Macroeconomic

Performance of Argentina
Under the guidance of Dr. Jaydeep Mukherjee

Group 9 Section A
Anit Kumar Pandey 10A
Ayush Saraf 15A
Neelesh Sahay 28A
Nishant Sinha 31A
Pranenjyoti Sarkar 34A
Rajroop Bhattacharya 37A

Table of Contents
1.

Political, Economic and Socio-cultural Background.................................................... 3

1.1 Political Environment .............................................................................................. 3
1.2 Economic Environment ........................................................................................... 3
1.3 Social & Cultural Environment................................................................................ 4

2.

Macroeconomic Performance (2007-2014E*) .............................................................. 5

2.1 Growth Performance ............................................................................................... 5
2.2

Inflation .............................................................................................................. 6

2.3 Unemployment ........................................................................................................ 7

2.4 Industrial Production Indices .................................................................................. 8
3.

Macroeconomic Problems: Causes, Effects and Recommendations ............................. 9

3.1 Hyper-Inflation ........................................................................................................ 9
3.1.1 Causes .............................................................................................................. 9
3.1.2 Effects: ........................................................................................................... 10
3.1.3 Suggestions: ................................................................................................... 10
3.2 Investments getting dried up ................................................................................. 11
3.3 Currency Crisis Looming Ahead for Argentina: ...................................................... 13
3.3.1 Cause ............................................................................................................. 13
3.3.2 Effect .............................................................................................................. 13
3.3.3

Recommendations ...................................................................................... 14

Bibliography ................................................................................................................... 15

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1.

Political, Economic and Socio-cultural Background

1.1 Political Environment

Argentina is an interesting study in terms of the political environment. Today Argentina is
a federal constitutional republic and representative democracy. However, from 1930 to
President Peron ousted and

1st Military coup

War with Falkland Islands

military rule imposed

1930

1943

1955

1976

1982

1984

Military coup & Emergence of

Military started the Dirty War

Argentina became a free nation with

Peronism

which continued till 1983

citizens having full civil liberties and

political rights

Exhibit 1: Political Background

1983 Argentina has experienced political instability in the form of military coups and it is
only after becoming a free nation (the citizens shall have full civil liberties and political
rights). Since then Argentina has had a multi party system with the Justicialist party
winning the elections 9 out of 11 times since 1946. In Argentina, there is the legislature or
the Nation of Congress consists of the Chamber of Deputies of Nation which is elected for a
four year term and the Senate of the Nation elected for a six year term, however the one
third of seats of the Senate is renewed every two years.
Such a hostile political environment has led to a drop in investments in Argentina and the
already existing companies looking to take their investments elsewhere, as has been the
recent case in the agriculture sector. There is increasing political unrest over wage issues,
increasing crime rate and drug issues which have had an adverse impact on the country.
2014 has presented itself with challenges to the President to come up with policies to
counter rising inflation, protect foreign reserves and prevent a currency crisis.

1.2 Economic Environment

The economy of Argentina is an upper-middle income economy. From being one of the
richest countries in the early 19th century, today Argentine economy is returning on track
after being marred with several problems. It has faced a lot of problem as a result of the
policies that had been undertaken in the last century. Peronism as a concept came up in

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Period of high inflation, low growth,

External adverse shocks such as

Deterioration in economy due to

fiscal deficit, Introduction of

appreciation of USD, devaluation of

political unrest (Great Depression)

alternative currencies

Brazils Real, capital flight

1930's

1975-1988

1943-1970

1991-1997

1998-2002

2003-present

Macroeconomic shocks due to high

Market Reforms, Open Trade, Fixed

Reforms brought by Nector Kirchner;

import substitution

Exchange Rate of Peso

Argentina overcomes depression

Economy

Exhibit 2: Economic Background

1946 and since then has been a crucial feature in the policies of Argentina. The economy
has suffered because of hyperinflation, has faced the economic depression of 1998-2002, a
time at which it defaulted on the foreign debt and also removed the fixed exchange rate
system.
There have been reforms since 2003, and Argentina is coming back on the growth track.
The GDP of the country as of 2012 is 468.3 billion Pesos. The Service sector is the largest
contributor with 60% of the GDP. Manufacturing is the second biggest contributor to GDP
with 19% thereby capitalizing on the availability of natural resources. Argentina is a major
agriculture producer and account for large exports in the sector mainly in form of beef,
fruits, oilseeds and cereals. Tourism is an upcoming sector in Argentina.

