Argentina: The Wrong Sense of Déjà vu

President Cristina Fernandez de Kirchner’s disastrous policies left many pundits wondering if Argentina was on the verge of default. They highlight the country’s stock of public sector debt, which is at similar levels to those that were recorded on the eve of the moratorium. Using real exchange calculations, the Argentine peso is 19% more expensive now than it was at the end of 2001. Moreover, government expenditures are currently higher than on the eve of the default. All of this leads local pundits and international analysts to conclude that the country is on the verge of another collapse.

However, this picture is far from complete. A look at a broader range of economic variables shows that the Argentine economy is much healthier than during the dark days of 2001. Moreover, the concentration of political power in the hands of the Chief Executive increases the commitment of the government to honor its external obligations.

To begin with, the Argentine economy is an exporting powerhouse—despite the real appreciation of the currency. Manufactured exports are more than twice the level of seven years ago. The economy is also a major provider of services, thanks to the revitalization of the tourist sector in the aftermath of the maxi-devaluation. This allows the country to boast a current account surplus of more than 2% of GDP in 2008, versus a deficit of 1.5% of GDP in 2001. This is the reason why Argentina’s reserves are more than three times higher than they were on the eve of the default—which puts it in a comfortable situation to meet its external obligations with its own resources. Moreover, with more than half of its debt in local currency and a floating exchange rate regime, the government enjoys a great degree of flexibility. Last of all, the government has an enormous commitment to meet its external obligations. The Kirchners central political message is that their leadership was the defining factor why Argentina emerged from the chaos of the default. Therefore, a return to a default environment would implicate the end of their term in office—something that they will avoid at all cost. Given that their message is designed for the country’s lowest income strata, which is also the largest part of the electorate, it is no surprise that it is misunderstood by Wall Street and the investor community.

The vast concentration of political power within the executive branch is one of the main problems facing Latin America, particularly in countries like Argentina and Venezuela. The gradual demise of the political party system across much of the region, allowed more power to be concentrated in the hands of the Chief Executive. Instead of political parties devising schemes to remain in power through the electoral process, presidents devised strategies to remain in office through constitutional reforms and the election of their spouses. Moreover, many of the privatizations unwittingly removed some of the economic checks and balances against the political body. In many countries, such as Chile, Mexico and Brazil, local economic groups are counterweights to the executive. Interestingly, in these countries, local investors were given preference during the privatization process. However, in some of the other countries, such as Argentina and Venezuela, the privatization process implicitly (or explicitly) gave preferential treatment to foreigners, in order to attract higher prices, capital inflows and better technology. However, foreign operators tend to be more timid in their approach, eschewing the political process. They are afraid that they will lose their concessions or operating licenses, a threat that has been exercised in both countries. The private sector in Brazil, Chile and Mexico would never allow their governments to act with the impunity seen in Argentina and Venezuela because they control part of the political machinery. At the same time, the embodiment of the economic and political institutions within the framework of the Chief Executive suggests that the leader will do all they can to maintain their reputations. Default is a sign of weakness and an inability to honor one’s commitments. Such a sign of weakness would be unfathomable by strong leaders, such as Kirchner and Chavez, especially when they have the resources to meet their obligations. President De la Rua was the picture of weakness in 2001, the Kirchners are not. That is why the sense of déjà vu is clearly the wrong perception of what is happening right now.