Argentina: Towards Stability and Growth

The two World Wars and the Great Depression led to a dramatic fall in export demand and foreign investments, spoiling the economic fortunes of Argentina. The post-war period was marked by political instability and military dictatorships. Juan Peron, an army officer who was first elected as president in 1946 and again in 1952 and 1973, played a major part in shaping domestic policies. Economic policies during the period increasingly became inward looking and socialist, which prevented any meaningful and sustainable recovery.

Political instability peaked in 2001 when the country had as many as five presidents in just two weeks! These swift changes in political leadership followed a period of economic collapse and bloody riots in major cities. Things improved from 2003 under President Nestor Kirchner, and in 2007, his wife Christina Kirchner was elected as Argentina’s first woman president.

This gaucho is part of a distinct sub-culture developed around Argentina’s cattle ranches, much like the cowboys of the American West. Cattle farming brought prosperity to the country in the 19th century, and remains an important industry even today.

Culture

Estancias and gauchos

Blessed with vast plains ideal for raising cattle, Argentina turned to livestock farming which fostered prosperity in the 19th century. A unique culture and lifestyle developed around the estancias – Spanish for ranch. The estancias, which included even small farms, were run by gauchos or cowboys, and continue to thrive today. More recently, the estancias are attracting travelers interested in experiencing traditional working ranches. For the modern tourist from the developed world, adventure sport activities have also been thrown in.

Gauchos were wanderers or nomads roaming the plains of South America, who later settled down to run the organized farms that came up to feed the European demand for leather and later, beef. As overseas demand for meat and leather waned after the First World War, the farms went into a decline. Political instability within the country held back the revival of the Argentinean livestock industry during the second half of the last century.

Firm demand and higher prices for meat products in recent years reinvigorated the estancias and exports picked up, including to the U.S., until the global economic slowdown led to slower shipments. Though Argentina remains the third largest beef exporter globally, the gap with leader Brazil has widened. Unfavorable government policies, like the 2006 ban on beef exports to fight domestic inflation, remain the biggest challenge for the industry. The beef export ban was later replaced by a quota system which continues to restrict export volumes. Lower domestic prices have led to an increase in domestic consumption since the export restrictions and Argentineans, who devour more than 150 lbs of beef on average every year, remain the biggest consumers of beef in the world.

From near obscurity a decade back, Argentinean wines now occupy pride of place among New World wines and are enjoyed the world over.

Mendoza – Argentina’s Napa valley

When Wine Spectator, one of the most influential voices in the wine industry, rated
an Argentinean wine 95 out of a possible 100, wine aficionados were not surprised.
South American wines have been in the forefront of the ‘new world wine’ wave. Among
South American origins, Chile has been the major exporter, but Argentina is fast
catching up.

Argentina is often called the sleeping giant in the global wine market. The country
boasts of the greatest land area suitable for wine growing, most of it in the Andes
mountain valleys. High-altitude growing imparts uniqueness to Argentinean grapes,
like Malbec and Torrontes, an attribute which many vineries in the region have now
started exploiting. Yet, though it is the fifth largest wine producer in the world,
it exports only 10% of its production.

Mendoza,
in west-central Argentina, is the undisputed wine capital of the country.
With more than 800 vineries, the region accounts for nearly 80% of total vine production.
Mendoza has vineyards at altitudes as high as 1,400 meters above sea level.

Annual wine exports from Argentina now exceed $600 million and the U.S is the biggest
customer, accounting for nearly 30% of exports by value. It takes, many years to
develop superior wines and the relatively improved political and economic conditions
compared to the past should encourage Argentinean winemakers to take a longer term
view and increase investment in vineyards. With demand for wine growing globally,
the Argentinean wine industry holds a quite a bit of promise.

Economy

Political instability and restrictive policies hinder economic growth

Argentina’s hydro-electric potential is vastly under-exploited and may hold the key to the country’s future energy security.

The first wave of development happened towards the second half of the 19^th
century when increased export demand led to the establishment of immense livestock
ranches and commercial farms. Large scale migration from Europe before the Great
War ensured a steady supply of labor, essential for farm development. The country
subsequently expanded its export basket to include corn and wheat, which eclipsed
meat exports by the first quarter of the 20^th century.

Large capital inflows, initially from Britain and subsequently from the U.S., facilitated
the modernization of the farm sector and industrialization in the country. In the
absence of domestic capital and credit, foreign investments financed the development
of the meat packing industry and the railway network. Meanwhile, increased urbanization
pushed up domestic consumption which became the primary driver of economic growth.

