Buenos Aires nightclub owner Juan Fabbri recalls all too well the dark days earlier this decade when Argentina’s debt default and subsequent depression forced him to seriously consider moving his business abroad — to Las Vegas, Shanghai or Moscow. Every evening after shutting down the Esquina Carlos Gardel, the capital’s leading tango club, Fabbri and his staff would hand out leftover food to scores of poverty-stricken neighborhood residents lined up at the club’s exit. “I couldn’t bear to see them rummage through the garbage bins,” he recalls.
Today, he’s glad he decided to hang tight. The country’s economy has roared back to life, with growth averaging nearly 9 percent a year for the past five years, thanks to the government’s 2002 devaluation and surging global prices for Argentina’s agricultural exports. Every night some 500 customers cram into Fabbri’s club to savor prime Argentinean beef and watch tango dancers and singers perform. “Now there isn’t anywhere I could make more money than in Buenos Aires,” he declares.
The country’s newfound prosperity has unleashed a powerful consumer boom. Across Anchorena Street from the nightclub, the Abasto, a four-story mall that occupies the art deco premises of the city’s former wholesale produce market, bustles with shoppers snapping up the latest fashions from Christian Dior and Zara, as well as local outlets, such as Ayres women’s apparel and Cheeky kids’ clothing; many of them are using bank debit and credit cards for the first time. Private sector credit, which fell from 23 percent of GDP in 2000 to a low of 7.6 percent in 2004, rebounded to 12.5 percent of GDP last year. Mortgage lending was up a stunning 150 percent in the first nine months of 2007 from a year earlier; new car sales, which tanked to just 90,000 in 2002, hit a record of 570,000 last year.
“The economic prospects of this country are, in my opinion, spectacular — the best in decades,” gushes Enrique Cristofani, chief executive officer of Banco Santander Río, the local subsidiary of Spain’s Grupo Santander.
But there are clouds on the economic horizon, and Argentina’s history of boom and bust cautions against such unrestrained ebullience. After all, it was Carlos Gardel, the famed tango crooner and namesake of the nightclub, who sang songs warning that life is like a pendulum that swings between good times and bad.
President Cristina Fernández, 55, who took office in December after winning a 45 percent plurality in October’s presidential election, has inherited some worrisome economic problems from her husband and predecessor, Néstor Kirchner. By many estimates, inflation last year reached more than twice the official rate of 8.5 percent. Government price controls on fuel and electricity have discouraged investment by energy companies and led to power shortages that could curtail the expansion. Argentina’s default on its $110 billion foreign debt in 2001 continues to deter capital inflows; the government hasn’t come to terms with either the Paris Club of creditor governments, which are owed $6.3 billion, or with private sector creditors who refused repayment offers of about 35 cents on the dollar on nearly $25 billion in bonds. With debt-service payments mounting, Argentina is increasingly vulnerable to the global credit crunch.
Meanwhile, friction is mounting between Fernández’s Peronist government with its populist policies and the nation’s financiers. Private sector banks have increased lending at an average annual rate of more than 40 percent for the past three years. But with bank profits up sharply — reaching a cumulative 10.03 billion pesos ($3.3 billion) for the three years from 2005 through 2007, compared with losses of 25.32 billion pesos in the period from 2002 through 2004 — the government is pressing the industry to make even more credit available to small and medium-size businesses. “We expect the banks to lend money to those who need it to produce goods, not only consume them,” Fernández’s cabinet chief, Alberto Fernández (no relation), asserted in a January radio interview.
The recent revival of a lawsuit against the major banks has raised suspicion that the government might use the judicial system, which rarely displays independence from the president, to put pressure on the banks. The suit, brought in 2002 by depositors against Grupo Financiero Galicia, Santander Río, Banco Sudameris Argentina and the local subsidiaries of Citigroup and BankBoston (now part of Standard Bank of South Africa), alleges that the banks defrauded depositors through “fraudulent management” and by engaging in a conspiracy with the Argentinean government to prevent depositors from emptying out their accounts in December 2001, when the government placed strict limits on bank withdrawals. The measure, known as the corralito, led to massive losses of savings after a January 2002 devaluation caused the peso to lose three quarters of its value against the dollar. Last year a federal judge declared that the banks had not conspired to defraud depositors, but in January another judge ordered the interrogation of a dozen top managers. The banks all decline to comment on the case.
To nobody’s surprise, President Fernández, who has worked in tandem with her husband for decades, has followed Kirchner in both style and substance. Both favor wealth redistribution and generous social spending and use rhetoric championing the working class and small enterprises while badgering big business and farmers. “They share responsibility for the current political and economic policies, so there is no reason to expect any substantial changes,” says Graciela Römer, a pollster and political analyst.
