Hard Times for Argentina

Latin America's most vulnerable economy faces restive farmers, skyrocketing inflation, and mounting debt. And it still needs to strike a deal with creditors it disappointed in 2001

by Charles Newbery

President Fernández de Kirchner

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A day's drive south of Buenos Aires in a town called Coronel Suarez, Facundo Gallardo grows corn and soybeans on land his family has tilled for half a century. With the high prices of global commodities, this should be the best of times in the world's biggest supplier of soy oil, second-largest producer of corn, and third-biggest shipper of soybeans. "Business would be great if I was anywhere but Argentina," Gallardo, 47, fumes. "Margins are shrinking all the time."

Fertilizer prices have more than doubled over the past year and the price of diesel, while relatively cheap at 97¢ a gallon, has zoomed up by 30% to 50%. Worse, the President and her husband "hate us," Gallardo laments. President Cristina Fernández de Kirchner, whose husband Néstor Kirchner ran the nation between 2003 and 2007, in March jacked up crop export taxes to raise government revenue and keep food prices down at home. The tax burden on farmers today exceeds 55%.

The battle between the Fernández de Kirchner administration and the farmers is only one reason why economists consider Argentina to be the most vulnerable economy in Latin America today. Concerns are rising that as the nation's economy slows, if Kirchner doesn't deal with mounting debt, rising inflation, sagging investment, and limited resources to pay for subsidies, then Argentina may be on the way to an economic crisis and debt default.

Independent economists say annual inflation is 25%—not the 9.3% the government claims. That would place Argentina just behind Venezuela in the region, with its 32% inflation rate. Economic growth is expected to slow to 6.5% this year and to just 2.5% in 2009.

If Argentina is to have any hope of rolling over its debt or borrowing fresh money, it will have to reach some sort of agreement with creditors still demanding payment for around $20 billion in paper from a $93 billion sovereign debt default in 2001, the biggest in world history.

A Long and Loud Rebellion

The Kirchners—Néstor is head of the ruling Peronist party—touted the agriculture tax policy as key for assuring local food supplies, fighting inflation, and helping the poor. Fernández de Kirchner is heavily reliant on farm tax revenue to finance surging government spending as labor unions—a key base of her political support—demand higher wages, and as energy shortages force her to import more diesel and natural gas. The latest tax increase—to nearly 50% from 35% on soybeans, the country's biggest crop—would have raised an additional $1.2 billion a year, which the President said would be used to build hospitals and schools.

Enraged, farmers took to the streets. For more than four months they blocked highways, drove tractors through cities, withheld exports, and banged pots and pans to demand a reversal. It was the loudest—and longest—rebellion by Argentine farmers, a traditionally nonpolitical group whose predecessors helped make Argentina as prosperous as the U.S. in the late 1800s and early 1900s. The former President called them "coup mongers" and deployed Peronist sympathizers to break up demonstrations.

After three months of failing to negotiate an end of hostilities, Fernández de Kirchner asked congress to officially approve the taxes she had imposed by decree. On July 17, the senate voted no, with Vice-President Julio Cobos breaking a tie by voting against his boss.

A Spending Problem

It was an unexpected defeat for the President and has raised questions about her leadership and the financial health of the country. In an apparent effort to improve her battered image, the President held her first-ever news conference on Aug. 2 and defiantly insisted that taxing farm exports at a time of high world food prices is a legitimate "instrument of economic policy."