Foreign investment flows dried up after the Second World War and the Peron government,
which came to power after the War, nationalized most of the economy. These policies
remained for the next several decades and stifled long term economic growth. To
make matters worse, the second half of the 20^th century was a period
of heightened political instability in Argentina. Several governments were brought
down in military coups and the uncertain environment hampered the overall development
of the country. After political stability returned in 2003, the country saw average
growth of close to 9% for the next few years. However, Argentina was one of the
worst hit in South America by the global recession in 2008 and the recovery came
slower and weaker than most of its neighbors.

Though Argentina’s economy has performed below par for the last several decades,
its strengths and potential for growth are evident. It is largely self sufficient
in food and energy. Only a small portion of its land area is under cultivation or
livestock farming, which can be expanded with supportive government policies. Argentina
relies heavily on natural gas which accounts for the bulk of domestic energy consumption.
The country has the third largest reserves of natural gas in South America, but
output has stagnated because of underinvestment. Most of Argentina’s electricity
demand is met by gas-fired thermal plants and hydroelectric plants. With only 20%
of its hydroelectric potential exploited, the country can meet much of its future
electricity demand by increasing investments in new hydroelectric plants.

Policy inconsistency and concerns about poor economic governance have long affected
investor perceptions about Argentina and have restricted capital inflows into the
country. Successive Argentinean governments have always been ready to indulge their
domestic constituencies at the cost of consistent economic policies that are crucial
to ensure long-term growth. Extended periods of political instability have also
contributed to the country’s poor record in economic management, as the government
turned more populist to gain political advantage. Efforts to build and nurture independent
economic institutions were undermined by politically expedient decisions for short-term
gains. In the most recent of such instances, the country’s central bank chief was
forced to resign for resisting the government’s decision to utilize part of the
exchange reserves for debt servicing. Unless Argentina can build investor confidence
in its economic institutions by freeing them from political pressures, it will continue
to lag its regional competitors like Brazil in the ability to attract foreign capital.

The debt default that initially helped, but hurt later

Sovereign countries usually do not refuse to honor their debt obligations. Defaulting
countries will be shut out of global credit markets and raising external finance
will be extremely difficult in the future. Even then, Argentina did not have much
of a choice but to default on its debt repayments to international creditors in
2001. The government’s finances were so bad that it could not have made the repayments
even if it wanted to, as the IMF refused to provide additional loans. At over $90
billion, it remains the biggest ever sovereign debt default in history.

Three years later, Argentina offered to pay its creditors 30 cents to a dollar on
total debt, which had increased to $103 billion including interest. More than three-fourths
of the investors accepted the offer, as they saw no other way out, though some investors
held out and challenged the settlement in U.S. and European courts. Though at a
painful cost to its creditors, the debt restructuring helped Argentina significantly.
As the total external debt declined after the default, lower demand on government
finances for debt servicing helped improve fiscal health and supported economic
growth.

However, the debt default and the recovery suits filed by the remaining creditors
made it impossible for Argentina to raise money from international financial markets.
Before the global recession, when domestic tax revenues were buoyant, this was not
a major concern for the Argentinean government. But as the economy slipped, government
finances also suffered and the fiscal deficit soared.

As the country’s debt servicing needs are set to rise in the coming years, and domestic
sources are unlikely to meet the requirements fully, Argentina may have to raise
funds from the international markets. To this end, the Argentinean government has
made a new offer to the holders of defaulted bonds. If the new proposal is accepted
by a majority of the bond holders, Argentina’s long exile from international financial
markets will end. The government’s controversial plan to set aside a part of its
foreign currency reserves for debt repayment is aimed at reassuring international
investors and encouraging them to subscribe to new bond issues.

Trade ties that bind, though often fractious

The recession affected demand for luxury goods and shopping malls like this one in Buenos Aires are attracting fewer visitors. However, retailers are hopeful that the mostly urban population will again throng the shopping centers as the economy revives.

South American countries have deep economic relationships among themselves and hence
their economic cycles often follow the same trends. For instance, Brazil, South
America’s largest economy, accounts for 31% of Argentinean imports and 19% of exports.
Bilateral trade between Brazil and Argentina now exceed $30 billion annually. Neighboring
country Chile is the fourth biggest importer of Argentinean goods, with a 7% share.