The new president reappointed seven of her husband’s 12 cabinet ministers and retained other key officials, such as the controversial secretary of Internal Commerce, Guillermo Moreno — dubbed “Guillermo el Terrible” by businessmen and bankers for his constant bullying of companies over prices. True to form, Moreno forced Shell Argentina, the local arm of Royal Dutch/Shell, to cut gasoline prices by 11.6 to 14.9 percent in January, as the subsidiaries of Spain’s Repsol YPF, Brazil’s Petrobras and Exxon Mobil Corp. of the U.S. had already done. Shell ended its holdout after the government threatened to put a lien on one of its refineries.
But even opponents of the Peronist government believe that economic and political difficulties are unlikely to derail the country’s revival. In Buenos Aires, where a majority voted against Fernández, a December poll by the Universidad de Belgrano showed that 82 percent of the capital’s residents think the economy will be at least as good in 2008 as it was last year. (Most nongovernment economists predict that GDP growth in 2008 won’t exceed 6.5 percent, compared with 8.7 percent in 2007. The International Monetary Fund forecasts growth of 5.5 percent.) Almost two thirds of business owners polled in December by the Universidad Austral, another Buenos Aires academic institution, said they intended to invest in major expansions in 2008.
“Economic problems are manageable — they don’t require drastic solutions,” says Roberto Lavagna, a former Economy minister who was fired by Kirchner in 2005 and ran for president against Fernández in 2007, placing a distant third with 17 percent of the vote.
The optimism of Lavagna and others lies in the source of Argentina’s dramatic recovery: namely, the bounty it is receiving from global commodity prices. A country almost the size of India but with only 40 million inhabitants, Argentina has extensive, fertile farmland. Food exports surged 19.8 percent, to a record $30.7 billion, last year and were up 128 percent from 2002, reflecting the enormous demand from China for soy, wheat and corn. The strength of those exports should minimize the risks to Argentina from the global credit crisis, notwithstanding the country’s big debt.
“The country has two important things going for it today that didn’t exist in the crisis seven years ago,” says Claudio Loser, former head of the Western Hemisphere department at the International Monetary Fund and now senior fellow at the Inter-American Dialogue, a Washington think tank. “The peso-to-dollar exchange rate is much more reasonable, and export revenue is way up, thanks to high commodity prices.”
By imposing steep taxes, the government kept 80 percent of the $11.6 billion in income from soybean exports last year. That windfall enabled it to boost public spending by 47 percent in 2007 and still record a budget surplus of 3.2 percent of GDP. The government has increased spending by 50 percent a year for the past four years, providing big raises in public sector wages, social security, subsidies for public transportation and infrastructure investments.
Such traditional Peronist largesse helped shrink unemployment to 7.5 percent at the end of last year, from a peak of 20.5 percent in 2002, and reduced the poverty rate to 27 percent, from more than 50 percent, over the same period.
But heavy spending is fanning inflation. Lavagna contends that Fernández’s government needs to curtail subsidies for public services to keep inflation below 9 percent, which he regards as the maximum rate consistent with healthy economic growth. “Even if there isn’t a short-term deterioration of the economy, Cristina’s honeymoon will be very brief unless she deals decisively with inflation,” says Loser. Already, labor leaders are agitating for automatic income adjustments every six months to reflect rising prices. And inflation is forcing the government to pay higher interest rates on its inflation-indexed bonds.
Reining in spending would represent a sharp break in policy from the Kirchner government, however, and Fernández has given no indication that she is prepared to take such a step. “Today’s Peronism bears little resemblance to the original movement six decades ago, except in one respect — when there is wealth to distribute, it does so,” says Tomás Eloy Martínez, an author of bestsellers on the movement’s founder, Juan Domingo Perón, and his wife, Evita.
Perón, an army general who was elected president in 1946, used revenues from the country’s grain and beef exports to boost social welfare spending and fostered a muscular labor movement that squeezed higher salaries and job guarantees from employers. A combination of lower commodity prices, rising domestic inflation and lagging private investment plunged Argentina into recession, however. Evita, who had hoped to succeed her husband as president, died of cancer in 1952; Perón was overthrown by a military coup three years later. He returned from exile to serve as president in 1973 but died from a pulmonary embolism the following year. Military regimes seized power for long periods between the 1950s and 1980s by promising to clean up the economic and political mess left behind by Peronist governments, only to mire the country in corruption and stagnation and embark on a so-called dirty war against leftist opponents.
After democracy was restored, the Peronist government of president Carlos Menem ran up huge foreign debts in the 1990s and fixed the peso to the dollar, a policy combination that would prove disastrous, but the economic collapse took place under his successor, Fernando de la Rúa, leader of the centrist Radical party. Argentina’s economic output contracted for four straight years, culminating in an unprecedented 10.9 percent decline in 2001.
