The thing is, people keep saying there is something wrong... actually, this was all to be expected, and it's just surprising that it's only taken 5 years to happen. Kirchner's reforms post-crisis were meant to artificially lower the value of the peso and hold it there to encourage foreign investment and hopefully flood the coffers. However in the face of competition Argentina has had to continue these policies for longer than is truly healthy. They say the peso should really be at 2.10 to the dollar, not 3.10, but if this were to happen the herd may turn and run to Brazil, China, and other competitors.
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From the Economist (Feb 8, 2007)
Argentina is still a long way from a return of the hyperinflation of the 1970s and 1980s. But many economists believe that prices of goods and services not covered by price controls will rise by 13-15% this year. Nipping inflation in the bud would require a rise in interest rates and curbs on public spending, as well as letting the peso appreciate. But first there is an election to be fought. It is shaping up to be a war of numbers.
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K's government has also looked to other methods to encourage spending at home and keep inflation under control -- the most obvious being the use of Tickets. Tickets force a certain amount of money to remain circulating in the market rather than get hidden under the mattresses of the country. It also means that the government doesn't have to spend money printing money, and risk flooding the market with more pesos and seeing inflation jump.
But of course the most obvious method of keeping inflation low is to simply change the numbers on paper and pretend it doesn't exist. So far K and his team seems to think this will work. Nothing like cooking the books to give the appearance of a rosy-outlook.
After the election who knows -- the K Government economic policies were really a bandaid solution to get the economy back on track. But what works well for a few months can be detrimental after a few years.
In my opinion for longterm growth this country really has got to start investing in mining & exploration. It's ridiculous -- education here still seems to favour arts, law, and accounting, when really they have got to get into engineering -- particularly in oil, gas, and mining.
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On a side note:
I think that the constant spitting out of 100 peso notes from bank machines is a mechanism to encourage spending -- what do you think? People don't use credit cards here the way you do at home, and usually cash makes you more aware of your purchases and more careful. However if you're always given 100 peso notes, you're more likely to spend beyond what you were thinking, since you've got extra in your wallet etc. Do you think this is another method to encourage spending?
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Also, for those that don;t subscribe:
The Economist's June Report:
Either Nestor Kirchner, the incumbent president of the Partido Justicialista (PJ, or Peronists), or his wife Cristina, a popular senator, is well-placed to win the presidential election of October 28th 2007. Mr Kirchner has increased his influence over the bulk of the Peronist party, which has a majority in Congress, while successfully courting sections of the opposition and obtaining the support of two-thirds of provincial governors to form a broader political alliance. If he (or she) wins, governability will be robust at least until the 2009 congressional elections. A populist stance on major economic policy issues will bolster their support, although the Economist Intelligence Unit expects this to decline gradually from current high levels once the economy eventually slows, potentially undermining their position. Mr Kirchner’s tendency to concentrate power in his first term will heighten concerns about government effectiveness and transparency under the next Kirchner administration.
On economic policy, the Kirchner government represents a departure from the free-market orthodoxies of the 1990s. It will maintain a more interventionist role for the state, especially regarding infrastructure and energy. Policymakers will target a competitive exchange rate to support growth in the tradeable sector of the economy. Unorthodox measures, such as price controls, will be used to achieve policy goals, at least until the 2007 election and quite possibly in 2008. We assume there will be a shift towards a tighter fiscal and monetary policy thereafter in order to curb inflation, although there is considerable uncertainty over the timing and extent of tightening. However, relative price misalignments and other distortions pose a threat to the sustainability of Argentina’s current growth cycle. Having repaid the US$9.5bn owed to the IMF in January 2006, the government can ignore the Fund’s recommendations, meaning little progress in pending structural reforms, such as tax reform, public banks reform and a new fiscal relationship between the central government and the provinces.
The economy has rebounded from its deep recession in 1999-2002, stimulated by the devaluation of the peso and high commodity prices. However, the closing of the output gap, bottlenecks and the scarcity of financing will slow GDP growth from 2008 onward. Inflows of foreign direct investment (FDI) will average around 2% of GDP, although uncertainty over government policy will persist. The outlook is for a slowdown in GDP growth towards Argentina’s annual potential rate (estimated at 4%) and a gradual decline in fiscal surpluses. Even though public debt ratios will still ease, concerns over long-term fiscal sustainability will linger, alongside little prospect of a sustainable reform of the system of revenue-sharing and the still unresolved issue of US$25bn in“hold-outs”who did not participated in the 2005 debt exchange.
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