"El Modelo-K”: A Post Default Success! ! • After 2003 the economy put up exceptional indicators: GDP grew almost 70%! • Formal employment increased more than 30% ! • Reduced reliance on debt funding! • Fiscal restraint! • Increasing tax revenues from the nominal increase in prices! • Devaluation of the peso increased the value of foreign holdings! • Exports drove the recovery!
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1!
"El Modelo-K": After the 2008 Crisis! To address a weakening global economy:! • Increased taxes on soybean exports by 44%! • Increased use of central bank reserves to support the dollar/ peso exchange rate! • Use of central bank reserves to make debt payments! • Increases of the monetary base stoked inflation!
2!
President Kirchner is Appropriately Trying to Transition to a Value-Added Economy! • Exports of Argentina’s vast natural commodity resources supported growth over the past decade, funding economic and social improvements.! • Argentina is a major exporter of raw goods but her imports are primarily value-added finished goods.! • Even with huge-natural gas and energy resources, the country must rely on imported energy.! • Transition from a commodity economy to a value-added economy is necessary for resumption of and sustainable growth.!
Exports Remain Less Value Added! Exports()(Primarily(Natural(Resource(Related( 9%! 21%!
Fuels!&!Energy! Industrial!Goods!(Equipment,!Chemicals,! DerivaDves!&!Other)! 32%!
Industrial!Goods!(Basic!Materials)! Agricultural!Goods! Primary!Products!
31%!
7%!
Source:!Ministry!of!Economy!(MECON)!Ă?!2010!Exports,!USD!billions;!Measured!on!a!CIF!basis!(cost,!insurance,!and!freight! !included)!whereas,!for!Balance!of!Payments!purposes,!measured!on!a!FOB!basis!
Imports – Are Largely Value Added! Imports(are(Diversified,(but(Weighted(Towards(Value)Added(Equipment(and(Goods( OpDcal!Instruments!
2%! 3.0%!
10%!
6%!
TexDles! Common!Metals!
6%!
PlasDc,!Rubber! Mineral!Products! Industrial!Products! 9%!
28%!
Transport!Equipment! Machines,!Instruments!and!Electric!Materials! Other!
15%!
21%!
Source:!Ministry!of!Economy!(MECON)!Ð!2010!Exports,!USD!billions;!Measured!on!a!CIF!basis!! (cost,!insurance,!and!freight!included)!whereas,!for!Balance!of!Payments!purposes,!measured!on!a!FOB!basis!
The Costs of Development Require Investment! • Nationalization of YPF was recognition of the need for massive investments in the development of the energy sector (and necessarily other sectors). ! – Government is correct to criticize the underinvestment and expatriation of profits.! – Lack of policy stability and clear adherence to contracts leads to short-term rather than longer-term FDI.! • Investments are too large to fund without foreign direct investment. !
!
Underinvestment Has Consequences!
Source: EIA, International Energy Statistics!
Investment Requires Policy Stability! • Increased policy interventions are having the opposite affect ! – Capital controls ! – Ongoing use of central bank reserves for dollar funding needs ! – Reductions in support for essential services in the provinces! – Placement of increasing amounts of internal government debt with ANSES and other public sector dependencies !
Trade Concerns! • Criticism from trade partners: “In many cases, the export tax for raw materials is set higher than the sale price of the processed product to encourage development of domestic value-added production” - NOPA, ASA, NAEGA comments to the USTR (September 2011)! – Examples! • Soybeans at 35 percent; soybean oil and soybean meal at 32 percent! • Sunflower seeds at 32 percent; sunflower meal and sunflower oil at 30 percent!
Trading Partner Alienation! • Uruguay: Argentina becoming increasingly protectionist and returning to the imports substitution policies of the 1950s. ! • European Commission, Canada, Colombia, Australia, Japan, Switzerland, Norway, and the United States, raise concerns over Argentina s import limitations! • Global Trade Alert named Argentina the second most protectionist economy ! • From the Chinese government s point of view, the fact that Argentina launches anti-dumping investigations so frequently against one country is totally abnormal and discriminatory ! • the Economic Commission for Latin America and the Caribbean, in recent years Argentina and Brazil have been involved in more trade dispute settlements than any other two neighboring countries. ! • Fiat recently announced that it would be reducing production in both Argentina and Brazil because of these issues. ! 10!
