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South America and South Atlantic Islands
Argentina |
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Last Reviewed: 20 August 2009 |
Country information
ECONOMY
Throughout the 1990s, the Argentine Government pursued a policy of trade liberalisation, deregulation and privatisation. The peso was pegged one-to-one with the US Dollar ('convertibility'), which helped bring inflation down from the high levels of the 1980s. For much of the decade, Argentina enjoyed growth with low inflation. But fundamental rigidities and fiscal imbalances were not tackled, external economic conditions worsened, and in 1998 Argentina entered a recession which, despite an IMF-led rescue package in 2001 worth almost US$40 billion, culminated in a collapse at the end of that year. Strict controls on bank withdrawals were imposed amid widespread public protests and in early January 2002, Argentina officially defaulted on its external debt of around US$100 billion. Convertibility was abandoned and the currency was allowed to float, with an immediate steep devaluation. 2002 saw the economy shrink by 10.9%, and the social impact of the crisis was huge, leaving over 50% of Argentines below the official poverty line and well over 20% unemployed. But inflation was controlled and the country managed to return to fragile growth in late 2002, led by import substitution and a rise in export prices. In 2003 banking restrictions and most currency controls were lifted and the economy returned to normality. Since 2003 Argentina started a process of strong growth that has averaged nearly 9% in the last 5 years. For 2008, the economy is expected to cool down to around 5% with a further decelaration in 2009. The steep rise of inflation has smoothed consumption spending, as workers incomes are not adjusted as fast as prices. Also inflation is the main culprit to a slight rise of poverty standards.
After 3 years in default, the sovereign debt restructuring was completed in March 2005 with 76.15% of creditors accepting Argentina’s proposal. Most of the holdouts were Italian retail bondholders and investment funds. In September 2008 Argentina said it would re-open the debt exchange in a complex financial deal managed by Barclays and other banks but the international turmoil could delay such a deal. In December 2005, following the Brazilian example, Argentina decided to pay off all its IMF debts in full and immediately. This was done on 2 January 2006.
In spite of a freeze in utility tariffs and price controls on key goods, inflation is in 2-digit territory as measured by a number of indicators. Consumers are starting to be concerned. Food prices have suffered the most with annualised increases of 30% in 2007 and more during the first half of 2008. As the economy is cooling down inflation has stopped growing. The Argentine government faces further challenges ahead, including the renegotiation of contracts with privatised companies, tax reform and long-term stability in the credit and investment climate. Energy is another delicate topic, as firms and to a lesser extent households, are often rationed from the market, given the bottlenecks in the electricity and gas systems. Marginal tariff increases and better planning are soothing these shortages a bit but the fundamental weakness persists.
