Argentina’s flight of capital
I was writing about this nearly three years ago, and it’s not stopping.
As kichnerismo enters its ninth year, the populist economic model is beginning to fray. Price controls and contract abrogation have damaged foreign investment flows. Government expenditures increased last year by 40% while revenues were up by only 30%, according to Universidad Torcuato Di Tella economist Pablo Guidotti. “If the economy slows it will aggravate this fiscal weakness,” he told me in a telephone interview last week.
Normally deficits can be financed in the international capital markets. But Argentina has been cut off since 2001 because it is in default to the Paris Club governments and to private creditors. Mr. Guidotti says the central bank has been “printing” money to close the gap. Inflation estimates by other private-sector economists of over 21% in 2011 support his claim.
The central bank insists that annual inflation is only 10%, and it has used capital controls and market intervention to limit peso devaluation to a similar level. Markets know better. The truth is showing up in the drag on Argentine competitiveness in export markets, i.e., Argentine products are too expensive. It is clear that the peso will eventually face a much larger devaluation and Argentines therefore prefer to hold dollars. But experience tells them that holding dollars inside Argentina isn’t real protection, and tighter capital controls have increased fears of confiscation. This is why Mrs. Kirchner has employed sniffer dogs.
On the fiscal side trouble is also looming. Even with generous central bank accommodation, Mr. Guidotti says, fiscal accounts are “deteriorating.” The government has recognized this and announced that it will reduce subsidies in gas, electricity and water and will stop subsidizing the Buenos Aires subway. While the administration claims the utility cutbacks will only hit the wealthy, Mr. Guidotti says “it will affect almost everybody except the very poor,” who will have to apply for an exemption. Last week ticket prices on the subway in the capital went up by more than 100%. But by all accounts the belt tightening has only just begun.
Who let the dogs out?