A decade ago, trade between South American countries was even more important, which
led to the formation of the regional trade group Mercosur. However, increasing demand
for minerals and farm products in other parts of the world has led to a decline
in the importance of trade within the Mercosur group. In the case of Argentina,
exports to other Mercosur countries have steadily declined over the last decade.
China has emerged as Argentina’s second biggest trading partner, followed by the
U.S. Though the Mercosur member countries are now less reliant on each other for
trade, total trade in absolute terms within the group continued to expand until
the 2008 global economic decline. As the regional economies emerge out of recession,
growth in trade between them should also revive.

Efforts are being made by member countries to strengthen Mercosur, through further
liberalization of trade between member countries, improving market access, and trade
agreements with other countries. More countries may be added to the group, which
currently has five full members and five associate members. After the formation
of the Mercosur Parliament next year, observers feel the trade block can develop
along the lines of the European Union template.

However, the relationship between countries in the region has often turned fractious
and has led to trade disruptions. Most recently, a trade dispute between Argentina
and Brazil caused a sharp decline in bilateral trade. To protect domestic manufacturers
hurt by the global recession, the Argentinean government imposed restrictions on
imports and Brazil responded by preventing Argentinean trucks carrying farm produce
from entering their territory. Realizing that trade disputes are harmful to the
interests of both nations, Brazil and Argentina have agreed to resolve the problems
and promote more trade and economic integration.

Commemorating the 400th anniversary of the founding of Buenos Aires, El Obelisco or The Obelisk was built in a mere 31 days. As the most recognizable monument in the city, the Obelisk stands tall as an icon of Argentina’s many rebirths and revivals. Argentina – vivacious, full of possibilities, and always hopeful.

Candies to online auctions

Most Americans wouldn’t suspect that the candies they crave for are probably made
in Argentina. They could be, as the largest Argentinean confectionery group is a
leading supplier to large American retailers and a contract manufacturer for some
well-known American brands. With a history of more than 50 years, Arcor Group has
manufacturing plants in five countries and sells its products in more than 120 countries
across the globe. It manufactures more than 1,500 different products and launches
over a 100 new products every year.

Such success stories in non-traditional businesses are rare in Argentina, where
commodity businesses thrive. Like neighboring Brazil, Argentina is a significant
producer and exporter of farm products which remain the mainstay of the economy.
Exports include soybean, vegetable oils, and cereals. Higher international food
prices contributed significantly to the country’s economic growth, until the 2008
global recession led to weak export demand. To make it worse, the Argentinean government
imposed export taxes on several farm products to improve their domestic availability
and control inflation. This policy led to widespread protests by farmers and farm
produce exports suffered. More recently, the global economic recovery lifted demand
for agricultural produce, and prices became more remunerative. Increased revenues
from farm produce exports, especially soybeans, will likely drive the country’s
economic prospects.

As well, Argentina is a large exporter of copper and gold concentrates. Other mineral
resources include lead, zinc, tin, iron ore, and manganese. American and Canadian
companies have a large presence in the domestic mining industry. The upstream oil
industry in Argentina was dominated by a state-owned firm, which was later privatized
and subsequently merged with a Spanish oil company to become Repsol-YPF.

With changing global trends, Argentinean businesses are also evolving. Good education
standards have helped the country emerge as a favored destination for outsourcing,
largely comprised of call centers offering services in Spanish. Several global technology
companies, including Microsoft, IBM and, HP, have back-office operations in Buenos
Aires now. More recently, the country is attracting outsourced creative work, including
graphic design and entertainment software. Such service businesses are estimated
to have created tens of thousands of jobs and now generate annual revenues of billions
of dollars.

Yet, the enterprise which should represent Argentina today and inspire its young
citizens is a young technology company. Its founder was still in business school
when he volunteered to chauffeur a well-known investor, in order to make a pitch
for venture capital to start his own business. His company, MercadoLibre, is now
the largest online auctioneer in Latin America and is listed on the NASDAQ. MercadoLibre
has more than 25 million registered users, spread across 12 countries in the region.
If Argentina can build the right economic environment for more firms like MercadoLibre
to thrive, the country’s below par economic performance will be history.

Young, vibrant, adventurous, and full of life – that is the image the world had
of Argentina. Unfortunately, the reality behind that colorful mask has often let
the country and its citizens down. To bury the disappointments of the past and regain
its glory days, the country has to work hard, strengthen its institutions, and rebuild
confidence. However, unlike in the past, Argentina may not get several more opportunities
for revival and growth. With several countries in the region quickly recovering
from the global recession and now starting to grow at a good pace, Argentina cannot
afford to fall behind. If it does, the country risks that the label of a perennial
laggard will forever remain.