Fiscal Problems Will Increase! • Fiscal position has gone from sustainable surpluses to over a year of deficits and growing inflation. ! • Fiscal balance turned from surplus to deficit in Q2’11! • Without GDP growth and a sub-inflationary growth in fiscal expenses, it will be difficult to avoid fiscal deficits over the next 3 years! • “In summary, the sharp real business cycle slowdown observed during 1H2012 was a reflection of further real ARS appreciation, softening external demand, the negative impact of restrictive FX and import controls on a number of production and distribution chains, and market-unfriendly policy measures that have hurt consumer and business sentiment. That is, the business cycle slowdown drivers were mostly domestic rather than external and mostly due to exogenous policy moves rather than endogenous macro dynamics.” Alberto Ramos, Goldman Sachs - July 27, 2012!
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! Apr\01! Jul\01! Oct\01! Jan\02! Apr\02! Jul\02! Oct\02! Jan\03! Apr\03! Jul\03! Oct\03! Jan\04! Apr\04! Jul\04! Oct\04! Jan\05! Apr\05! Jul\05! Oct\05! Jan\06! Apr\06! Jul\06! Oct\06! Jan\07! Apr\07! Jul\07! Oct\07! Ene\08! Apr\08! Jul\08! oct\08! ene\09! abr\09! jul\09! oct\09! ene\10! abr\10! jul\10! oct\10! ene\11! abr\11! jul\11! oct\11! ene\12! abr\12! jul\12! oct\12!
Consumer Sentiment Reflects Policy Approaches! Consumer(ConďŹ dence(Index((ICC)((
!70.00!!
!60.00!!
!50.00!!
!40.00!!
!30.00!!
!20.00!!
!10.00!!
Universiidad!Torcuato!di!Tella!
Fiscal Position Deteriorating!
Argentina Nominal Fiscal Surplus / (Deficit) - Rolling Twelve Month Period 40.0 35.0 30.0 25.0 20.0 15.0
Peso Billions
10.0 5.0 -(5.0)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Q1'11
Q2'11
(10.0) (15.0) (20.0) (25.0) (30.0) (35.0) (40.0) (45.0)
Source: Ministry of Economy (MECON) for historical figures!
!
Primary Surplus / (Deficit)
Fiscal Surplus / (Deficit)
Q3'11
2011
Q1'12
Q2'12
Despite Strict Capital Controls the Balance of Payments has Turned Negative! Balance of Payments (USD Billions) $20.0 $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 -($2.0)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Q1'11
Q2'11
($4.0) ($6.0) ($8.0) ($10.0) ($12.0) ($14.0) Trade Surplus
Source:!Ministry!of!Economy!(MECON)!for!historical!ďŹ gures!
Current Account Surplus / (Deficit)
Balance of Payments
Q3'11
2011
Q1'12
(Global Slowdown = GDP Falling toward Zero) + " (20%+ Inflation) = Stagflation! Stagflation 28.0% 26.0% 24.0% 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% -Jan-05 (2.0%)
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
(4.0%) EMAE Growth (GDP Proxy)
Source:!Ministry!of!Economy!(MECON),!GlobalSource!Partners! !
Market CPI
Jul-10
Jan-11
Jul-11
Jan-12
0! 19/10/2012! 7/8/12! 24/05/2012! 8/3/12! 22/12/2011! 7/10/11! 28/07/2011! 17/05/2011! 28/02/2011! 16/12/2010! 1/10/10! 22/07/2010! 7/5/10! 23/02/2010! 11/12/09! 29/09/2009! 20/07/2009! 5/5/09! 17/02/2009! 4/12/08! 23/09/2008! 14/07/2008! 30/04/2008! 14/02/2008! 30/11/2007! 19/09/2007! 10/7/07! 25/04/2007! 9/2/07! 28/11/2006! 15/09/2006! 6/7/06! 24/04/2006! 8/2/06! 29/11/2005! 19/09/2005! 8/7/05! 27/04/2005! 14/02/2005! 3/12/04! 23/09/2004! 14/07/2004! 30/04/2004! 17/02/2004! 4/12/03! 23/09/2003! 14/07/2003! 30/04/2003! 14/02/2003!
