Presentation is loading. Please wait.

Presentation is loading. Please wait.

Fernando Cerioni “The Argentine Business Environment: Roots of the crisis”

Similar presentations

Presentation on theme: "Fernando Cerioni “The Argentine Business Environment: Roots of the crisis”"— Presentation transcript:

1 Fernando Cerioni “The Argentine Business Environment: Roots of the crisis”

2 Argentina prior to 1990 1930’s: Argentina economy based on agricultural expansion 1955-1990: Turbulent political, “Stop and Go” policies, usually contradicting each other Government financed budget deficit w/ the Central Bank  long periods of inflation & hyperinflation “Economic Neo-liberalism” policy in early 90s

3 Economic Neo-liberalism in Argentina New government in place (Menem 1989) –Follow example of Chile, Mexico and South East Asian countries  liberalization –“Convertibility law”: peg Peso to US Dollar. Dollar backed by reserves at Central Bank. No emission of peso unless backed by dollars in reserve. –This would succeed if peso becomes competitive and helps generate Exports > Imports  and use earnings to pay foreign debt

4 Market-oriented plan Cavallo’s plan –High exch rate  Arg products too expensive. Could be solved if Productivity  > Wages   Arg prices go down –Productivity   Arg products competitive & keep confidence in peso  preventing inflation  “float” peso when it is undervalued  peso raises at end of “Peg”  boost to price stability

5 Argentina 1990 - 2002 Phase 1 (1990-1995): –Urgent need to end hyperinflation Convertibility Plan created (Cavallo)  Fixed Exchange rate (“Peg”) Massive privatizations & Import tariffs lowered Deregulation of economic activities (like mining) –Initial success (yearly inflation from 3000+% in 1989 to single digit in 1994) –Growth achieved 7+ % from 1991-1994 –Benefited Ext investors, Local corporative groups and Banking sector Middle & lower classes  wages  –Non-benefited Export sector (Exch rate too high, less protection) Industrial sector (more competition)

6 Argentina 1990 - 2002 Phase 2 (1995-1997): –Wages  kept prod costs high  Imports > Exports  Arg competitiveness  –Terms of trade against Arg: Export prices  relative to imports –External shock: Mexico crisis –Budget deficit mainly due to provinces’ expenditures –If foreign investor wanted to Convert Pesos to Dollars… Central Bank shrinks Money Supply  r  sharply  people keep Pesos But, high r  weaken domestic demand  Wages & Prices  But government was not willing to sharply raise r, Wages & Prices not falling as much as needed  CA deficit remains  Investors loose confidence in long term Exch Rate

7 Argentina 1990 - 2002 Phase 3 (1997-2001): –External shock: Brazil crisis (Sharp ‘Real’ devaluation) –1999: New elected president (De LaRua), radical party (opposed to previous Menem) –Despites 15% unemployment rate, Unions resisted wages decline  no decline in production costs  competitiveness did not improve –Arg economy enters in recession Lack of growth Worsened debt issue Less resources for socially active policies Loss of confidence in new government –IMF brings in more loans (~ 19 B for 2000-2003 period)

8 Argentina 1990 - 2002 Phase 4 (2001-2002): –Two key issues still not resolved: Fiscal policy adjustments (too rigid) Public debt –Provincial budget deficits did not improve, and required external capital flows –Debt continued to grow  Int rate paid by Arg grew  further imbalance increase  Foreign Debt Growth –Argentina defaults on $155 B of Central and provincial debt in December 2001 –IMF brings another loan to boost confidence, but not enough –Argentina’s Peso devaluates sharply in January 2002 (from 1 to 1  peaks of 4 to 1 during 2002).

9 Argentina 1990 - 2002 Why not devaluate earlier (before default)? –Fear that breaking the 1-to-1 (thus, devaluating the peso) would bring high inflation rates again –Many Argentine people and businesses had a huge debt in dollars  Devaluation would bring massive bankruptcies  ripple effect in provinces (which also had dollar-denominated debts to foreign creditors) –Hope that situation may improve over time. If US dollar declines against Yen and Euro (due to large trade deficits), Arg products would become more competitive. But, US dollar strengthened in the period 200-2001. –IMF continued bringing money (loans) and encouraged Arg to continue with fixed exchange rate (IMF believed in a fixed exch rate as a viable long-term economic policy)

10 The Convertibility Program Accomplishments: –Convertibility  Prices stability –High growth rates: GDP grew 8% yearly in 1991-1995 and 6% in 1996-1998 –Opening of country’s economy: Imports grew dramatically: US$ 4.2B in 1990  US$ 21.7B in 1994  US$31.4B in 1998 Exports also grew: 65% between 1994-1998 High int rates (low in the US) + privatization  Capital inflow  Foreign Exchange reserves  –Massive privatizations  helped to reduce deficit in public sector  $14.2 B received in 1991-1996

11 The Convertibility Program Missteps: –Sharp increase in Indebtedness level: Govmt to finance budget deficit thru issuance of debt (domestic & international) in foreign currency (debt servicing as % of total govm’t expend: 6.6% in 1993  14% in 1999) Privatizations income not enough to cover growing public deficit  increase in public debt (29.5% GDP in 1993  50.3% in 1999) –Fiscal adjustment Government sustained itself thru borrowing (thanks to low inflation and high growth rates) Govmt real expenditures grew 19.3% in 1993-1999; Revenues declined 4.3% and GDP grew 10.8% in same period –Privatizations Resulted in concentration of productive assets Increase in relative prices (consumer expenditure)

12 The Convertibility Program Missteps (continued): –Needed market reforms not done: Reduce provinces deficit Deregulate labor market –High unemployment: 6.5% (1989)  17.5% (1995)  15% (2000) Layoffs in productive sector Increase in labor costs Very high taxes on wages (40+% average) –Uneven income distribution: Labor rigidities + increased competition in labor market + labor- saving investments  unskilled workers suffered Real wages began to decline in 1995 (but unequally, affecting the lower income sector much harder)

13 Effect of external shocks in Convertibility Program Four external crisis affected Convertibility program Mexico crisis in 1995 (“Tequila effect”) Asian crisis in 1997 Russian crisis in 1998 Brazilian crisis in 1999 Mexico crisis Liquidity crisis in Arg affected banking sector  credit crunch Interest rates grew dramatically Unemployment rose to 17.5%, Poverty rate to 22.6%, Industrial production declined 11% GDP decreased 5%, but recovered to 8.1% by 1998 Asian & Russian crisis No effect over banking system (like Tequila did) Sharp increase in Interest rate, to keep capitals in country Slowed the economy down

14 Effect of external shocks in Convertibility Program (cont’d) Brazilian crisis Brazil devaluates their currency (the “Real”) Severe impact on Arg economic growth  30% of exports went to Brazil Simultaneous appreciation of US Dollar relative to Euro & Yen Caused Arg competitiveness to decrease GDP decreased by 3.4% in 1999 Due to lack of economic growth  growth of debt service becomes a serious issue

15 Summary – Lessons learned Argentina’s Convertibility Plan brought price stability and growth, but lack of fiscal adjustment played against it Some economists consider the Currency board the cause of all issues  Arg should ‘float’ the Exch rate High growth of indebtedness fueled by price stability, opening of the economy, privatizations and incentives for foreign investments High indebtedness in dollars is very risky. Portfolio equity investments and direct investments in P&E do not have this issue Economy liberalization, privatizations and incoming foreign investment are desirable policies. Argentina needs policies to “cushion” financial shocks, ample international reserves, and more diversified export base

Download ppt "Fernando Cerioni “The Argentine Business Environment: Roots of the crisis”"

Similar presentations

Ads by Google