How far will the downturn be in Argetina?

[Conorworld]

I think it is going to hit Argentina hard, a lot harder than some of its peers in South America. The government is over-reliant on revenue from its (until recently) booming exports. It squandered them on bad micro-economic policies and wage increases, stoking inflation. Unlike Chile it did not save money for a rainy day from its booming exports. Its public finances are badly managed

The collapse of revenue from exports have been sudden but have not fully hit the public purse yet so the full scale still has to come. It will be interesting to see how the government cope with this.

I have been fascinated by the peso recently. The government have always had a hand in its value the last number of years and it never dropped majorly like other similar currencies. I think it is doing what the rouble is doing where the government to prevent major drops in the peso (memories of the last major devaluation are still raw) is allowing a measured devaluation. I find that interesting.

 

[perry]

All,
I am an American and work in for a local investment bank here in Buenos Aires and part of my job responsibilities includes gathering macroeconomic research for the entire Latin American region, but especially on Argentina.

The outlook is not good.

A conservative Wall Street Consensus (combiled from reports issued by Goldman Sachs, Merill Lynch, JP Morgan, Deutsche Bank, Credit Suisse, Citi and Santander) puts Argentina at -1.2% growth this year after explosive 7-10% growth annually since 2002. I wrote to this effect a few weeks ago in a post about electricity costs, but the government is in an extremely dire situation as far as being able to cover its costs due to huge spending increases in the last few years. Many of the policies instituted by President K#1 (that have been continued by President K#2) were meant as stimulus items after the crisis of 2001-2002 that were simply never rolled back until recently if at all for fear of losing the support of the electoral base. A few examples of this include the massive subsidies for electricity (5x cheaper per KW/hour than in the US in real dollar terms), public transport (a ride on the Subway in New York is US$3 and here its US$0.30), milk, beef, and the list goes on.

The government payroll has also increased massively in the last few years (especially in the smaller provincial cities), and when combined with the lower world prices for Commodities (Oil -68%, Soy -29%, Wheat -28%, Corn -30%, Copper -50% Source: Economist Intelligence Unit), the drought that could potentially eliminate 40% of the country’s agriculture production, and an ever increasing debt burden due to dollar denominated debt whose interest payments are based on domestic inflation numbers (that’s why INDEC lies about the national inflation), one understands why the private pension funds (AFJPs) were nationalized in October of 2008.

This gave a quick relief to government coffers, but took US$30 billion out of an already miniscule stock market and has destroyed over 50% of the value of nearly every public company in the country while at the same time pushing sovereign debt risk premiums as high as they were in October-November of 2001 (1,707bps over a US treasury bond as of yesterday).

This all leads us to a preoccupation of the government, any anyone else who hopes to keep Argentina at least marginally on the world economic map, which is paying off the foreign debt no matter what the domestic costs are. The government will be able to accomplish this for at least the next 18 months at the expense of the peso. Right now we are at 3.58 pesos / USD, July of last year it was 3.02 / USD, and end of this year it will be over 4 / USD heading towards 5 by the middle of next year. This makes it ever more difficult for the government to meet its dollar denominated debts, the only up side being inflation is expected to go as low as 6% this year after years in the high 20s.

An earlier post talked about how many companies are waiting until the next quarter to announce layoffs and let loose with all of the bad news and I agree. One thing that needs to be taken into account with the current state of affairs in Argentina is that it is still summer vacation. School aged children have not returned to classes, many people are just ending long vacations, they were spending their year end bonuses from last year, and in general the populace is not back in the swing of things after the long holiday. The same thing happened last summer in the Northern Hemisphere.... need I remind you of what happened last September 15th after the world was on vacation for 6 weeks amidst a looming crisis?

All this being rambling is essentially meant to give a basis for my belief that the economy here is currently an 18-wheel truck that is about to slam into a wall within the next 3-4 months. What will things be like on the ground here? I have no idea. I was not around in 2001-2002 (moved here in early 2007) but I doubt it will get that bad. For those of you in this forum that are looking at Argentina for long-term living and employment 2009 will be the true test. If the country makes it to 2Q 2010 without falling to pieces I believe we will be in the clear.... but 2009 will be a very, very bumpy ride.

