Wednesday, February 26, 2014

Argentine economic situation worsens

The Argentine currency peso devalued by 12.4 % in just one day on 23 January reaching 8 pesos to a dollar at the official exchange rate. The devaluation in the month of January alone was over 22% coming on top of a 32 % depreciation in 2013. The black market rate rose to 13 pesos a dollar. 

The traditionally large trade surplus shrank by 27% in 2013 to 9.24 billion dollars from 12.42 billion in 2013.  Imports had increased by 8 % to 74 billion while exports had gone up by just 3% to 83 billion.

The forex reserves of the central bank fell to a precarious level of 28 billion dollars in February 2013 from 52 billion in 2011.

The economy is continuing to suffer from the high inflation which stood at 28% in 2013 although the government's inflation figure was just 11%. The annual inflation has been above 20% since 2007 although the government has consistently manipulated the statistics showing inflation around 10% in the last seven years. But the government has been giving salary increase of over 20% to its employees and the private sector has also been forced to do the same over the last seven years to compensate for the high inflation.

The Argentine government has imposed a number of import and foreign exchange controls with non-transparent criteria in the last three years. The Argentine citizens and companies invent ingenious ways to circumvent the controls to buy dollars and for shopping and travel abroad. The import controls have hindered foreign trade including  the imports from Mercosur member countries. The government has accused some big companies of foreign exchange manipulation and is going after them.

The worsening Argentine economic situation has an adverse collateral impact on Uruguay which is expected to fare poorly since the Uruguayan economy is closely linked to Argentina's. Brazil is also concerned fearing negative impact on its own economy.

The worried Argentine government has been taking a more protectionist stand in the ongoing EU- Mercosur trade negotiations. The Brazilians have warned that they might be forced to leave Argentina and go ahead with the EU negotiations along with Uruguay, which is also keen on the trade treaty with EU.
Some economists and foreign commentators have predicted a repeat of the 2002 crisis. But the situation this time is not beyond control as in 2002 when Argentina declared the world's largest debt default of 90 billion dollars. The debt at this time is within the capacity for repayment. The government could bring the situation under control with proper policies and by giving more space for the private sector to grow by lessening the controls and restrictions.
But there are some signs of positive changes in the attitude of the government. They have finally admitted to high inflation and started showing real figures, under IMF pressure. They have also started talking to the Paris Club about settlement of their debt which should open up access to global financial markets. The government has announced on 24 January lifting of some of the restrictions on personal dollar purchases by its citizens.
According to the latest estimates of the US energy department, Argentina has the largest technically recoverable shale gas reserves at 802 tcu and the second largest shale oil reserves (27 billion barrels) in the Americas. The exploitation of the shale could be a game changer for Argentina as seen in the case of US. The Argentine industry will get a boost with the low-cost shale gas and  could emerge as a leading exporter of energy. The first shale investment took place in 2013 with the entry of Chevron and more investors are expected to follow. Argentina could also double its current production of 500,00 bpd of conventional crude with more investment. The oil and gas sector remains under invested. The recent decision of the Argentine government to compensate Repsol for the YPF nationalization has generated confidence among potential investors.
Despite the Argentine import controls, India's exports have increased in 2013 reaching 695 million dollars from 573 million in 2012. Imports from Argentina remained at the same level as in 2012 at 1.1 billion dollars. Soy oil was the main import accounting for 1 billion dollars. India has been importing between one and two billion dollars of soy oil from Argentina, the largest soy oil exporter in the world. India also imports sunflower oil from time to time. Argentina has the potential to grow and supply pulses to India which imports over three million tons annually from other countries. An Argentine company Los Grobo sent its first shipment to India in 2013. The company is looking for Indian partners to continue the business on a long term basis.

No comments: