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Argentine Growth Halts as Fernandez Tightens Controls

Argentine President Cristina Fernandez de Kirchner’s efforts to stem capital outflows and extend her control over South America’s second-largest economy has brought growth to a standstill.

Gross domestic product was unchanged in the second quarter from a year earlier and shrank 0.8 percent from the first quarter, the national statistics agency reported today. Economists had forecast year-on-year growth of 0.5 percent, according to the median estimate of 10 economists surveyed by Bloomberg. This was the first time GDP hasn’t grown annually since a 0.3 percent contraction in the third quarter of 2009.

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Argentine President Cristina Fernandez de Kirchner speaks at the presentation of the new 100 pesos bill with the portrait of Eva Duarte de Peron, popularly known as "Evita", at Casa Rosada government house in Buenos Aires. Photographer: Juan Mabromata/AFP via Getty Images

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Argentina is the world’s biggest exporter of soybean oil, the second of corn and the third of soybeans. Photographer: Daniel Garcia/AFP via Getty Images

“The government’s policies have halted growth because they led to lack of confidence and of investments,” said Walter Molano, head of sovereign research for emerging markets at BCP Securities in Greenwich, Connecticut, an investment bank that focuses on developing nations. “Argentina could have easily continued growing 7 percent or 8 percent for years.”

Since her re-election in October, Fernandez, 59, has banned most purchases of foreign currency, restricted imports and nationalized YPF SA (YPF), the country’s biggest oil producer. While those policies have eroded business confidence and investment, a drought in the U.S. that has pushed up soybean prices may provide some relief for the world’s third-largest producer of the oilseed.

Budget Forecasts

Argentina, which has expanded an average 7.8 percent a year since 2003, will grow 2.5 percent in 2012 and as much as 5 percent next year, Molano said. Fernandez’s government forecasts growth will accelerate to 4.4 percent in 2013 from 3.4 percent in 2012, according to the 2013 budget.

The Argentine government has defended its record and says growth will rebound.

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

Emerging-market stocks rose, paring the first weekly decline this month, as gains in commodities lifted producers and investors speculated losses were excessive given central bank stimulus measures.

Emerging Markets

The MSCI Emerging Markets Index rose 0.8 percent to 1,006.40 at 4:03 p.m. in New York, trimming this week’s loss to 0.8 percent. India’s benchmark gauge jumped to a one-year high and the rupee rallied the most among major currencies on tax cuts that added to policy reforms last week.

In the U.K., the government posted its biggest August budget deficit on record, heaping pressure on Chancellor of the exchequer George Osborne as the recession hits tax revenueand pushes up spending on welfare.

Argentina’s Fernandez tightened import restrictions in February to boost the country’s narrowingtrade surplus and bolster central bank reserves. With Argentina locked out of global credit markets since its $95 billion default in 2001, Fernandez has tapped the bank’s holdings since 2010 to help pay the nation’s foreign debt. She plans to use $8 billion of reserves for the same purpose next year.

The import restrictions led to shortages of foreign-made parts, forcing manufacturers such asFiat Spa (F)’s local unit to trim production. Fernandez also tightened controls on dollar purchases in a bid to slow capital outflows, which accelerated to $21.5 billion in 2011 from $11.4 billion the previous year.

Kirchner Remembered

In April, Fernandez, who succeeded her late husband Nestor Kirchner in December 2007, seized control of YPF from Spain’s Repsol SA, blaming lack of investment by her country’s biggest oil company for a doubling of fuel imports in 2011. During her first term, she expropriated $24 billion of private pension savings and nationalized Aerolineas Argentinas SA, the nation’s flagship airline.

Since Kirchner’s death in October 2010, Fernandez has always worn black at public appearances and often cries when she refers to him in her speeches. Governors and lawmakers who support her have named avenues, public squares and a soccer championship after Kirchner.

The slowing economy has prompted Argentines to curb purchases, according to Juan Dumas, head of the country’s shoe manufacturers association.