1.3 Social & Cultural Environment

Nestor Kirchner after coming to power in 2003 brought about a transition in culture for
the country. From people discontent with government and taking to streets, it took a
reverse turn, however in 2013, there have been issues when people have taken to strikes
for wage issues in light of high inflation.
Doing business in the country means that one should be ready to go through government
bureaucracy and for some tough negotiations. A high Uncertainty Avoidance Index means
that the people in the country have high regard for rules, people are risk averse and do not
accept change easily. Society is collectivist in nature and based on strong relationships
where people take care of each other. It has one of the lowest birth rate and population
growth and has a high literacy rate.
Illegal immigration has been a recent issue in Argentina, however the government
launched Patria Grande ("Greater Homeland") to encourage illegal immigrants to regularize
the status.

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2.

Macroeconomic Performance (2007-2014E*)

The macroeconomic performance indicator analysed in the report include GDP growth,
inflation numbers, unemployment, labour market analysis and industrial production
indices.

2.1 Growth Performance

The GDP at constant prices of Argentina stood at 468.3 billion Pesos in 20121. This
showed a meager growth rate of 1.9% over 2011 GDP figure of 459.6 billion Pesos
(constant prices). This slow growth was preceded by another bout of close to zero growth in
2009 when the GDP at constant prices grew by only 0.85% over 2008 numbers. The slow
growth of GDP in these years (2009, 2012) was also marked with high government gross
debt, at 58.7 and 47.7% of GDP. From historically high numbers of current account deficit
for Argentina (ranging from 2.5% of GDP to 4.8% during the 2002 Argentine Depression),
the country managed to recover and push towards current account surplus in 2008. Its
CAS was around 2.5% of GDP at US$ 7.5bn in 2009, but then again the dip started. In
2011, Argentina was running a CAD of 0.6% of GDP which marginally improved to (0.04%)
of GDP in 20122.

Exhibit 3: GDP % change (const. prices,

1993) [BLUE] vs. Central govt. debt (% of
GDP) [RED]

The estimates for 2013 and beyond for Argentina (based on official reports and published
by IMF) demonstrate a growth in GDP (constant prices) of about 2.7-3.5%, with GDP
touching 500 billion Pesos in 2014. Also the gross debt of the government is expected to be

World Economic Outlook, IMF; Oct 2013

Haver Analytics. Last Actual Data (official): 2012
* Expected
2

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Exhibit 4: GDP % change (const. prices, 1993)

[BLUE] vs. BCA (% of GDP) [RED]

around 43-45% of the GDP (with absolute numbers hovering around 1,300 -1,500 billion
Pesos3.

2.2

Inflation

Argentina has seen periods of hyperinflation and deflation all within a period 10 years. In
1989, the reported inflation in the country stood at 4,924% (base year 1993), which
gradually fell and Argentina reported deflation in 1999 (-1.81%). This was marked the
Argentine Depression. The official figure for inflation for 2010 was 10.9%, but many
economists argue that the official numbers are grossly under-reported by the Fernandez
de Kirchners government in order to paint a rosy picture. Economists and those who
followed Argentine economy had reported actual CPI to be around 25-30% before 2011
elections4. The current estimates for 2012 CPI is around 22-25% whereas the official CPIGBA data by the Argentine government and central bank have predicted inflation to be
around 10.8% and growing at the same rate for 2013 and 145.

Exhibit 6: CPI for Argentina (average vs end of period)

Base Year: 1993 (2013, 14 are estimates)

Exhibit 5: Difference between official and unofficial CPI (2011)

Ministry of Economy, Argentina; General govt. includes: Central Govt., Local Govt., State Security Funds, State
Govt.; http://www.mecon.gov.ar/onp/html/ejectexto/cuenta_nac_dosuno.html?var1=cuentanacdosnueve
4
NY Times (Feb 2011), BBC News (Mar 2011)
5
Ministry of Economy; Haver Analytics; IMF (Oct 2013)

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The difference between unofficial and official CPI numbers is shown in Exhibit 66.
2.3

Unemployment

During the Argentine crisis of 1998-2002, the official unemployment number soared to
around 22.5%7. This was also accompanied with a drop in gross national savings. The
numbers for national savings reached their lowest during the crisis and remained only
12.8% of GDP in 2001 from around 20% in early-1980s. The savings of Argentines started
to increase, as per official data, and the gross national savings touched around 26% in
2007. The unemployment
also

reduced

reported

and

under

was

10%

of

labour force in 2007. For

Argentina, we can analyse
the Philips Curve for the
short-run
Exhibit 7: Inflation [BLUE] vs Unemployment [RED] (2003-14)

