Argentina’s pivot point
This post is a guest contribution by Daniel Volberg of Morgan Stanley.
This year could be pivotal in shaping Argentina’s economy, as well as its political and policy direction. Argentina appears to be at a crossroads: this year’s presidential and congressional elections could determine policy direction in the next few years. But while Argentina watchers are looking closely at any signs of a shift in the policy mix of the current administration and trying to handicap how the political landscape could change ahead of the elections, we would argue that alongside a great deal of political unknowns there are economic known facts about Argentina that may challenge conventional wisdom.
While elections may be the critical element towards understanding Argentina’s dynamics this year and beyond, in the near term the political landscape is likely to remain highly uncertain. Indeed, we suspect that the outlines of the election contest are likely to start taking shape only in March or April. Two points are worth highlighting:
First, we believe it is unlikely that economic policy will change ahead of the elections, given our expectations of persistent political gridlock. The political gridlock may be the result of a tight balance of power between the administration’s party and the opposition in Congress. The administration’s party controls 104 seats in the 257-seat lower house of Congress and 36 seats in the 72-seat Senate. Meanwhile, the opposition block – a loose union of several parties – have an outright majority in the lower house with 131 seats and a minority of 32 seats in the Senate. This tight balance of power, especially in the Senate where no block has a majority, has raised the power of independents and contributed to significant gridlock and uncertainty. We suspect that this political landscape is unlikely to change dramatically until presidential and congressional elections in October 2011 and so we see little chance for a change in economic policy in the interim.
Second, we expect persistent uncertainty in the near term over the presidential contenders, their programs and their electability. There are many politicians tipped to run for the top job, but very few have actually declared their intent to do so. Indeed, only four politicians have declared their intent to fight for the top job – Vice President Julio Cobos, Senator Ernesto Sanz and Senator Ricardo Alfonsin – all from the center-left UCR party – and Senator Elisa Carrio from the opposition ARI block. The three candidates from UCR are expected to first run against each other in a primary scheduled for August, and perhaps also in an earlier primary possibly in April.
In addition to the declared contestants, a key question will be whether the current president will run for reelection. Her approval rating has improved dramatically over the course of last year – from just over 20% at the beginning of 2010 to nearly 60%% by the end of the year, according to polling data from Poliarquia Consultores. That would suggest that her chances at re-election are very strong. However, much of this upturn in popularity – over 20pp – appears to have come in the aftermath of her husband’s sudden death in October last year, and it is uncertain whether it would persist or translate into votes on election day. Despite this caveat, the president’s decision on whether to run for re-election is likely to be an important milestone in defining the political landscape as she remains a strong contender.
Meanwhile, other key political figures tipped to run for the presidency remain in the background. These include well known politicians like Senator Carlos Reutemann and Buenos Aires mayor Mauricio Macri who may be strong contestants from the opposition or the current governor of Buenos Aires province Daniel Scioli who may challenge President Cristina Kirchner either from within her own party or from the opposition. And there are many more potential contestants on Argentina’s fractious political landscape. Indeed, even once there is a clearer picture of who is running – we expect better definition by April, which should give the candidates enough time to campaign ahead of the August primaries – it is unclear when the candidates would formulate their economic and policy programs.
But while the direction of political developments still remains difficult to gauge, there is a great deal that is knowable (but often misunderstood) about Argentina’s current macro environment. Indeed, we would argue that Argentina has a number of important macro strengths that have been ignored or misunderstood, given the challenging political environment. After all, on some key economic fundamentals, Argentina is more comparable to investment grade or near investment grade countries, rather than its current place as just barely above sovereign default. These strengths, if eventually leveraged by a market-friendly policy mix, could provide significant upside to our view of Argentina’s economic development in the coming years.
First, after one of the strongest growth spurts in the globe last year, Argentina should continue to enjoy economic growth in 2011. According to official data, the economy expanded by 8.2%Y on average in the three months through October. And we are forecasting 5.0% growth this year. Of course, part of the strength of growth in 2010 comes courtesy of a rebound from the weakness in 2009. Indeed, in 2H10, Argentina’s economy began to slow. Still, given a very favorable external environment buoyed by soaring soft commodity prices, growth support from Brazil – Argentina’s largest trade partner – and potential for a repeat of last year’s significant boost to wages that could underpin an upside surprise in domestic consumption, we remain constructive on Argentina’s growth outlook for 2011.
However, if we look at the growth over a longer period – during the last decade and a half – real GDP growth averaged just 3.3%. The strength of the growth in recent years may be largely a consequence of an unprecedented improvement in the external environment and thus may not be ultimately sustainable. However, growth sustainability analysis is fraught with uncertainty. Meanwhile, Argentina’s track record over the five years through 2009 is impressive – near 7 % – and places it in the same bracket as largely investment grade or near investment grade countries.
Second, Argentina has one of the largest current account surpluses in the world. We estimate that last year Argentina’s current account posted a surplus of 1.6% of GDP. That puts Argentina as one of the top current account surplus countries among emerging economies – a bracket largely populated by investment grade or near investment grade countries. Indeed, we are forecasting a current account surplus of 2.6% of GDP this year.
Third, Argentina has one of the most comfortable fiscal positions in the world. While during the 2009 recession the fiscal accounts posted a modest 0.6% deficit, they appear to have turned around dramatically in 2010. In the 12 months through November, the fiscal balance posted a surplus of roughly 0.4% of GDP. By contrast, in the same time period, Mexico posted a deficit of 2.1% of GDP and Brazil a deficit of 2.7% of GDP. Indeed, with most economies in the world still running large deficits, Argentina’s fiscal position places it in a small club of mostly investment grade economies with balanced budgets. And looking ahead, we are forecasting a 0.8% of GDP fiscal surplus in 2011.
Finally, Argentina’s policy-makers used the past decade of abundance to strengthen the country’s macro balance sheet by accumulating a large cushion of international reserves. As of January 12, Argentina had $52.2 billion in international reserves, a strong cushion for a near $400 billion economy. Indeed, reserves stand at roughly 13% of GDP, in line with the ratios for the rest of Latin America’s large economies which are rated investment grade.
Of course, Argentina’s strong macro picture contains a number of important caveats. After all, the discipline Argentina exhibited in recent years has been largely forced on it. The surpluses in the current and fiscal accounts are in part due to Argentina’s limited access to financing from capital markets. And Argentina’s policy-makers eventually have to contend with a whole host of issues, from resolving the remainder of the defaulted debt to high inflation to distortions in the energy and public transport sectors, to fiscal spending rigidities and to issues regarding quality of the official economic statistics. But arguably, the main challenge for investor sentiment towards Argentina has been in economic management, not the country’s fundamentals. Given Argentina’s relatively healthy macro fundamentals, a move away from economic populism could yield impressive results.
Argentina appears to be at a crossroads. With a supportive external environment and given relatively strong fundamentals, the next administration could have an outsized importance in determining Argentina’s longer-term economic development. A turn away from policy heterodoxy and towards market-friendly policy management could be the boost Argentina needs to secure an improved medium-term economic outlook and further bolster investor sentiment. And however difficult it may be to handicap the likelihood of a policy shift – and we expect to see numerous twists and turns in the months ahead – Argentina watchers should not lose sight of the relatively healthy macro starting point for the economy and for possibly a new set of policy-makers.
Source: Daniel Volberg of Morgan Stanley, January 19, 2011.
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