ARGENTINA´S ECONOMIC MODEL IS UNDER DURESS

Analysis | A sudden fall in commodity prices could spell disaster for Argentina


ARGENTINA'S ECONOMIC MODEL IS UNDER DURESS DESPITE AN ENVIABLE RECENT ECONOMIC GROWTH RATE.

By WALTER BRANDIMARTE and HERBERT LASH (Reuters)


Italian Prime Minister Silvio Berlusconi adjusts his tie next to Argentinean President Cristina Fernandez de Kirchner as they take part in a photo shoot during the G20 summit of major world economies in Cannes, France.


A decade of high international commodity prices, rising demand from neighbouring Brazil and high government spending have all helped to turn the world's No. 3 soybean exporter into the fastest-growing economy in Latin America.


But some of the fiscal stimulus is funded by controversial taxes on farm exports, leaving economists worried that there is little insurance against any fall in commodity prices. There seems to be no Plan B, analysts said.
"Argentina remains almost fully dependent on the state of the world economy.


High commodity prices remain the anchor of stability in this country," said Alberto Bernal, director of research at Miami-based BullTick Capital Markets.


Argentina's troubles are not new but are becoming more pressing as President Cristina Fernandez, re-elected 10 days ago, pushes the limits of the country's economic model.


Inflation is running at over nine per cent officially and over 20 per cent unofficially, undermining the value of the currency and unnerving investors.


Local and foreign investors, who have not forgotten that Argentina defaulted on its debt back in 2002, are increasingly worried about President Cristina Fernandez's attempts to blame speculators for the slump in the currency.


At the G20 meeting in Cannes, France, on Thursday, Fernandez denounced a "sort of anarcho-capitalism in which no one controls anything".


She called on world leaders to take more action to regulate financial markets and curb erratic moves in raw material prices.


Argentine economists estimate that nervous investors have moved some $10 billion out of the country in the past three months on fears the government would allow the peso to weaken even faster.


Re-elected with 54 per cent of the votes on Oct. 23, Fernandez promised to "deepen" an economic model that many Argentines equate with the country's recent good times.


Her first act made good on that promise. In a surprise rule change last week, Fernandez ordered oil, gas and mining companies to cash in all their export revenue on the local foreign-exchange market.


A few days later, she ordered that all individuals or companies wanting to buy U.S. dollars must get prior approval from tax authorities.


The measure was seen by analysts as only a short-term fix to the chronic capital flight that has been weighing on the peso.


"This may provide some short-term support to the foreign-exchange rate, but it only aggravates already deteriorating investor sentiment," said Siobhan Morden, head of Latin America strategy at RBS Securities.


The controls Fernandez introduced in Argentina this week only add to long-simmering investor unease.
Last month, the Argentine central bank spent $1.88 billion of its $47.5 billion foreign reserves to keep the peso's exchange rate around 4.2 per dollar. It plans to use reserves to pay sovereign debt for a third straight year in 2012.


But the strength of the currency in inflation adjusted terms has made Argentine exports less competitive, helping to erode the country's balance of payments which economists expect to turn negative this year for the first time since 2001.


Argentina has attracted less foreign direct investment than Colombia in the past five years and less than Peru, whose economy is half the size of Argentina's, in the past two years, according to World Bank data.


While FDI flows to Latin America are poised to reach an all-time high this year, inflows to Argentina have shrunk 30 per cent in the first half of 2011 from a year ago, data from the United Nations' Economic Commission for Latin America and the Caribbean showed.


FDI inflows are a key contributor to a country's prospects, as they include the transfer of technology, corporate know-how and large sums of money for infrastructure projects.


In Argentina, though, government policies have had a negative impact on corporate investment plans, said Gary Garrabrant, chief executive of Equity International, the international arm of billionaire real estate mogul Sam Zell.


Garrabrant, who has invested widely across Latin America and turned down a number of opportunities in Argentina, was blunt in comparing it with Colombia, where he is embarking on his first real estate development with a local partner.


"The contrast between Colombia and Argentina could not be more acute. Senior government officials in Colombia are intelligent, sophisticated, responsible and appreciate the opportunity," said Garrabrant, who has a joint venture in Argentina with Spain's NH Hoteles.


The recent free trade agreement that the United States agreed to with Colombia highlights the Andean nation's appeal to investors as it safeguards U.S. investments.


The trade agreement also allows foreign companies with a substantial U.S. presence to take advantage of the provisions, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.


"Little if any of this legal apparatus exists with respect to Argentina. Moreover, Argentina has a well-deserved reputation for erratic and populist policies," said Hufbauer, an expert on foreign direct investment.
Fernandez, who took office in December 2007, has ignored international arbitration awards to some private firms hurt during the 2001-02 economic crisis.


Depending on the outlook for commodity prices, Argentina will either have to find a way to boost its trade surplus, reduce government spending, or find other sources of financing.