(from

2003

to

2013). The Philips curve is

an

inverse

relationship

between the rate of unemployment and the rate of increase in money wages. The higher
the rate of unemployment, lower the rate of wage inflation. In other words, there is a
tradeoff between wage inflation and unemployment8.
This
after

demonstrates
the

that

Argentine

Depression of 1998-2002,
a 1 percentage decrease in
unemployment led to an
increase in inflation by
about 0.53% (Exhibit 7)9.
The data on inflation sees
a lot of variation between
Exhibit 8: Short-run Philips Curve (2003-13)

the official and unofficial

Washington Post>What-is-argentinas-true-inflation-rate (Oct 2011)

National Statistical Office, Argentina; IMF (Oct 2013)
8
Macroeconomics Dornbusch, Fisher, Startz (10e)
9
World Economic Forum, IMF (Oct 2013)
7

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figures. The IMF has, however, issued a declaration of censure and called on Argentina to
adopt remedial measures to address the quality of the official GDP data and other
macroeconomic data.

2.4 Industrial Production Indices

In Argentina, industrial production measures the output of businesses integrated in
industrial sector of the economy such as manufacturing, mining and utilities. Industrial
production reached an all-time high of 24.60% in March 2003 and an all-time low of
-22.30% in March 2002. Argentinas economy slowed in 2012 after booming for 9 years
after the Argentine Depression of 1998-2002. The reason for this mostly lied in the fact
that the inflation in the country was soaring along with a sluggish growth in Brazil, which
is a key trade partner for Argentina. Argentine Peso depreciated from 4.32/USD to
4.93/USD from Jan 2012 to Jan 2013. This led to a sharp recovery of exports for
Argentina. The production also rebounded in late 2012 and this led to stronger recovery of
industrial production index in 201210. However, the industrial production remained in
negative for the most part of the period of 2008-2010, with a positive trend seen in late
2009 and being sustained for 2 years till January 2012. For the complete 2012, Argentina
manufacturing index shrank by 0.9%. This was mostly because of soft demand from Brazil
and low consumer confidence. Manufacturing index is expected to rise by 2.3% in 2013.
Also, Argentina has been getting benefits because of its weak currency and boost in
exports. However, this trend is dwindling now and the government is looking to bring
macroeconomic adjustments. Owing to this, manufacturing index will rise by 0.4 percent
in 201411, as shown in Exhibit 10.
Industry
Food and Beverages
Motor vehicles, trailers, semi-trailers
Wood products (excluding furniture)
Paper and paper products
Coke, refined petroleum products, nuclear fuel
Chemicals and chemical products
Rubber and plastics products
Nonmetallic mineral products
Basic metals
Fabricated metal products
Machinery and equipment n.e.c.
Electrical machinery and apparatus
Radio, television and communication equipment
Medical, precision and optical instruments
Other transport equipment
Argentina Manufacturing Index

Exhibit 9: Exchange Rate - ARS vs USD (2011-12)

10
11

2012
6.3
-11.9
-2.2
0.2
1.4
2.3
-2.5
-3
-10.4
-6.4
-13.9
-4.7
0
-6.6
-22.5
-0.9

2013 (F)
1.2
4.4
2.1
-0.9
5.5
3
1.1
6.3
1
3.2
1.6
-5.2
-9.7
2.9
10.9
2.3

Exhibit 10: Argentina Manufacturing Index - Breakup of Sectors

TradingEconomics.com>Business>Industrial Production, Argentina

Manufacturers Alliance for Productivity and Innovation (MAPI)

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2014 (F)
0.1
1.6
5.6
0.8
3.7
0.4
2.5
3.4
2
-0.2
4.8
-2.5
3.2
1.8
8.1
0.8

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3.

Macroeconomic Problems: Causes, Effects and Recommendations

3.1 Hyper-Inflation
3.1.1 Causes
1. High Expectation of Inflation: e (inflation expectation) for Argentina has always
been very high. This is supported by both the adaptive and rational expectation
theories. Traditionally, Argentine economy has always had very high inflation which
makes e very high based on adaptive expectation theory. Also, the government of
Argentina has always made it unequivocal that driving growth is its primary objective
than fighting inflation. This raises e as people dont see the Argentine government and
central bank having the intent to fight inflation.
2. Expansionary Fiscal Policies: The government of Argentina follows an expansionary
fiscal policy to drive growth. This can be considered as a rightward shift in the IS curve
in the IS-LM model which should lead to an increase in inflation and interest rate.
3. Monetization of Debt: However, the
Argentine central bank finances the
expansionary fiscal policies of the
Argentine

government

by

printing

more pesos. This monetization of debt

is highly inflationary (Exhibit 11).

