Bloomberg News

Fernandez Rejects Argentina CPI Target During Second Term

December 13, 2011

(Updates to add Congress debating land legislation in seventh paragraph.)

Dec. 12 (Bloomberg) -- Argentine President Cristina Fernandez de Kirchner, facing the fastest inflation among major economies after Venezuela, started her second four-year term vowing to focus on job growth and competitiveness.

Fernandez said at her Dec. 10 inauguration that European Union governments are facing a debt crisis similar to what Argentina experienced in 2001, when it defaulted on $95 billion of bonds. She said EU leaders have focused too much on inflation targets and the health of the financial sector, over what she called the real economy.

“We have governed with targets for employment growth and we’ll continue to do so,” the 58-year-old Fernandez, wearing the blue and white presidential sash, said at the Congressional building in Buenos Aires. “I’m not president of the corporations, but of all 40 million Argentines.”

Since Fernandez took office in December 2007, annual economic growth has averaged 5.6 percent and unemployment fell to 7.2 percent. Aided by surging soybean exports and growth in neighboring Brazil, Fernandez used record government revenue to increase spending on public works, raise pensions and provide subsidies to poor families. That helped fuel a consumer boom and annual inflation economists estimate is 25 percent.

“The main problem that should be resolved is inflation,” said Nestor Walenten, head of the country’s real estate chamber. “Once we manage to control inflation, the country will be able to keep on the growth path and workers will have more purchasing power.”

The government says annual inflation is 9.7 percent.

Land Law

Fernandez used her inauguration to call on Congress to pass a law restricting the purchase of agricultural land by foreigners, a bill the lower house will debate this week. She also said greater regional integration helped the country get through the 2008-2009 global financial crisis.

“We know that regional integration is one of the best defenses in a difficult world,” Fernandez said as the presidents of Brazil, Uruguay, Bolivia and Chile looked on. “We need to protect what we have achieved in recent years.”

The lawyer and mother of two referred to her late husband and predecessor, Nestor Kirchner, throughout her speech. Absent from the ceremony was President Hugo Chavez of Venezuela, who has undergone treatment for cancer this year. Chavez canceled his plans to attend the ceremony Dec. 9, saying he needed to deal with heavy rains in his country.

As a result of the global economic crisis and a slowdown in neighboring Brazil, Argentina’s economic growth will slow to 4.3 percent from 7.5 percent this year, according to the median estimate of nine economists surveyed by Bloomberg.

Signs of a Slowdown

Some sectors are already showing signs of stalling. Contracting vehicle demand in Brazil, the main destination for Argentine car shipments, led auto 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.

“There are a lot of challenges from an environment that is anything but calm,” Economy Minister Hernan Lorenzino told reporters after the inauguration. “The agenda remains the same: boost employment, promote growth with social inclusion, strengthen internal markets, maintain the budget and trade surpluses, manage the exchange rate to make it competitive and continue the process of industrialization.”

Finance Secretary

Lorenzino, 39, helped manage last year’s debt restructuring and accompanied Fernandez to a November summit of G-20 leaders in France. He appointed former deputy finance secretary Adrian Cosentino to be Finance Secretary.

Lorenzino’s appointment “increases the possibility” that Argentina will return to global credit markets for the first time since defaulting on $95 billion of bonds in 2001, Sebastian Vargas, an analyst at Barclays Plc in New York, wrote in a Dec. 6 report.

Fernandez also said she’ll create an office focusing on foreign trade within the Economy Ministry, where Interior Commerce Secretary Guillermo Moreno oversees a similar department coordinating domestic policies, including inflation. Former national statistics institute chief Beatriz Paglieri, a Moreno ally, was named to head the new office.

A weakening peso and the surge in consumer prices led Argentines to pull $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.

Foreign Exchange Controls

Fernandez has sought to stem the losses since her Oct. 23 election by ordering companies to repatriate foreign investment and export revenue and tightening controls over the foreign exchange market. She has also prodded companies such as Volkswagen AG to increase their investments in the country and to manufacture more goods locally.

“The government will continue to react to growing macroeconomic imbalances, especially inflation and deteriorating fiscal and external accounts by doubling down on heterodox policies and more state regulation and pressures on the private sector, all of which will do little to solve them,” said Daniel Kerner, an analyst at the Eurasia Group, in a Dec. 6 report.

Fernandez’s efforts to reduce subsidies, limit salary increases and restrict access to the foreign exchange market risk alienating a broader range of voters, said Mariel Fornoni, director of Buenos Aires-based pollster Management & Fit. Yet given the size of her October election victory, Fernandez can press ahead with difficult measures to fix the economy, Fornoni said.

Falling Reserves

Without access to global markets, the government has turned to the national pensions agency for financing, and tapped central bank reserves, which fell to $46.4 billion on Dec. 7 from $56.2 billion in January, to help pay its foreign debt.

Central bank reserves are strong given that the country has spent more than $40 billion of savings since 2009 paying off debt and defending the peso, Fernandez said. Lowering the country’s debt burden has been worth the cost, the president said.

Argentina’s debt before its 2001 default “was a weight that prevented us from growing, a weight that generated misery and tragedy,” she said. “Today other countries face the same problem and we see what is happening.”

--With assistance from Silvia Martinez in Buenos Aires. Editors: Mike Millard, Richard Jarvie

To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Bill Faries in Buenos Aires at wfaries@bloomberg.net

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


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