Analysis of the global challenges and economic situation in Argentina - Essay Example

?Global Challenges: Analysis of the global challenges and economic situation in Argentina Introduction Argentina is one of the largest economies in South America. It has a good quality of life and also one of the highest GDP per capita in the Latin America. The country is well positioned for future growth because of its vast market size, high level of foreign direct investment, and significant levels of high-tech exports. The country is also a founding member of United Nations and it is also among the G-20 major economies (Wikipedia 2011) This paper aims to analyse the current economic environment in Argentina, including GDP, Inflation, Industrial Production Index, agriculture, the country’s debt situation, foreign exchange rate, unemployment, Consumer ABS, Central Government revenue and expenditures etc. It also covers the country’s future economic outlook as projected by leading consulting firms. Finally, it includes the recommendations for Argentina to improve its economic condition Current economic situation in Argentina: GDP According to the Economist Intelligence Unit (EIU), Argentina’s GDP grew by 9.2% year-on-year through the quarter ended Dec 2010. The economy’s strong performance was driven by domestic demand, with private consumption rising 11.5% year on year, up from 8.9% in the previous quarter. Also, there was a 9.4% year-on-year increase in manufacturing driven by increased output in agricultural and construction Goldman Sachs is positive about the Argentina GDP growth. In Mar 2011, it has raised its forecast to 6.8% of GDP growth from 5.6%., as a result of regained economic activity in Argentina in the second half of 2010. According to Alberto Ramos, an economist in Goldman Sachs “Leading and coincident indicators show that activity remained quite strong during 1Q11, and the authorities seem bent on maintaining very strong fiscal and monetary stimulus ahead of the October presidential elections” However, the Central Bank of Argentina forecasts the country’s GDP growth between 3.5% to 6.5% in 2011. The country’s president Cristina Fernandez has also set a GDP growth plan of 5% annually over the next decade. The government believes that this growth will be achieved by continuous rise in the domestic demand, substitution of imported products and heavy government intervention in the country’s economy (Romig 2011). Inflation As the economic activity in Argentina has expanded in 2010, there was a sudden increase in money supply which has resulted in increasing the consumer prices. According to the Central Bank of Argentina, the YoY increase in money supply during Feb 2011 increased by nearly 27.8%. This resulted in increased inflation figures for Argentina. As a result, the exporters of the country, mainly in the manufacturing sector are losing their competitive position in the market, driven by increase in domestic costs and relative stability in the exchange rates (Ken 2011). “Beyond entrenched high inflation, the erosion of external competitiveness during 2010-2011 is another thorny issue the next administration will have to face, which, if not properly handled, could end up generating a crash- rather than soft-landing of the economy in 2012” - Alberto Ramos, Economist, Goldman Sachs, Mar 2011. As a result, Argentina’s middle class suffered most due to high inflation, thereby affecting mobile phones, cable, petrol, health insurance premiums etc. in the month of Jan 2011 According to Argentina’s national statistics agency Indec, the country’s annual inflation in was 10% by the end of Feb 2011 and 10.6% by Jan 2011. Inflation was mainly supported by increase in prices of tourism services, clothing and increase in prices of food and beverages. Also, according to EIU, the inflation was supported by the government’s intervention in the agricultural sector which has resulted in the reduced production of important foodstuffs such as beef. Many local consulting companies in Argentina differ on these official inflation figures are they estimated the country’s inflation to be around 25%. For them, the monthly inflation advanced nearly 2% a month, instead of 0.7% as estimated by government agencies. In order to avoid these discrepancies, Argentina’s government has asked technical assistance from the International Monetary Fund (IMF) to provide their estimates and methods of measuring the country’s inflation Industrial Production Index (IPI) According to the National Statistics & Census Institute of Argentina, the country’s IPI increased by 10.3% YoY in Jan 2011 to reach 114.5, from 103.8 in Jan 2010. The highest IPI increase