1

• 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

       

"El Modelo-K”: A Post Default Success

2

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 •  Increased the monetary base & stoked inflation

"El Modelo-K": After the Drought & Global Financial Crisis

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 & social improvements.

•  Easy growth of emerging, commodity export economy, are behind us & can’t support the past pace of economic growth.

•  Argentina is a major exporter of raw goods but her imports are primarily value-added finished goods.

•  Today, even with huge-natural gas & energy resources, the country must rely on imported energy.

•  Transition from a commodity economy to a value-added economy is necessary for resumption of & sustainable growth.

Exports Remain Less Value Added

9%  

32%  

7%  

31%  

21%  

Exports  -­‐  Primarily  Natural  Resource  Related  

Fuels  &  Energy  

Industrial  Goods  (Equipment,  Chemicals,  DerivaDves  &  Other)  

Industrial  Goods  (Basic  Materials)  

Agricultural  Goods  

Primary  Products  

Source:  Ministry  of  Economy  (MECON)  Ð  2010  Exports,  USD  billions;  Measured  on  a  CIF  basis  (cost,  insurance,  &  freight    included)  whereas,  for  Balance  of  Payments  purposes,  measured  on  a  FOB  basis  

Imports – Are Largely Value Added

2%   3.0%  6%  

6%  

9%  

15%  

21%  

28%  

10%  

Imports  are  Diversified,  but  Weighted  Towards  Value-­‐Added  Equipment  &  Goods  

OpDcal  Instruments  

TexDles  

Common  Metals  

PlasDc,  Rubber  

Mineral  Products  

Industrial  Products  

Transport  Equipment  

Machines,  Instruments  and  Electric  Materials  

Other  

Source:  Ministry  of  Economy  (MECON)  Ð  2010  Exports,  USD  billions;  Measured  on  a  CIF  basis    (cost,  insurance,  &  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 (& other sectors). –  Government is correct to criticize the underinvestment &

expatriation of profits. –  Repsol is also correct, a lack of policy stability & historic failures to

adhere to contracts makes Argentina unattractive for real investment.

–  Net result, this leads to short-term rather than longer-term foreign direct investment (FDI) & expatriation of profits rather than further investment.

•  Necessary investments for transition of the economy to a value-added export economy are too large to fund without foreign direct investment.

•  FDI increases supply of dollars & reduces economy’s reliance on potentially excessive consumption.

Underinvestment Has Consequences (Argentina is a Importer of Value-added Energy

Source: EIA, International Energy Statistics

Investment Requires Policy Stability

•  Policy interventions are having the opposite affect –  Capital controls. –  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 & other public sector dependencies. –  New regulations on local dollar law bonds.

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) (dumping) –  Examples

•  Soybeans at 35 percent; soybean oil & soybean meal at 32 percent

•  Sunflower seeds at 32 percent; sunflower meal & sunflower oil at 30 percent

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•  Uruguay: Argentina “becoming increasingly protectionist & returning to the imports substitution policies of the 1950s.”

•  European Commission, Canada, Colombia, Australia, Japan, Switzerl&, Norway, & 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 & discriminatory”

•  the Economic Commission for Latin America & the Caribbean, “in recent years Argentina & 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 & Brazil because of these issues.

Trading Partner Alienation

Fiscal Problems Will Increase

•  Fiscal position has gone from sustainable surpluses to over a year of deficits & growing inflation.

•  Fiscal balance turned from surplus to deficit in Q2’11 •  Without GDP growth & sub-inflationary growth in fiscal expenses, it

will be difficult to avoid fiscal deficits for next several 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 & import controls on a number of production & distribution chains, & market-unfriendly policy measures that have hurt consumer & business sentiment. That is, the business cycle slowdown drivers were mostly domestic rather than external & mostly due to exogenous policy moves rather than endogenous macro dynamics.” - Alberto Ramos, Goldman Sachs - July 27, 2012

Consumer Sentiment Reflects Policy Approaches: Leads to Decreased Consumption Increased Capital Flight

Universiidad  Torcuato  di  Tella  

 