That debacle brought Kirchner to the presidency in 2003 with only 22 percent of the vote. Ignoring the advice of orthodox economists in Argentina, on Wall Street and at the World Bank and the IMF, he imposed price controls, paid back only a fraction of the country’s foreign debt, jacked up public spending and encouraged a consumer boom. “Most Argentineans believe he led the nation out of hell,” says pollster Römer.
The Kirchners have long been a political dynamic duo. They met in the 1970s while studying law at the Universidad Nacional de La Plata, the city 35 miles southeast of Buenos Aires where Cristina was born. After marrying, they moved to Néstor’s hometown, Río Gallegos, 1,650 miles south of the capital in Santa Cruz, a frigid Patagonian province best known for its vast sheep ranches, natural-gas deposits and penguin colonies. Néstor became governor of Santa Cruz in 1991, while Cristina served as a provincial legislator.
After Néstor squeaked into the presidency, Cristina crisscrossed Argentina as an impassioned advocate of his populist policies. She was elected senator for the province of Buenos Aires in 2005 and gained a reputation as a political strategist. The cabinet merely ratified decisions made by the pingüinos, or penguins, the nickname for the Kirchners and their coterie of Santa Cruz advisers.
Under President Fernández, the pingüinos, including Kirchner himself, have continued to be more influential than the new cabinet in setting government policies. The most notable new appointment is Economy Minister Martín Lousteau, 37, former president of state-owned Banco de la Provincia de Buenos Aires, the country’s second-largest bank by assets after state-owned Banco de la Nación. Though praised by the banking and business community, Lousteau is regarded as a junior voice on economic matters. “Néstor Kirchner has been the real minister of Economy over the past couple of years and seems ready to continue that role,” says Miguel Angel Broda, an economist who heads Estudio Broda y Asociados, a Buenos Aires–based economic forecasting firm.
Still, mounting economic pressures may lead to some noticeable policy shifts. The well-advertised presence at Fernández’s inauguration of Dominique Strauss-Kahn, managing director of the IMF, raised hopes that the new government would make a priority of reaching a settlement with Paris Club creditors. “Despite running a large primary surplus in its fiscal accounts, Argentina will have very significant borrowing requirements over the next few years, so it has to come to terms with its foreign creditors,” says the Inter-American Dialogue’s Loser.
Until now the gap in foreign financing has been largely covered by the Venezuelan government, which has bought some $5 billion in Argentinean government bonds over the past three years. But Argentina’s borrowing requirements will rise from last year’s $4.5 billion to about $7 billion in 2008 and close to $10 billion in 2009. “Argentina has a larger debt today than at the time of the 2001 crisis,” says Pablo Guidotti, a University of Chicago–trained economist at Universidad Torcuato Di Tella in Buenos Aires. He co-authored a study that calculated Argentina’s public debt at $162.8 billion, or 76.5 percent of GDP, at the end of 2006. In 2001, before the peso’s devaluation, the debt stood at $144.5 billion, then equivalent to 53.8 percent of GDP.
Coming to terms with its creditors abroad will be crucial to attracting foreign direct investment, which in 2006 reached only $4.9 billion, or a mere 2.3 percent of GDP. That compares with $8.3 billion, or 5.7 percent of GDP, in neighboring Chile the same year. Besides opening the spigot for investment, agreements with foreign creditors will be needed for imports of capital equipment that could help ease the energy bottleneck.
The government’s efforts to control domestic oil, gas and fuel prices, either through so-called voluntary industry agreements or open threats, have crimped investment for exploration and production. “The country most likely will become a net importer of crude oil before 2010,” warns Luciano Gremone, a Buenos Aires–based credit analyst who covers the energy sector for Standard & Poor’s. Oil production fell 14 percent from 768,000 barrels a day in 2001 to 658,000 in 2006, the last year for which figures are available.
One sure sign of the industry’s discouragement came in December when Repsol YPF announced a deal to sell 14.9 percent of YPF — which has holdings in both Argentina and Bolivia — for $2.35 billion to Petersen Group, an investment firm controlled by Enrique Eskenazi, a Buenos Aires businessman with close ties to the government. Eskenazi’s firm has an option to purchase an additional 10.1 percent within four years. The deal values YPF at a mere $15.7 billion — the price paid by Repsol for the company in 1999, when oil was about $16 a barrel.
The energy sector could receive a big boost if electricity tariffs are allowed to rise in the first half of this year, when new pricing agreements are supposed to be negotiated between the government and electricity distributors. Edenor, the country’s largest distributor, predicts that electricity demand will increase 5.5 percent annually over the next decade. But mainly because of price controls, the company suffered a net loss of $14.2 million in the third quarter of last year on revenues of $138.8 million.
Controls and jawboning haven’t kept prices of other basic goods and services from rising, despite government claims to the contrary. According to the Instituto Nacional de Estadística y Censos, the state agency that compiles key economic indicators, inflation last year reached 8.5 percent. That figure is derided by private sector economists and some of Indec’s own researchers, who put real inflation at closer to 20 percent.