Monetary Base Expansion + Declining Access to Hard Currencies = Deposit Flight!
300000!
250000!
200000!
150000!
100000!
50000!
Monetary!Base!
Source: BCRA!
Money!Outside!the!Financial!System! InternaDonal!Reserves!Excluding!2009!SDRs!allocaDon!
Risking the Model: Pesification, Devaluation – A 1994 Move toward 1989? ! • Recent actions risk greater reliance on increasing internal debt.! • Recent Central Bank regulation: issuers that sold dollar bonds on the local market won't be allowed to buy the U.S. currency unless those bonds were specifically sold to finance infrastructure projects.! • Reduces risk appetite for local and corporate debt issuances, crowding out.! • ANSES and other public agencies will be pushed to increasingly increase holdings of government debt but risks posed by devaluation and fiscal stress rises.! • Currency controls make it impossible for provinces and corporations to sell new local law dollar bonds.! – Chaco! – Buenos Aires City! – Formosa! – Tucuman!
Lessons from 1989! “The consequent increase in internal interest bearing debt further deteriorates the fiscal situation of the government adding inflationary pressure especially in the context of indexed government debt. The higher the inflation rate, it is argued, the lower will be real cash balances and tax receipts. Once the (operational) fiscal deficit as a percentage of GDP becomes greater than the maximum attainable with the inflation tax, the government will have to continuously accelerate the rate of money growth and thus push the economy into a hyperinflation.” – John Walsh US Federal Reserve (1991)!
1989! • High proportion of internal rather than external debt ! • July ! – Devalued the currency by 54%! – Increased public services rates 200% ! – Imposed wage controls and price guidelines! • December! – Another 34.5% currency devaluation ! – Two-year postponement of payments on their state-issued debts ! – 60% increase in public service fees and gas prices ! – Mandatory exchange of certificates of deposit over $1000 for 10year USD bonds (Bonex 89)!
Steps Necessary to Attract Much Needed FDI! • Finish the work started with the IMF to create a new national CPI and take the INDEC issue off the table (a basket of provincial CPI?).! • Smooth relations with IFIs and thus facilitate a favorable rescheduling of the Paris Club debt. ! • Paying the final ICSID awards would eliminate a major irritant in Argentina’s relationship with the World Bank. ! • Exploring settlements with Spain and others.!
November 2011 Presentation !! • Demonstrated Argentina could save U$S 28 billion between 2012 and 2020 if it reengaged with international capital markets and, thus, lowered the country’s risk premium. ! • Warned the economy was in danger of a significant decline within six months if it did not begin to quickly attract the capital it needed.! • The slowdown is here, and Argentina has room to avoid another 1989 crisis but time is short. ! • More debt (either internal or external) is not the answer.! • Foreign direct investment is THE answer.!
"El Modelo-K": Proving the Model! A year ago I demonstrated the results would be:! • An increase in investor confidence and reduction in dollar flight;! • Increasing Foreign Direct Investment from the current 1.1% toward the peer group average of 2.9%;! • Recognition that per-capita GDP numbers that are more than twice those of its more highly rated peers;! • Central Bank Reserves that, even though declining, remain high relative to its peers;! • International recognition of Argentina s low debt relative to borrowing capacity. Total debt to GDP is currently 37% and interest on those debts amounts to only 2% of GDP. Nearly half of the public debt held by public sector agencies and foreign currency debt represents only about 55% of the total. ! • Today, the fiscal and economic reality are a closing window. ! 22!
A History of Default !! • Argentina’s history of default has not all been about too much external debt.! – The history of default represents the mismanagement of excessive amounts of internal and external debt! • The Kirchner government has recognized this and done an excellent job of reducing government debt! – Unfortunately, deficit funding will be increasingly difficult and put the country back on a 1989 path.!
History Must Change – It is a “both and” rather than an “either or” world.! “Decision makers in Argentina have quite consistently attempted to adopt policy positions that seemed designed to tear society apart rather than to forge new coalitions. . . . Major policy disagreements in modern Argentine history have their main roots in the conflict between two divergent streams of thought: liberalism of the British Manchester School variety and what can be called national populism! . . . . In general, the liberals have stood for the virtues of a society open to international opportunities and influences, whereas, the national populists have emphasized indigenous, autonomous development. – Mallon & Sourouille (1975) !