Bloomberg News

Fernandez Must Stem Argentina’s Capital Flight in Second Term

December 07, 2011

Dec. 7 (Bloomberg) -- Argentine President Cristina Fernandez de Kirchner must tackle decade-high capital flight and one of the world’s highest inflation rates as she begins a second term on Dec. 10 with the biggest mandate in four decades.

Fernandez was re-elected by a landslide on Oct. 23 after leading South America’s second-biggest economy to a ninth year of growth and cutting unemployment to a record low. The 58-year- old lawyer kept policies introduced by her predecessor and late husband, Nestor Kirchner, using revenue from surging soybean exports to boost government spending and fuel a consumer boom.

Still, with a weakening peso and living costs rising about 25 percent a year, Argentines pulled $18 billion out of the economy in the first nine months of 2011, double the pace of a year earlier, according to the central bank. Fernandez has sought to stem the losses since her election by ordering some companies to repatriate foreign investment and export revenue and tightening controls over the foreign exchange market.

“Fernandez is facing a much more complicated panorama now than when she took office for the first time,” said Juan Pablo Fuentes, a Latin America economist at Moody’s Analytics in West Chester, Pennsylvania. “The government’s measures have made people more nervous. There is a lack of confidence.”

To counter investor concerns over the possible impact of a global slowdown, Fernandez has prodded companies such as Volkswagen AG to boost their investments in the country and to manufacture more of their goods locally.

‘Redouble Our Efforts’

“During a period in which the world seems like it is crumbling and is beaten down by speculation, we in Argentina have come to insist that our vision is one of growth,” Fernandez said in a Nov. 30 speech at an aluminum plant in Buenos Aires province. “During these difficult times, we have to redouble our efforts in every sector to protect what we have achieved.”

In a move that helped rally the country’s bonds yesterday, Fernandez named Finance Secretary Hernan Lorenzino to take charge at the Economy Ministry, replacing Amado Boudou, who will become her vice-president. Lorenzino, 39, helped oversee a $12.9 billion debt restructuring last year and accompanied Fernandez to a summit of G-20 leaders in France last month.

Lorenzino’s experience may help pave the way for Argentina’s return to global credit markets for the first time since defaulting on $95 billion of bonds in 2001, said Alberto Bernal, head of fixed-income investments at Bulltick Capital Markets in Miami.

Return to Markets

“There are more chances that Argentina will issue a bond abroad because Lorenzino is more aware of the need to return to the markets,” Bernal said.

Without access to global markets, the government has turned to the national pensions agency for financing and tapped central bank reserves, which dropped to $46.2 million yesterday from $56.2 billion in January, to help pay its foreign debt.

Argentine dollar bonds surged after yesterday’s announcement. The yield on the 2015 bond tumbled 51 basis points, or 0.51 percentage point, to 10.4 percent, the biggest decline in a month. The extra yield, or spread, that investors demand to own Argentine debt over U.S. Treasuries tumbled 38 basis points, the most among major emerging markets, according to JPMorgan Chase & Co. The peso, down about 7 percent this year, strengthened 0.2 percent to 4.2785 per dollar, while the benchmark Merval stock index fell 0.93 percent to 2,615.58.

Spending Cuts

Lorenzino’s appointment means recent measures to contain capital flight and rein in public spending through cuts in energy and transportation subsidies may be extended, said Carola Sandy, an economist at Credit Suisse Group AG in New York.

“It’s a sign the economic policy of recent months will continue,” Sandy said. “He gives continuity to Minister Boudou’s policies.”

Under its 2012 budget proposal, the government plans to turn this year’s estimated deficit of 0.6 percent of gross domestic into a 0.2 percent surplus. This year’s shortfall will be the first since 2009.

Economic growth averaging 5.6 percent a year since 2007 enabled Fernandez to cut unemployment to a record 7.2 percent and reduce the poverty rate, which peaked at more than 40 percent in 2001, to 20 percent, according to estimates by Buenos Aires-based Consultora Equis.

Slower Growth

Next year, the global economic crisis and a slowdown in Brazil, Argentina’s main trade partner, will cut growth to 4.3 percent from 7.5 percent this year, according to the median estimate of nine economists surveyed by Bloomberg.

Some sectors are already showing signs of stalling. Contracting demand for vehicles in Brazil, the main destination for Argentine car shipments, led exports to slip 18 percent in November from a year ago. Industrial production in October rose 4.1 percent from a year earlier, the slowest pace in two years.

While slower growth may dent inflation that economists say is more than double the official rate of 9.7 percent a year, Fernandez will need to rein in pay increases and cut expenditure to bring prices under control, said Daniel Chodos, a strategist with Credit Suisse AG in New York.

“Limiting wage negotiations and cutting public spending, will certainly help to ease inflationary pressures,” Chodos said. “Slowing inflation is probably a top priority of the government together with finding new sources of financing.”

Since Fernandez took office in December 2007, wages have more than doubled, according to national statistics institute data.

Voter Risks

While imposing pay restraints may eat into Fernandez’s support among labor unions, her most recent measures risk alienating a broader range of voters, said Mariel Fornoni, director of Buenos Aires-based pollster Management & Fit.

About 41 percent of people surveyed by Management & Fit rejected the elimination of energy subsidies while almost 70 percent opposed increased controls on the purchases of foreign currencies. The poll of 1,500 people was conducted Nov. 3 to Nov. 8 and has a margin of error of 2.5 percentage points.

Still, after winning 54 percent of votes in the October election -- the most since Juan Domingo Peron in 1973 -- Fernandez is in a position to press ahead with measures to fix the economy, however unpopular they may be, Fornoni said.

“She has the political capital to do that now,” Fornoni said.

--Editors: Richard Jarvie, Bill Faries

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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