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Argentine economy raises doubts for investors
International Herald Tribune
August 15, 2008

By Associated Press

BUENOS AIRES, Argentina: Investors are losing confidence in Argentina amid concern that a cocktail of slowing growth, soaring prices and steep public spending could shave budget surpluses and keep the government from servicing its debt.

With memories of the country's US$95 billion default in 2001 the largest in history fresh in their minds, two top ratings agencies issued harsher assessments of Argentine risk this week: Moody's lowered its outlook from "positive" to "stable," while Standard and Poor's cut its country rating to B, five levels below investment grade.

President Cristina Fernandez dismissed those moves as proof the international financial establishment wants "to convince us that we have problems."

"A country shouldn't have to kneel" for loans, she said in a midweek speech.

But stung by a four-month standoff with Argentina's powerful farm sector over new export-taxes ultimately defeated in the Senate and repealed in July Fernandez may no longer have the political capital needed to adjust fiscal policy and restore investor confidence.

Increased political tensions may make it harder for her to cut spending, balance the budget and service an estimated US$140 billion in debt, Moody's said Thursday.

"We're looking for signals that the government understands it has problems, which are important problems, but not life threatening," said Gabriel Torres, a senior analyst for Moody's Investor Services in New York.

At the top of the problem-list is galloping annual inflation, which was officially reported at 9.1 percent in July but is widely estimated by independent economists to be closer to 25 percent. The discrepancy has driven foreign investors away from the 40 percent of Argentine debt that is held in inflation-indexed peso bonds, leaving Argentine pensioners holding the bag as their assets shrink in real terms and the government avoids paying the difference, Torres said.

"It's the equivalent of the government of the U.S. coming in and taking a chunk of your 401K," Torres said.

Members of Fernandez's own Peronist party are pressuring her to overhaul the national statistics institute, and rumors are swelling that the agency's chief, Guillermo Moreno, could soon resign.

Public spending meanwhile continues to climb, funneling cash out for subsidies, infrastructure projects and a 27 percent hike in minimum wage, even as a slowing economy brings in decreased tax revenue.

Fernandez's government did cut electricity subsidies in July suggesting an early attempt to curb spending and draw investors back to Argentina, where they might boost supply and competition, ultimately driving down prices.

But government revenue will likely fall further with commodity prices, which have already begun to decline. Exports have increased in 2008, but in dollar terms rather than volume illustrating the farming nation's reliance on exports like soybeans, corn, wheat and beef, which hit high prices earlier this year. Argentina is one of the world's top four exporters of each.

The country's powerhouse farming sector is meanwhile limping along after its heated tax dispute with the government, which caused weeks of farm strikes and scattered food shortages, raising the specter of economic crisis. Central bank reserves fell more than US$2 billion during that time as exports stalled.

Still, while ratings agencies see "great risk" in Argentina Moody's rates Argentina's benchmark foreign- and local-currency government bonds at B3, six levels below investment grade talk of default may be premature.

The government still had US$47.7 billion in reserves in central bank coffers as of Aug. 1 and could raise new cash from local investors, including Argentina's social security system, local insurance companies, public banks and several state governments that have money on hand, said Santiago Mosquera, Latin America economist for Global Insight in Quito, Ecuador.

Argentina could also turn again to its ally Venezuela, which has bought more than US$5 billion in dollar-denominated Argentine debt in recent years including about US$1 billion more last week, Mosquera said.

While most experts agree another default is extremely unlikely, the memory of the 2001 meltdown may also serve to obscure the urgency of fiscal reform.

"We are accustomed to this, that's the biggest problem," said Diego Giacomini, a senior economist at the Economia y Regiones consultancy in Buenos Aires.