was registered by ‘Motor Vehicles’ sector as 38.5% followed by non-metallic mineral products (14.5%) Trade Barriers The country aims to impose trade barriers due to high imports. In 2010, Argentina reported 46% rise in its imports, to reach $56.4 billion. This was mainly due to heavy imports of intermediate goods used by automobile industry and capital goods industry (Romig 2011). As a result of this, Argentina has stepped up trade barriers in terms of import duties or the range of products. These trade barriers are aimed at monitoring the imports from other countries. This has also resulted in some resentment among its neighbours including Brazil and Uruguay and also in the EU Agriculture According to the EIU, Argentina has shown a record harvest of 93.4 million tonnes in 2009-10, a 50% increase over the previous year. This was mainly driven by the production of soybeans, which has shown an increase of more than 70% over the previous year and accounted for more than half of the country’s agricultural output Debt situation In Mar 2011, Argentina’s government tapped nearly $2.17 billion of its reserves to pay its foreign debt and creditors. Also, the country’s treasury estimated a total of $7.5 billion of government reserves required to repay foreign debts in 2011 (Otaola 2011) Foreign Exchange rate Argentina’s government is committed to maintain stability in its currency and it predicts an average exchange rate of 4.11 pesos to dollar in 2011. On the country’s foreign exchange visibility, Argentina’s Deputy Economy Minister Roberto Feletti said in Mar 2011 “We are absolutely convinced that the foreign exchange visibility will be near the estimate we made in the budget that we also have agreed upon with the central bank”. However, the government is facing challenges to maintain the stability of the currency, because of massive dollar inflows driven by the export boom. In 2010, exports rose 23%, to $68.5 billion, led by automobiles, grains and agricultural products like soy oil (Romig 2011). Thus, the central bank of Argentina aims to purchase $12.5 billion in 2011 and would add to its foreign reserves. This will also help Argentina to reduce its local currency supply and also to curb inflation in the country Unemployment According to statistics agency, Indec, in Dec 2010 unemployment rate of Argentina was 7.3% and this is expected to reduce to 6.6% by the end of 2011. Commenting on reducing the unemployment rate, Argentina’s Deputy Economy Minister Roberto Feletti said in Mar 2011 said “We want to eliminate structural unemployment in Argentina. The rate of 6.6% is a goal, but isn’t the floor. The floor is going to be around 5%.” Consumer Asset-backed Securities (ABS) Argentina’s ABS market has also boomed in 2010, backed by economic recovery and reduced unemployment rate. Consumers became optimistic and they made more purchases on credit. Further, credit purchases by the consumers are expected to increase in 2011. Also, due to ample liquidity in the banks, they do not hesitate with securitization However, the credit taking ability of the consumers may reduce due to increased inflation in the country going forward. Commenting on the consumer’s purchasing power, Fabian Pirrone, manager of capital markets and investment banking at Banco Patagonia, in Mar 2011, said ”Inflation at these elevated levels in Argentina spurs consumers to consume more than they would during periods of price stability. In this situation, if you buy a consumer good, which generally moves in price with inflation, then you generally protect yourself from inflation and the resulting deterioration in your purchasing power. The outlook this year continues to be favourable for those companies related to consumption, and as a result we expect that the volumes of securitization will keep increasing” Central Government Revenue and Expenditure According to Argentina’s Ministry of Finance report, in Jan 2011, the central government’s total revenue increased by 40.5% YoY to reach ARS 31,960 million. Government earnings were mainly supported by increased agricultural exports with high international prices for various food items. Also, in Jan 2011, the central government’s total expenditure increased by 42.9% YoY to reach ARS 31,871 million. Future Economic Outlook GDP Economist Intelligence Unit (EIU) expects the country’s GDP growth to moderate at 5.2% in 2011, as the investors would become more cautious to the presidential elections to be held in Oct 2011 and the companies would hold their capacity expansion plans. EIU believes that the Argentina’s growth would continue to remain healthy, mainly because of on-going private consumption boom and the