“We are facing the slowest growth of the past four years as consumers have become more cautious about spending,” Dumas said in a telephone interview from Buenos Aires. “The country’s economy is facing a freeze that we haven’t seen in previous years.”

Shoe Sales

Sales by the shoe industry will grow 10 percent this year after expanding 14 percent in 2011, Dumas said.

A drought that reduced corn and soybean harvests, two of the country’s biggest exports, and a slowdown in demand from Brazil, its main trade partner, also undermined the expansion.

Soybean output fell 18 percent to 40 million tons while corn production dropped 14 percent to 19.8 million tons after a drought during the growing season was followed by rainstorms at harvesting time, according to the Buenos Aires Cereals Exchange.

Encouraged by this year’s surge in soybean prices and abundant pre-planting rains, Argentine farmers may reap a record harvest next year. The U.S. Department of Agriculture said on Sept. 13 that soybean production will rise to 55 million tons from the crop to be gathered from March, while corn output will increase to 28 million tons.

Farm Exports

Argentina is the world’s biggest exporter of soybean oil, the second of corn and the third of soybeans. Agriculture generates more than half the country’s export revenue.

Forecasts that a boom in farm production coupled with soaring commodity prices will lift government revenue and spur 2013 growth helped Argentina’s government dollar debt return 35 percent since June 1, according to JPMorgan Chase & Co’s EMBI Global Index. In the first five months of this year, bonds fell 15 percent as investors shied away from the country’s inflation and Fernandez’s tightening grip of the economy.

The extra yield that investors demand to hold Argentine dollar bonds instead of U.S. Treasuriesfell 22 basis points to 844, or 8.44 percentage points, the highest in South America afterVenezuela, at 4:08 p.m. in New York, according to JPMorgan Chase & Co.’s EMBIG index. The spread has widened from as low as 784 on March 19, a month before the announcement on YPF seizure.

Weakest Currency

The peso, whose rate is managed by the central bank, has weakened 8.2 percent this year, the most of any currency in the region. In the unregulated market, in which investors buy assets locally in pesos and sell them abroad for dollars, the peso has dropped 26 percent.

Sputtering growth has led to a drop in consumer confidence, which fell in six of the first eight months of this year, including a 1.9 percent decline in August from July, according to a poll released on Aug. 23 by Buenos Aires-based Torcuato Di Tella University. Confidence in the government fell in August for a third consecutive month, according to the poll.

Fernandez’s policies to encourage domestic consumption by boosting wages and increasing public spending is fueling the fastest inflation in the region, said Claudio Loser, a former Western Hemisphere director for the International Monetary Fund who now runs Washington-based Centennial Group research company.

Wage Rises

Wages rose an average 25 percent in the 12 months to July 31, official data show. Fernandez also boosted handouts to poor families and retirees’ pensions. Government spending rose 33 percent in the first seven months of this year while revenue rose 30 percent, according to theEconomy Ministry.

“The government believes the central bank has to help growth by injecting liquidity to the market, so there’s no independent entity to control inflation,” Loser said in a telephone interview from Buenos Aires. “Argentina has suffered a significant loss in competitiveness due to inflation and a slowdown in economic activity.”

Argentina’s inflation data has been under question since early 2007, when Kirchner replaced senior staff at the national statistics agency. Last year the government fined more than a dozen researchers as much as 500,000 pesos ($107,000) each for reporting inflation rates that were higher than official data.

To avoid fines, economists now share their research with opposition lawmakers, who release a monthly report based on the data. The September report said prices rose 24 percent in August from a year earlier. Two days later, the statistics agency said annual inflation was 10 percent.

This week, the IMF gave the country until Dec. 17 to respond to concerns about the quality of its inflation and economic growth data. If the deadline is missed, the board can issue a declaration of censure, a warning that has never been used and which means sanctions may be applied if the concerns aren’t addressed.

According to the 2013 budget proposal, consumer prices will rise 10.8 percent next year after a 10.7 percent increase in 2012.