A farm and manufacturing boom are fueling a projected 8% growth in Argentina. But some are warning of a fall unless the government slashes subsidies and reins in inflation. One observer says the economy is 'running on steroids.'
In Argentina, soybean production is flying high. That
means another banner year for farm equipment salesman Carlos Meniavere.
His company, Apache, expects sales of its planters and
harvesters to increase 20% this year over 2010. Local demand for his machines,
costing $75,000 and up, has risen sharply. So have foreign sales. Apache's
relatively low manufacturing costs have led to deals with buyers in Brazil,
Venezuela, Russia and other markets.
"We're going to sell 400 units this year and export
to 10 countries. It's a good year in every sense of the word," said
Meniavere, whose company is based in Las Parejas, about 250 miles west of the
capital in Argentina's farm belt.
Times are good in much of Argentina, where farm and
manufacturing booms have set the economy on fire the last two years. Incomes
are rising. Poverty is in decline. Argentines are buying cars and taking
foreign vacations.
The United Nations forecasts the country's economy will
grow 8% this year, well above the 2.5% expansion some predict this year for the
U.S. That's on top of Argentina's 9% growth in 2010. The biggest driver is
exports, which are expected to reach $80 billion this year. That's triple what
they were in 2002, when the country was mired in a financial crisis.
But major challenges loom. Analysts and industry leaders
warn the country's fortunes could decline unless President Cristina Fernandez
de Kirchner sharply reduces consumer subsidies and reins in galloping inflation
that could reach 25% this year.
Rising concerns about a devaluation of the peso have
caused a resurgence of the capital flight that hastened the country's economic
crisis in 2001. Economist Gustavo Canonero of Deutsche Bank in Buenos Aires
said $10 billion left the country in the first half of 2011 as Argentines
changed pesos for dollars. He is concerned that flight could accelerate over
the remainder of the year.
At the same time, the competitive advantages that
Argentine companies such as Apache have enjoyed over the last decade are
evaporating because of rising labor costs.
"No one questions that the economy is running well,
but it's running on steroids," said Alberto Ramos of Goldman Sachs, who
added that the high cost of subsidies and welfare programs are beginning to
tell. "It may be like the sprinter who runs fine for 60 yards and then
tires."
Salesman Meniavere showcased his company's equipment last
month at La Rural, an annual agricultural fair in the capital. Several of his
company's bright-red farm machines were displayed among the Angus bulls, prize
hens and quarter horses. The atmosphere was upbeat, with a number of exhibitors
saying times are good.
Indeed, Argentina — a country known for gauchos, red wine
and the tango — is living a golden moment. Construction is on a roll. So is
auto manufacturing. Auto plants are projected to turn out 900,000 cars and
trucks this year, 26% more than 2010, on top of 29% unit growth last year.
"It's a very encouraging prospect," said
Osvaldo Kacef, a United Nations economist in Santiago, Chile. He noted that
Argentina's projected economic growth for this year is far above the 4.7%
expansion he expects for the Latin American and Caribbean region as a whole.
It's all a remarkable turnaround from the 2001-02
economic crisis, when Argentina defaulted on $130 billion in bonds, sharply
devalued its currency and suffered through an economic contraction that cost
tens of thousands of jobs. Weeks of civil unrest turned the capital into a war
zone.
Then along came the global spike in commodities prices,
fed principally by growing demand from Asia. Argentina's annual soy harvest has
risen 67% over the last decade. This year, farmers will reap an anticipated 50
million tons. That's creating a bonanza for producers as well as for the
government, which taxes it heavily.
Soy exports last year rose to $17.1 billion, nearly
quadruple the $4.6 billion in foreign shipments in 2001, according to
government statistics. The commodity accounted for one-quarter of Argentina's
total exports of $68.5 billion last year.
But there was another important factor in Argentina's
recovery: the competitiveness of the country's manufacturers.
The 2002 devaluation of the peso cut minimum wages by
two-thirds, left half the nation's manufacturing capacity idle and put legions
of skilled workers on the streets desperate for work. When factories got
rolling again, production costs of steel, appliances, plastic tubing and autos
were considerably lower than those of most other countries in the region, said
Dante Sica, director of Abeceb.com, an economic consulting firm in Buenos
Aires.
"As a result, every Argentine manufacturing sector
has shown solid gains since 2001," Sica said, adding that more than 3
million jobs have been created over the last decade, twice as many as in the
previous decade. "All the government had to do was create incentives for
[consumer] demand."
But Abel Viglione, senior economist at the FIEL economics
think tank in Buenos Aires, said Kirchner's government has overdone the
incentives. Subsidies for a broad range of goods and services — including
gasoline, electricity and bread — will total about $15 billion this year.
"Electricity rates have not changed since 2001,
while the cost of producing it has risen 150%. Gasoline costs about 70% of the
market rates in other countries. The government pays the difference,"
Viglione said.
Price controls limit the amount that oil companies can
charge for crude, natural gas and refined products. Many of those firms have
reduced their Argentina investment in recent years, seeking better returns
elsewhere. The upshot: oil and gas output and reserves have plummeted, said
Daniel Gerold of G&G Energy Consultants in Buenos Aires.
Argentina now produces about 600,000 barrels of crude a
day, down 28% from the 1998 peak — not because oil resources are running out,
but because the energy business is unprofitable for most companies, Gerold
said.
That's forcing the government to import oil and gas that
Argentina used to produce on its own. Gerold expects Argentina's energy trade
deficit to hit $3 billion this year, compared with a $6-billion surplus as
recently as 2007.
"The good times are an illusion, like a vacation at
Disney World. And Argentina's stay at Disney is about to end," said
Gerold, who predicted that the government will have to soon reduce or eliminate
fuel subsidies.
The subsidies, combined with expanded government welfare
programs, have reduced Argentina's poverty rate to 21% from nearly 40% a decade
ago. The measures have solidified Kirchner's political base as she revs up her
campaign for reelection in October. At this point, most pundits pick her to
win.
But a patchwork of special tariffs and taxes that attempt
to force producers of foodstuffs, energy and household goods to keep domestic
prices low are distorting the economy, several analysts said.
"I'm not debating the subsidies on their merits or
social needs but on their efficiency as mechanisms," said Ramos of Goldman
Sachs. "When electricity or gas in an entire city is subsidized, you're
helping rich homeowners who can afford to pay the full price. Bus riders are
subsidizing the guy who drives a Ferrari."