increase in government spending. This would be partially offset by rising inflation which will weaken domestic demand by reducing real household incomes. EIU also believes that new government would make several adjustments in the economy and this would lead to the way to the GDP growth rate above 4.5% by 2014-15. Argentina’s central bank expects GDP growth of about 6% in 2011, led by strong domestic demand and increased government spending in the election year Though the country economy has grown by nearly 9.1% in 2010, but the government believes that in 2011, the growth rate would be nearly half as compared to 2010 Inflation According to the IHS Global Insight, the official inflation figures would touch around 12.4% by the end of 2011. It also expects that the inflation in 2012 and beyond would moderate as the economic activity decelerates, however increase in wages may impose increased pressure on inflation going forward (Mosquera 2011). Also, according to EIU, the inflation is expected to rise in 2011, however, with the implementation of government’s price control policies, the inflation is expected to reduce in 2012. The unofficially measured inflation is expected to be in the range of 25% - 30% for the year 2011 Industrial Production The EIU expects Argentina’s industrial production to remain robust during 2011, however, it might be slower that the 2010 year as the companies may face capacity constraints and they might hold the investment plans till Oct 2011 presidential elections. This may result in slower production growth and energy shortages Agriculture The EIU expects Argentina’s agricultural output to increase by 10% in 2010-11, to reach 103 million tonnes. It also expects that the production of crops like wheat, soybean, and corn are expected increase because of the favourable weather condition during the year and also due to increase in cultivation area Government Expenditure It is expected to rise sharply in 2011 on the backdrop of the presidential elections. For this, the government is looking at the external sources of finances to carry out its public expenditure plans. For example, it will borrow up to US$2.5bn from BNDES, Brazil’s state-owned development bank. It is also borrowing from the state owned companies such as Enarsa (electricity) and Aysa (water). These expenditure plans may result in deterioration of government reserves and would result in increasing the fiscal deficit for the country Employment According to IHS Global Insight, the demand for workers in Argentina is expected to rise in the short term, mainly driven by recovery in industrial production and construction activity, increase in retail sales and also boom in the commercial and tourism sector (Mosquera 2010) Exchange Rates The peso has depreciated slightly by 4% to Ps3.95:US$1 at end-October 2010. The EIU expect the Central Bank of Argentina would further add to nominal weakening of the currency in 2010-11, to maintain the country’s export competitiveness. Going forward, EIU expects that peso could appreciate provided the flexibility in the government policies for greater inflows of FDI, improvements in the investment market and greater access to international capital markets Recommendations: The government should remove growth obstacles by reducing import and export tariffs and moderating its stringent price control measures. This would result in increasing the trade activity with other countries. It would also result in increasing the investors’ confidence which would result in increased FDI and FII in the country Also, the government should change its protectionism policy against its largest trading partners including China and Brazil, to foster trading activity in the country. References Parks, Ken. (2011). Goldman Sachs Raises Argentina 2011 GDP Growth To 6.8% From 5.6%. Dow Jones & Company, Inc.. Parks, Ken. (2011). Argentina February Inflation +0.7% On Mo; +10.0% On Yr. Dow Jones & Company, Inc. Otaola, Jorge. (2011). Argentina taps $2.17 bln of reserves to pay debt. Reuters Limited. Ossa, Felipe. (2011). Argentine Consumer ABS: Riding a Fast Economy and Faster Inflation. Asset Securitization Report and SourceMedia, Inc.. Romig, Shane. (2011). Argentine President Sets Goal Of 5% Annual GDP Growth Through 2020. Dow Jones & Company, Inc.. Mosquera, Santiago. (2011). Inflation Manipulation Continues in Argentina in 2011. IHS Global Insight Limited. Wikipedia contributors. (2011). Argentina. Available: http://en.wikipedia.org/w/index.php?title=argentina&oldid=420401235 . Last accessed 26 March 2011. Mosquera, Santiago. (2010). Employment Rises in Tandem with Economic Growth in Argentina. IHS Global Insight Limited Read More