Cynthia Pok, then director of the household expenses division, says her bosses began ignoring her monthly reports on food price hikes at the beginning of 2007. In January last year, when lettuce doubled in price, it was dropped from Indec’s consumer price index. Tomatoes also disappeared from the index after their price shot up a few months later. When Pok and a dozen members of her team signed a memorandum in protest, they were transferred to other jobs or fired. Pok found out she had lost her director’s post by reading about it in the newspapers on July 9, two days after the fateful memorandum.
“I remember the date perfectly because it snowed that day in Buenos Aires — something that hadn’t happened in more than 30 years,” says Pok, who remains on the agency’s payroll.
Beef is the one staple whose price and quality the government has been able to maintain by limiting exports to 2004 levels, thus creating a domestic surplus. “The government has allowed Brazil to become the world’s leading beef exporter by gaining market shares abroad that used to be ours,” complains Javier Martínez del Valle, managing director of the Argentinean Chamber of Beef Exporters. Beef consumption has risen by ten kilograms (22 pounds) per capita, to 70 kilos annually, compared with 30 kilos in the U.S.
At La Raya, often rated the best beef restaurant in Buenos Aires, tables brim with a dozen different types of meat cuts and entrails. “Restaurants are the thermometer of Argentina’s economy,” says owner Claudio Codina. “When times are tough, the first thing to get cut from the family budget is the weekend dinner out.” For the past three years, La Raya has been packing in more clients than ever. About one third of his patrons are foreigners, including many Americans who find Argentina to be one of the few places in the world where the dollar still goes a long way.
The government has intervened over the past two years to keep the dollar exchange rate between 3.00 and 3.20 pesos to maintain the competitiveness of Argentinean manufactured goods. Exports of cars, auto parts, farm machinery and clothing accounted for 31 percent of last year’s record $55.3 billion in exports.
The stable peso-dollar rate has also been a boon to banks by encouraging Argentinians to hold their savings in pesos rather than move them offshore into dollar accounts. Bank deposits have doubled from 100 billion pesos (then worth $26 billion) at the peak of the crisis in 2002 to 200 billion pesos ($63 billion) in November, helping to fuel a surge in lending. Banks generally pay rates of 12 to 15 percent, well below the 20 percent estimate that many economists put on the country’s inflation rate.
Bank profits have surged in line with lending. Banco Macro, which has built the country’s largest branch network by buying 11 regional banks in the past dozen years, led private sector banks, with net income of 495.2 million pesos in 2007, up 17 percent over 2006; assets rose 36.4 percent, to 19.8 billion pesos. BBVA Banco Francés, a subsidiary of Spain’s Grupo BBVA that is the fourth-largest private bank by assets, boosted its net income by 30.7 percent over 2006, to 235 million pesos, on a 16.7 percent rise in assets, to 19.5 billion pesos. Banco Galicia, the largest private bank, posted a 244 percent increase in net income, to 177.3 million pesos, even as assets declined by 6.4 percent, to 22.53 billion pesos. Banco Santander, the third-largest private bank, saw its net income in 2007 rise 15.7 percent, to 265.9 million pesos; assets increased 21.2 percent, to 19.55 billion pesos.
But muddying this upbeat scenario is the looming conflict between the government and banks over easier credit terms for small and medium-size businesses. Some bankers insist there is little demand for such loans because so many entrepreneurs can tap the nearly $100 billion that Argentineans are estimated to hold in offshore accounts. A case in point is nightclub owner Fabbri. “I used to send my money overseas, but now I’m bringing it back to invest here,” he says. Fabbri and his partners spent $6 million to open another tango palace this month, one that is closer to downtown Buenos Aires with capacity for up to 1,400 patrons — nearly three times that of Esquina Carlos Gardel. And they did it without bank financing.
But business owners who don’t have dollar accounts abroad complain they are unable to get affordable financing. Under pressure from the government late last year, banks agreed publicly to offer some loans at annual interest rates as low as 9 percent for individuals and 12 percent for businesses, compared with usual rates of 22 to 29 percent for bank loans of 18 months to four years. “Sure, the banks advertise them, but whenever I apply for those loans, I’m told they aren’t available,” says Dr. Luis Cordoba, owner of Instituto Blanquerna, a clinic for mentally incapacitated children on the outskirts of Buenos Aires that he has sought to further renovate and expand.
The banks concede that in practice they make few of the low-interest business loans demanded by the government. “It’s like the conquistadores used to say to the Spanish king: ‘Acato, pero no cumplo’ [‘I obey, but I don’t comply’],” quips one bank executive.
Such bravado could melt away, though, if President Fernández decides to get tougher. Argentina may be booming, but bankers there have plenty of reasons to remain vigilant.
