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“Groundswell of dissatisfaction” ahead for Argentina

Mar 3, 2014

Strikes and demonstrations could be on the cards in Argentina, says Arturo Porzecanski, professor at the American University, as analysts debate the country’s response to falling FX reserves

     
     
 

Argentina's government house, the Casa Rosada
Source: Sergio_Carvalho

 
Argentina faces months of political and economic instability unless it can steer its economy in the right direction and secure financing for the welfare state that underpins support for the government of Cristina Fernández, analysts said on Friday.

Trade unions will soon start negotiations over private and public sector salary increases, which could spark unrest in the South American country in the coming weeks. The big question for investors and analysts is whether Argentina would be able to bankroll those demands amid falling foreign exchange reserves after last month's devaluation.

Arturo Porzecanski, economics professor at the American University, said he expected a "groundswell of dissatisfaction" that would manifest itself in strikes and demonstrations.

"Starting next week, wage negotiations will get under way and that's when we'll see a big gap between what workers want and what companies and the government can afford to pay," he told an EMTA discussion on Friday. "I think that would be one of the big sparks of the social conflicts."

Yet speakers at the forum said that the Argentine government was in a good position to manage any social unrest.

"In the context of countries that have political legitimacy at stake like Ukraine, or even democratic though authoritarian-ruled like Venezuela, Argentina is on the political front in a better position despite the large challenges," said Vladimir Werning, an analyst at JPMorgan. "There will be social unrest, potentially, because an economic adjustment generates social unrest but it's not here to destabilize but rather to allocate the costs of a recession."

Yet as the country's dollar reserves dwindle, economic growth flags and inflation surges, analysts questioned how the government would finance itself in the next few months.

"Maximizing growth has been the policy goal of this government during its mandate, we've seen a U-turn here in the sense that the government is trying to find a policy to articulate a response to the current macro situation - and instead of maximizing growth it's essentially trying to preserve reserves," said Werning.

The government is expected to announce cuts in its subsidy programs that include discounts for transport, education and energy. That may not be enough to keep up with debt payments. Credit Suisse analyst Casey Reckman said Argentina would have problems servicing debt in 2015 " unless they can find a way to go back to markets or secure some alternative backstop".

Even though the country is courting capital markets, has agreed a settlement with Spain's Repsol, and is negotiating with the Paris Club of creditor countries and holdout bond investors, analysts think that in order to tap capital markets again Argentina would need to scrap subsidies and capital controls.

"Market access is a prize for a successful and consistent domestic policy adjustment that stabilizes reserves," said Werning. LF





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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management