Cheers.

This post is ironic as the people predicting Argentinas collapse are the same bankers who caused the worlds collapse in the first place . Does anyone remember the report that Lehman Bros wrote on Argentina predicting our imminent collapse in 2008 . Funny they did not predict their own spectatular demise.

The truth is that many want Argentina to collapse like they want Ecuador and Venezuela to as well. I was reading a CIA report saying the same thing carefully omitting Colombia, Chile and Peru

Before 2001 when Menem and Argentina were the IMFs darling there were glowing reports about Argentina. In the mainstream media you did not know the realities of life here and the tremendous unemployment and artificial situation created by the same policies .

What I am trying to say is be careful what you read in the mainstream media as there is a hidden agenda.

 

[soulskier]

WW7, very interesting and well written post. what's your thought about those living here that earn dollars? Do you think they are in a good position for the 18 wheeler impending crash? What would a saavy person do besides get out of the way of the said truck. Perhaps we should start another thread on that?

 

[Ernest]

I am back in the USA right now in Northeastern Pennsylvania where I grew up and the daily news is frightening. It seems every day the administration is proposing another multi-billion dollar expense. Today I saw a statistic that since Mr. Obama has taken office, he has spend $39 billion a day. Today's news is that he wants to tax the rich more heavily ($250k annual Salary and up) to give it to the poor and middle class. He also wants to force US industry to buy carbon off sets, which will "necessarily cause utility prices to skyrocket" (Obama's words, not mine). He also wants to double foreign aid and to spend over $600 billion as a "down payment" for national health care.

It seems like the Treasury doors have been broken down and the Congress is taking all they can for themselves and their pals. With most people seeing a great reduction in retirement and 401K funds, spending has slowed tremendously. Housing prices continue to fall and unemployment is at record levels. If utility prices really go up in the coming year, the common folks will be squeezed even more, and will spend even less so the cycle continues to spin downward.

I heard this week that the banks are going to have to face "stress tests" where they are asked if they can cover their liabilities in the event that unemployment reaches 10-12% and housing defaults increase from 20% to 35%.

Congress votes on an $800 billion spending package recently and NOT ONE Congressman or Senator read the bill! They had less than 24 hours from the time the bill was finished until the vote -the bill was over 1000 pages.

We are piling up debt to bail out banks, industry, pay for foreign aid, stop global warming and a whole LOT of pork barrel programs. Seems like no one is bringing up the fact that there is no money in the Treasury to spend and so Treasury will have to print money to pay for all this. There are less and less (if any countries) willing to lend more to the USA because they are fearful that they may not be repaid, and if they are repaid, they will be paid in dollars that are devalued because this is what happens when you print a lot of currency.

All this and the Administration will be handing out "tax refunds" to people that never paid taxes!

Where this is taking us I do not know. I am not an economist, but I don't think we will like it and I believe there will be nowhere on the planet to hide. Some places will be less affected, but none will escape without feeling the pain.

Seems like Mr. Obama learned, like Hugo Chavez did, that if you give money to a lot of the poor people, then you will remain in power because there are a lot more people to vote for you.

Let's hope everyone is all wrong and that this will resolve in the next year or so. But the US Congress and the Administration are gambling with hugh amounts of money and have no idea if any of this will work.

One email I received put it into perspective. Here it is:
Back in 1990, the Government seized the Mustang Ranch brothel in
Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed. Now we are trusting the economy of our country and our banking system to the same nit-wits who couldn't make money running a whore house and selling whiskey.

 

[Grazie]

soulskier, I think we should start a new thread on that.
I vividly remember a prediction last year by someone on this site that the peso will be exchanging at 2.60 to a dollar. For the life of me I cannot understand why with the US economy so bad..as it is stated here and there...that the exchange rate is now.. what 3.55 pesos for a dollar. What gives?
And we have not heard from that "2.60 poster" ever again. Would love to know their thoughts and own up to a mis-prediction?!
So anyone earning US dollars - I say for you - life is good.

