Argentina: Oil nationalization and currency controls divide a nation

Argentina is no stranger to financial crises. In fact, in the past 40 years, one has erupted every decade. This means many Argentines are skittish when it comes to controversial government decisions like nationalizing the country's biggest energy company or receiving warnings from international bodies who condemn it for misreporting economic statistics.

Last month, an estimated 200,000 people marched through the streets of Buenos Aires protesting a recent string of government policies aimed at curbing capital flight and fortifying Argentina’s central bank reserves.

Together with controversial nationalizations and import limitations, Argentina’s currency controls form part of an interventionist, protectionist economic strategy that President Cristina Fernández de Kirchner’s government says is needed to boost national industry.

Mercedes Marcó del Pont, president of the central bank, said the current measures will lead to a “winning decade [for Argentina], while developed countries are experiencing a lost [one].”

But as inflation skyrockets to an unofficial rate of 24 percent, the highest in South America, President Kirchner’s economic policies are dividing the country and putting it at risk of a future crisis, analysts say.

This is “an attack on my liberty,” says María Pagano, one of the protesters, who denounced tightening restrictions on purchasing dollars, which many Argentines prefer for saving because of the historic instability of the peso.

The divisions have spread beyond Argentina as well, with the International Monetary Fund (IMF) recently debunking Argentina's reported and projected growth, fueling the fire for nationals who believe the government is not respecting democratic processes.

History of financial crises

Argentina has experienced its fair share of financial crises and subsequent political turmoil. In the 1970s there was the mega-devaluation of the peso, known as "el Rodrigazo"; In 1989, the cause was hyperinflation; And in 2001, when former president Fernando De La Rúa fled rioters in a helicopter, it was the unraveling of a decade-long peg of the peso to the dollar.

Since its $100 billion default in early 2002, Argentina has been frozen out of international credit markets and uses central bank reserves to help settle its restructured debt – including a final installment on its $19 billion Boden bond in August.

Kirchner’s administration says the recent dollar restrictions are needed to bolster reserves and stop capital flight estimated at $20 billion in 2011, around 4 percent of GDP.

But restrictions have given rise to a flourishing black market for greenbacks and Marina Dal Poggetto, an economist at Estudio Bein & Asociados, a Buenos Aires consultancy, says the policies are “short-termist.” In the longrun, high inflation cannot be maintained, she insists. What is keeping the economy afloat today could potentially spin Argentina into yet another economic crisis in the future.

‘Not a soccer team’

Growth and inflation data are other points of contention in Argentina. The government reported growth of 3.4 percent this year and 4.4 percent next year, impressive numbers given the global crisis and reduced trade with Brazil, Argentina's biggest export market. 

“The engines of economic growth next year will be a boost in domestic consumption and in investment,” Economy Minister Hernán Lorenzino said when he presented the 2013 budget last month. “Argentina’s economy continues growing in an international economic context in which some important regions in the world are in recession.”

However, the IMF has called the government out on what it says are inaccurate statistics.

Christine Lagarde, head of the fund, threatened Argentina with a “red card” should it not improve the reliability of its statistics by mid-December.

“My country is not a soccer team,” Kirchner retorted at the United Nations last week, continuing the sports analogy. “We won’t be subject to threats.”

Argentina’s national statistics agency, INDEC, puts the annual rate of inflation at around 10 percent, compared with the 24 percent reported by independent economists, who say they have been discouraged from reporting these higher rates through legal action and fines by the government: Twelve consultancies have so far been reproached.

Speaking in the United States last week, Kirchner said they had “no scientific base” for their figures.

Ms. Dal Poggetto, whose firm was fined $130,000 for relesasing statistics that conflicted with INDEC, says underestimation of inflation and overestimation of growth is typical of a “populist regime.”

Oil company nationalization

In perhaps her most controversial move of the year, this April Kirchner nationalized YPF, Argentina’s biggest oil company, by emergency decree from Spanish energy firm Repsol.

This wasn’t the country’s first nationalization: During her first term, from 2007 to 2011, Kirchner expropriated a $24 billion private pension fund and an airline.

The government said YPF was seized because of Repsol’s lack in investment in oil company, and in an effort to boost control over the country’s natural resources.

The government’s policies have led to a lack in confidence on the part of investors, some analysts say. While Chevron signed an agreement to explore the vast Vaca Muerta shale field and an alliance has also been struck with Venezuela’s state oil company, Miguel Galuccio, YPF’s chief executive, has had to tour the US and Britain to woo investors in attempt to raise $37 billion over the next four years.

Mixed reactions at home

Kirchner’s recent policies have been met by mixed reaction at home. Reelected last year with 54 percent of the vote, her approval rating started dropping as economic controls tightened this year. Despite a spike in approval in the aftermath of the YPF expropriation, approval now stands at 38 percent.

Kirchner’s lagging popularity ratings and her battle with the IMF are linked, says Boris Segura, a Latin America analyst at investment bank Nomura.

“We wouldn’t rule out her further escalating the IMF dispute in order to prop up popularity ahead of next year’s midterm elections – key to her prospects of [staying in power],” Mr. Segura said in a research note. 

Despite the presence of mistrust toward the Argentine government, there are still many Argentines who have faith in Kirchner’s administration and applaud her policies.

“The [protectionist measures] are important to reverse the neoliberal reforms of the 1990s,” insists a member of the pro-government youth movement La Cámpora, echoing recent comments made by Axel Kicillof, the neo-Keynesian deputy economy minister.

“Inflation can’t be 24 percent,” says Ramiro Domínguez, an economics student the University of Buenos Aires. “Prices haven’t gone up that much.”

But Leandro Bullor, an economist at the University of Buenos Aires says he believes costs are indeed rising. Salary increases – including a 25 percent increase in the minimum wage in August – however, ensure that Argentines can keep spending.

In response to questions about the high inflation rate, Kirchner told an audience at Georgetown University last week that Argentina’s model is geared toward “growth not inflation.”

The country has expanded at an internationally accepted average of nearly eight percent a year since 2003, when Néstor Kirchner came to power, and enjoyed big trade surpluses.

Import restrictions – another protectionist measure – ensured a $1.6 billion surplus in August and are supposed to promote national industry, but have succeeded in achieving the opposite in some sectors.

“A lot of materials are not coming in,” says Esteban Martín, president of the Chamber for Spare Car Parts Dealers in Córdoba. “We’re having to make do with used parts.”

Mr. Bullor believes policies need to be more conciliatory, including a multiple exchange rate to favor local industry. “The peso is overvalued again. It can’t be sustained,” he says.

Back at the Buenos Aires rally, Ms. Pagano paused from chanting along with the crowd. "It’s all going to come tumbling down,” she says.