The economic situation in Argentina is deteriorating. The peso devalued by 12.4% in just one day on 23 January, reaching eight pesos to a dollar at the official exchange rate. The devaluation in the month of January alone was over 22%, coming on top of a 32% depreciation in 2013. The black market rate rose to 13 pesos to a dollar.
The usually large trade surplus of Argentina also shrank by 27% in 2013, to $9.24 billion from $12.42 billion. Imports increased by 8% to $74 billion, while exports went up by just 3% to $83 billion.
High inflation – 28% in 2013 – continues to smother the economy, though the government says inflation was only 10.5%. The annual inflation has been above 20% since 2007, though the government says inflation averaged only 9% in the last seven years.
The foreign exchange reserves of the central bank fell to a precarious $28 billion in January 2014 from $46 billion in 2011. In the last three years, the Argentine government has imposed controls on imports, including imports from Latin American countries that are members of the Mercosur economic agreement; this, along with the controls on foreign exchange, has hindered foreign trade.
The worsening Argentine economic situation has had an adverse collateral impact on the closely-linked economy of Uruguay. Brazil is also concerned about a negative impact on its economy.
A worried Argentine government is taking a protectionist stand in the ongoing EU-Mercosur trade negotiations. As a result, Brazil has warned that it might be forced to de-link from Argentina and go ahead with the negotiations along with Uruguay, which is also keen on a trade treaty with the EU.
Some economists had predicted a repeat of the 2002 crisis in Argentina. But the situation this time is not beyond control, as it was in 2002, when the country declared the world’s largest debt default of $90 billion. The debt is now within the capacity for repayment. The government of Argentina can address the crisis by enforcing better policies and by lessening controls and restrictions to give more space to the private sector to grow.
Indeed, the government is already making some positive changes. On January 24, it announced that some of the restrictions on personal dollar purchases by its citizens will be lifted. It has finally admitted to high inflation and started showing real figures, under pressure from the International Monetary Fund. The government has also started talking to the Paris Club about settling the debt, which will open up access to global financial markets.
According to estimates of the U.S. Department of Energy, Argentina has the largest technically recoverable shale gas reserves (802 tcu), and the second largest shale oil reserves (27 billion barrels) in the Americas. The exploitation of shale could be a game-changer for Argentina. The country’s industry will get a boost with low-cost shale gas, and Argentina could become a leading exporter of energy. In 2013, Chevron was the first private payer to invest in shale in Argentina, and more investors are expected to follow.
Argentina could also double its current production of 50,000 bpd of conventional crude with more investment. The oil and gas sector remains under-invested. However, the recent decision of the Argentine government to compensate the Spanish company Repsol for the nationalisation of the Argentine energy unit YPF – in which Repsol had assets – has generated confidence among potential investors.
Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.
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