 2010. Ratings agency
DBRS said the Second Circuit ruling "materially increases the risk of a
default on Argentina's restructured bonds issued under New York law."
This
past Monday, the U.S. Supreme Court formally declined to hear
Argentina's appeal in an earlier bondholder case. That was obviously a
setback for the Kirchner government, but it was not the end of the road.
Had the Supreme Court heard the appeal and then ruled against
Argentina, the nation's seemingly inevitable default would have happened
much sooner. Instead, the government now has some breathing room. It
has asked the Second Circuit to rehear the case that was decided on
August 23. If (or when) the Second Circuit rejects that request,
Argentina can once again appeal to the Supreme Court.
Moreover,
the Kirchner government has already indicated that it will not comply
with any U.S. court order to compensate the bond holdouts: Last
November, Argentinian economy minister Hernán Lorenzino told a Buenos
Aires newspaper that the government would not pay any former creditors
who refused to participate in the 2005 and 2010 debt restructurings.
Thus, following the October 7 Supreme Court ruling, Ted Olson, the
former U.S. solicitor general who is now representing one of the hedge
funds (NML Capital) suing Argentina, issued a statement reading in part:
"Argentina's representatives have asserted that it will file another
petition, but the facts of the case and Argentina's disregard for the
rule of law remain the same. That petition also should be denied."
Regardless
of how or when the bondholder litigation is resolved, Argentina's
economy is slowly imploding. It has fallen behind all but two Latin
American economies (Venezuela and Cuba) in the Heritage Foundation's
Index of Economic Freedom, and it now ranks lower than Swaziland in the
World Bank's Ease of Doing Business Index. For that matter, in the World
Economic Forum's latest Global Competitiveness Index, Argentina trails
several of Latin America's poorest nations, including Guatemala, El
Salvador, Bolivia and Nicaragua.
The
WEF notes that, given factors such as Argentina's market size and its
high level of university enrollment, the country still has "enormous
potential." Right now, however, that potential is being wasted -- and
the situation will almost certainly get worse before it gets better.
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