Exhibit 11: IS-LM Framework for Argentina

4. Faulty Inflation Fighting Policies: In neighboring countries like Brazil, inflation is

fought by keeping interest rates high but in Argentina the interest rates have
traditionally been lower than the actual rate of inflation. The reported rate of
inflation has been substantially lower as shown below. This has made fighting
inflation very difficult. Instead of fighting inflation through prudent monetary
policies, Argentinas has resorted to techniques like changing the composition of
CPI basket and freezing of prices which have proven to be ineffective in the long
run.

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Interest Rate (%)

25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012
Exhibit 12: Interest Rate (Source: World Bank)

Exhibit 13: DIfference Between Official and Unofficial CPI

3.1.2 Effects:
1. Social Unrest: Continuous high inflation has led to a wage price spiral12 which shows
only sign of deteriorating further in the years to come, leading to an increase in the
government and trade union conflicts. There is increase dissatisfaction in among the
workers as they demand higher wages to sustain their present living standard.
Moreover, high rate of inflation leads to a general feeling of discomfort for the
household as their purchasing power is consistently falling.
2. Greater

Uncertainty: There

may

be

greater

uncertainty

for both firms

and

households. Firms will postpone their investment due to uncertainty in the market.
This will result in negative implications on the economic growth in the economy.
3. Damage to Export Competitiveness: High rate of inflation will hit hard the export
industry in the economy. The cost of production will rise and the exports will become
less competitive in the international market. Thus, inflation will have an adverse effect
on the balance of payments

3.1.3 Suggestions:
The Argentine central bank needs to adopt sound monetary policies to fight inflation.
Instead of adopting faulty policies like prize freeze, the government and the central
bank needs to show positive intent to fight inflation and improve their credibility. This
will lead to lower inflation expectation and will lead to a partially painless disinflation,
as happened in US President Ronald Reagans tenure due to US Federal Reserve
chairman Paul Volcker's credible stand against inflation.

12

http://www.relooney.info/SI_Argentina/Oxford-Argentina_33.pdf

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3.2 Investments getting dried up

The investment in a country is dependent on many factors including prevailing interest
rates, political scenario, and tax regime among others. Deploying capital to stocks and
bonds isnt investment; rather, it is just an allocation of savings. Investment activity is the
one which results in creation of un-sold consumables (inventory stock) or an increase in
the real capital stock (eg. houses, machinery, factories). So, one of the primary drivers for
investment will be the expectation of demand resulting from that investment. If demand is
expected to be present or is expected to get created because of investment, then it is viable
to go for that investment.
A second driver for investment is the interest rate prevalent in the country. A low rate of
interest lets investors take more loans, as the repayment will not be very costly.
In case of Argentina, the Banco Central de la Repblica Argentina (BCRA, the Central
Bank of Argentina) uses an expansionary monetary policy to spur economic growth. In
case of debt, the financing is carried out by BCRA using monetization principle, i.e.
printing of Argentine Pesos to serve the debt or the interest. This increases the supply of
money in the economy and money supply curve shifts right.
This causes the interest rate to go down. The
amount of money in circulation increases. This leads
to consumers opting for depositing the additional
money with the banks, thus pushing the interest
down.
An increase in the interest rate has two-fold results.

Exhibit 14: Money Market Curve - Increase in

Money Supply'

The

low

interest

rate

spurs

investment

demand and thus, helps the GDP as a whole.

r => I(r) => Y

Low interest rates causes more outflow of capital from the country. This outflow
increases the demand of dollar in the foreign exchange market against the local
currency, and hence, Peso (in this case) depreciates. The depreciation of Peso
makes the exports of Argentina more competitive in the international markets and
hence, exports pick up, helping the GDP in turn.
r => CF(r) => e => X => NX => Y

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Theoretically speaking, an expansionary monetary policy in a large open economy is very

effective in spurring growth and output. The problem in Argentina remains the high
inflation it faces, along with the under-reporting of the same by the government.
The high inflation erodes
the consumer confidence
and this has had a severe
impact

on

the

investor

confidence in Argentina.
The total investment has
constantly been on decline
since

Exhibit 15: Trend of Investment (2003-14)

2008

(except

year

2010) (Exhibit 12).

