Argentina’s growth is collapsing

The latest data out of Argentina are just one month’s data. But the trend is clear and it is alarming: economic growth is slowing dramatically in Argentina. Three articles in Argentine dailies point out the nexus of issues developing around the economy’s slowing growth.

First, in, we learn that the Argentine statistical agency INDEC showed the Argentine economy contracting month-on-month by 1.3% in April with respect to March. This puts year-on-year growth at just 0.6% from April 2011 to April 2012, a marked slowing from 6.1% in January, 5.6 in February, and 4.1% in March. The lopsided fall in April clearly coincides with the YPF expropriation and suggests that the expropriation caused a one-month hiccup in Argentine growth. So it’s not clear what this means for Argentina going forward except in regard to the year-over-year trend which is clearly declining irrespective of the one-month’s data. Moreover, the chill on foreign investment that the YPF expropriation has had could be a permanent drag on the Argentine economy. Finally, I should point out that Argentine economic statistics are reputed to be manipulated and that these growth figures are therefore all the more alarming.

Second, the threat of pesoization of the Argentine economy is having a negative effect on US dollar bank deposits in Argentina. La Nacion reports that US dollar bank deposits continue to fall with banks reporting a 5% drop in the first week of June alone. This is a drag on Argentine foreign reserves and credit. Meanwhile, the black market value of the Argentine peso continues to trade much lower than the officlal rate at 5.93 peso to the US dollar.

The third article in Clarin pointed to Argentine President Cristina Fernandez de Kirchner telling Argentine and North American companies at the Council of the Americas that the YPF move was not designed as an "expropriation" in an apparent effort to soothe fears about rising nationalism in Argentine economic policy. I can’t be sure what her goals were but just the day before, Fernandez was at the United Nations in a surprise visit lambasting Britain over the Falklands issue on the 30th anniversary of the British-Argentine Falklands War.

In my view, the combination of these events point to a cooling economy falling more precipitously because of misguided economic policies now being enacted in Argentina. The country has high inflation and slowing growth. It will not be able to escape the global growth slowdown and so exports will be hit with falling commodity prices. Meanwhile, Argentina will be hard-pressed to reduce its net oil importer status given the chill the YPF expropriation has had on foreign investment. The Pesoification threat makes this situation worse as it sucks foreign reserves out. To top it off, Argentina’s protectionist policies will add to growth slowing as protectionism protects domestic producers at the expense of higher domestic prices that can only be decreased by price controls and subsidies.

In sum, the outlook for Argentina is weak. I expect recession and given the unpredictable political climate there, it is not clear how the government will react when this recession takes hold.


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