 

[wnewman7]

The reason the US dollar is increasing in value is a simple question of supply and demand. It is, and will remain for sometime, the world's only reserve currency. The entire world has become quite pessimistic about the security of their investments and many are returning to the old adage that cash is king. The reason the Euro will not be a world reserve currency in the near future deals with the very nature of the European Union and the Euro-Zone in particular. There are simply too many governments that have to come to a consensus to make a decision and the ECB has very little power aside from adjusting interest rates. The dollar, even with everything that is going on in the US Economy, is still seen as the world's safest investment.

And I agree - those living here on dollars are sitting pretty. I, unfortunately, am not one of the lucky ones. And trust that my firm has very little interest in seeing the demise of the Argentine economy - nor any other for that matter. It is actually quite bad for business.

 

[Lucas]

Well let see what the crooks have to say..

Fidelity Says Argentina's Bonds Are Among Best Investments
Bloomberg
February 25, 2009

"Boston-based Fidelity increased holdings of Argentina's benchmark 8.23 percent bonds due in 2033 in the second half of last year, according to filings with the Securities and Exchange Commission. Investors are returning to Argentine bonds on speculation the government has lined up enough financing to cover its budget needs through 2010.

"Argentina is one of my top picks for the next year," John Carlson, an emerging-markets money manager at Fidelity, which oversees $1.25 trillion, said yesterday at a conference on emerging-market investing in London hosted by JPMorgan Chase & Co."

..."The country's finances are "secure for the next two years," David Dowsett, who helps oversee about $16.7 billion at BlueBay in London, said yesterday at the conference. "I quite like Argentina here as much as it might be a shocking thing to say. You're well compensated for owning Argentine assets at this kind of level."

American Task Force Argentina

 

[soulskier]

I want what Bloomberg is smoking!

 

[bigbadwolf]

I vividly remember a prediction last year by someone on this site that the peso will be exchanging at 2.60 to a dollar. For the life of me I cannot understand why with the US economy so bad..as it is stated here and there...that the exchange rate is now.. what 3.55 pesos for a dollar. What gives?
And we have not heard from that "2.60 poster" ever again. Would love to know their thoughts and own up to a mis-prediction?!
So anyone earning US dollars - I say for you - life is good.

There are differing points of view -- i.e., no-one really knows what's going on. There are people like myself who believe that US current account and fiscal deficits must lead to a weakening dollar (if there's any order in the cosmos at all). And then there are people like "Spengler" in Asia Times, who penned the following compulsively readable article. We're in terra incognita, and I don't think anyone is really clear on what the "laws" are and how things will shape up. And I don't agree with "Spengler."

 

[Conorworld]

Well this time last year the dollar was in the doldrums. A lot of currencies, especially ones export and raw materials dominated (Australia, Brazil etc) were doing incredibly well and then in October it all colapsed as exports slowly did. 2.60 was a possibility. I remember talks of even parity with the USD and Real back then and 2 dollars for 1 euro. Things changed quickly.
People are taking flight at the moment taking a safe haven in the dollar. Since everywhere is being hit by the slowdown, the US doesn't look as bad in comparison as other nations. Countries like China and Germany thought they would not be as hit that much but even Germany now looks like contracting more than the US. That has helped the dollar.

The fiscal stimulus will help that too and the positive expectation will aid the dollar. However I think pretty soon people are going to take a real good look at government debts. Bonds are becoming very interesting. I feel soon people are going to see the horrendous beast which is the US government debt from the stimulus and compare it to other countries like Germany and then that will be dollar negative as debt takes over from growth as their main concern.

I see the peso continuing a slow depreciation as a means to retain competitiveness and promote exports. It will be gradual and like watching grass grow. You wont notice it and that's what the government wants, the feeling that the depreciation will be minutely done so people don't get worried.

However I heard that the government has used a lot of its reserves doing this and when the revenues plummet from collapsing exports they may not be able to stop it.