Also, to shore up drying up investments and rising government deficits (Exhibit 13)13,
Argentine government has looked towards borrowings. As IMF has severely cut back on
loans to Argentina, the only option
for the government is either to
monetize the debt or take loans from
the central bank, BCRA. This has
led to a creation of vicious circle in
Argentina.

The monetization of debt has

Exhibit 16: Argentine govt.'s Structural Balance (% of GDP)

resulted in unabated rise in

inflation.

The lack of loanable funds has led to crowding out of private investments.

A countrys BoP has to balance out using the 3 components (Balance of Current
A/c, Capital A/c and Official Reserves A/c). BCA has been in the red for Argentina
and this has had a serious impact on the official reserves of the country and capital
accounts.
BCA + BKA + BRA = 0
Also the softening of demand in the
Exhibit 17: Rising Benchmark Interest Rate in Argentina

13

World Economic Outlook, IMF, Oct 2013

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Brazilian economy, which is the primary market for Argentine manufacturing exports, has
led to decline in the growth of exports. Given this, the economy of Argentina is projected to
suffer serious setbacks until the government shores up its official reserves and manages to
get money from international institutions (IMF, World Bank) to quell the rising interest
rate and spur investment demand.

3.3 Currency Crisis Looming Ahead for Argentina:

3.3.1 Cause
1. Unsound Economic Policies: The Argentina government has moved away from market
friendly policies to populist policies which include subsidies that are given on transport
and utilities. This has resulted in a negative investment sentiment and thus Argentina
does not attract substantial foreign investments. Also the artificially created strong levels
of Peso, has taken a toll on the exports.
2.

Poor

Credit

History:

The

Argentine

government defaulted on its foreign debt in

2001, due to which Argentina finds it difficult
to borrow money from abroad to finance its
imports and debts. A reform approved by the
Argentine Senate gives unlimited access to
the reserves of the central bank, such kind of
Exhibit 18: Exchange Rate Depreciation for Argentine Peso

intervention into the independence of the

central bank has have serious repercussions

on the Argentine economy.

3. Weak domestic currency: The depreciating Peso and strong restrictions by
government has resulted in consumer losing confidence in the local currency and a
surge in demand for Dollar14.

3.3.2 Effect
1. Decline in Forex Reserves: Consequently, Argentina has been using its Foreign
Exchange Reserves to finance its imports and pay off it debt obligations. This has led to a

14

http://www.focus-economics.com/en/economy/news/Argentina-Exchange_RateBlack_market_peso_recovers_amid_government_intervention-2013-06-17

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steep decline in its Foreign Exchange Reserves from $50 billion two years back to $31
billion at the end of 201315.
2. Import and capital flow restrictions: Since re-election in 2011, the President has put
in tight currency controls to curb capital outflows (capital flight) and to protect the central
banks foreign reserves in order to use it to pay off its debt.
In addition to currency measures, there have been protectionist measures in place which
puts restrictions on imports. Though this can be a solution in the short run, in the long
term this could spell doom for the economy as firms will not have access to raw materials
and this could affect the production levels and employment levels..
People and businesses are vetted by the tax agencies for the amount of dollars that they
would want to purchase. The Argentines look forward to travel abroad to purchase things
cheaply. The government looks to curb the outflow of Peso to purchase dollars and have
increased tax from 20% to 35% on foreign currency transactions or denial of foreign
currency to tourists.
3. Thriving underground currency market: Multiple exchange rate is prevalent in
Argentina (something which the government does not acknowledge) which has been
adversely affecting the companies and investors. There is an official exchange rate at
which Peso can be exchanged for Dollars by small businesses and individuals, however the
stringent restrictions on buying Dollar has given rise to a black market where there is
another parallel rate for the dollar.
Such restrictions have also lead to powerful people indulging in taking advantage of the
arbitrage price and making money. Argentina lost around $30 billion in illicit capital flight
last year, according to figures from the Bank of Buenos Aires.

3.3.3 Recommendations
The government needs to create an environment to boost investor confidence. It needs to
do away/reduce subsidies. This will help improve capital inflows needed to finance imports
and help Argentina replenish its depleting forex reserves.
Offering Argentine investors access to alternate cheaper USD-denominated financial assets
like bonds. This will reduce the attractiveness of the U.S. currency in the underground
market.
15

http://www.thefinancialist.com/the-looming-argentinian-currency-crisis/

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