 -­‐        

 10.00    

 20.00    

 30.00    

 40.00    

 50.00    

 60.00    

 70.00    

Apr-­‐01  

Jul-­‐0

1  Oct-­‐01  

Jan-­‐02  

Apr-­‐02  

Jul-­‐0

2  Oct-­‐02  

Jan-­‐03  

Apr-­‐03  

Jul-­‐0

3  Oct-­‐03  

Jan-­‐04  

Apr-­‐04  

Jul-­‐0

4  Oct-­‐04  

Jan-­‐05  

Apr-­‐05  

Jul-­‐0

5  Oct-­‐05  

Jan-­‐06  

Apr-­‐06  

Jul-­‐0

6  Oct-­‐06  

Jan-­‐07  

Apr-­‐07  

Jul-­‐0

7  Oct-­‐07  

Ene-­‐08  

Apr-­‐08  

Jul-­‐0

8  oct-­‐08  

ene-­‐09  

abr-­‐09  

jul-­‐0

9  oct-­‐09  

ene-­‐10  

abr-­‐10  

jul-­‐1

0  oct-­‐10  

ene-­‐11  

abr-­‐11  

jul-­‐1

1  oct-­‐11  

ene-­‐12  

abr-­‐12  

jul-­‐1

2  oct-­‐12  

Consumer  Confidence  Index  (ICC)    

Fiscal Position Deteriorating

Argentina Nominal Fiscal Surplus / (Deficit) - Rolling Twelve Month Period

(45.0)

(40.0)

(35.0)

(30.0)

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

--

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1'11 Q2'11 Q3'11 2011 Q1'12 Q2'12

Peso

Bill

ions

Primary Surplus / (Deficit) Fiscal Surplus / (Deficit)Source: Ministry of Economy (MECON) for historical figures

 

Despite Strict Capital Controls the Balance of Payments has Turned Negative

Source:  Ministry  of  Economy  (MECON)  for  historical  figures  

Balance of Payments (USD Billions)

($14.0)

($12.0)

($10.0)

($8.0)

($6.0)

($4.0)

($2.0)

--

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

$20.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1'11 Q2'11 Q3'11 2011 Q1'12

Trade Surplus Current Account Surplus / (Deficit) Balance of Payments

GDP Falling toward Zero + ���(20%+ Inflation) = Stagflation

Stagflation

(4.0%)

(2.0%)

--

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

EMAE Growth (GDP Proxy) Market CPI

Source:  Ministry  of  Economy  (MECON),  GlobalSource  Partners  

Monetary Base Expansion + Declining Access to Hard Currencies = Deposit Flight & Lower Tax Base

0  

50000  

100000  

150000  

200000  

250000  

300000  

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   Money  Outside  the  Financial  System   InternaDonal  Reserves  Excluding  2009  SDRs  allocaDon  

Source: BCRA

Risking the Model: Pesification, Devaluation – A 1994 Move toward 1989?

•  Recent actions risk greater reliance on increasing internal debt. •  Recent Central Bank regulation over local law bonds will reduce risk

appetite for local & corporate debt issuances (crowding out). •  ANSES & other public agencies will be increasingly pushed to raise

holdings of government debt (but risks posed by devaluation & fiscal stress rises).

•  Currency controls make it difficult for provinces & 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 & 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 & 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 & price guidelines

•  December –  Another 34.5% currency devaluation –  Two-year postponement of payments on their state-issued debts –  60% increase in public service fees & gas prices –  M&atory exchange of certificates of deposit over $1000 for 10-

year USD bonds (Bonex 89)

Steps Necessary to Attract Much Needed FDI

•  Finish the work started with the IMF to create a new national CPI & take the INDEC issue off the table (a basket of provincial CPI?).

•  Smooth relations with IFIs & 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 & others. •  Settlement of issues attracts FDI (hard currency), drives GDP

and allows reduction of debt and ongoing refinancing of existing debt at lower rates.

November 2011 Presentation

•  Argentina could save U$S 28 billion between 2012 & 2020 if it reengaged with international capital markets &, 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.

•  Today the slowdown is here, fiscal and monetary environment are difficult.

•  Argentina has room to avoid another 1989 crisis but time is short.

•  More debt (internal or external) is not the answer. •  Foreign direct investment & development is THE answer.

22

A year ago I demonstrated the results would be: •  An increase in investor confidence & reduction in dollar flight; •  Increasing Foreign Direct Investment toward the peer group

average; •  Increases in Central Bank Reserves; •  International recognition of Argentina’s low debt relative to

borrowing capacity. Total debt to GDP is currently 37% & interest on those debts amounts to only 2% of GDP. Nearly half of the public debt held by public sector agencies & foreign currency debt represents only about 55% of the total.

"El Modelo-K": Proving the Model

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 & external debt. •  The Kirchner government has recognized this & done

an excellent job of reducing government debt during times of surplus and positive trade environment.

–  Unfortunately, deficit funding will be increasingly difficult & put the country back on a 1989 path.

History Must Change – It is a “both &” 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 & what can be called national populism . . . . In general, the liberals have stood for the virtues of a society open to international opportunities & influences, whereas, the national populists have emphasized indigenous, autonomous development. – Mallon & Sourouille (1975)