For Argentina, the worsening global crisis combined with the lenient domestic economic policy pursued since the start of President Cristina Fernandez de Kirchner's term is expected to lead the economy toward a hard landing. On top of this, the president's handling of the farm dispute in 2008 triggered the gravest socio-political crisis since 2002 and has undermined her popularity, with mid-term legislative elections scheduled for June 28. Further complicating matters still is inflation, which has remained very high without being masked by the price controls that are in force or the low credibility of the official index.
Overall economic contraction, despite the fiscal stimulus policy adopted in late 2008, in conjunction with the drop in world prices for farm products, may put public sector accounts into the red. Covering the government's financing needs will therefore be difficult. In a much gloomier international framework, the weakening of farm exports is likely to contribute to the shrinking of the current account surplus.
Given all this, a normalization of relations with foreign creditors is necessary, but while the risk of a liquidity crisis has been growing, it is likely to remain controllable for the near future. External financing needs are manageable, as they are largely covered by foreign direct investment (FDI). Foreign exchange reserves are still at comfortable levels despite a resurgence of capital flight and doubts about the sustainability of Argentina's economic model, particularly since the announcement of pension system nationalization last October. To regain access to international financial markets, it will be up to the government to normalize relations not only with its public creditors but also with the private creditors left out of the debt restructuring in 2005.
From a longer-term perspective, however, Argentina has recovered since the 2001-2002 economic crisis on the basis of strong growth driven by better terms of trade and a broad-based policy mix, although growth is expected to slacken somewhat to more accurately reflect the country's potential.
Individual Corporate Realities
Possibly more troubling is the fact that the financial health of private companies has deteriorated, particularly in the construction, distribution and automotive industries. The weakest sectors include agriculture and dairy, due to price controls and export problems, with oil refining also struggling from a lack of investment and public services (such as water, electricity, gas and transportation) because of regulated prices. On the other hand, sectors like food and communications have fared somewhat better. Overall, however, the payment behavior of private companies is expected to deteriorate.
Other domestic factors require exporters to convert their foreign currency export earnings on the Argentine currency market within a period of 60-360 days (longer for capital goods) and hold the converted funds with a local bank. Service exporters must convert their foreign currency earnings within 135 days. Importers can pay the full amount up front in cash or in installments. They must demonstrate that the goods have reached the country within 365 days of advance payment or 90 days of sight payment. In the event of delays, they must inform the central bank in advance.
Capital movements are regulated. Upon exit, foreign companies can transfer dividends, interest, royalties and commissions without restriction, provided that their financial statements are in order. They can also repatriate their capital in the event of a divestment or liquidation. Investment outflows are capped at US$2 million per month (under "Circular A 4128"), although waivers are granted for direct investment in production activities as well as for investment management.
Understanding Regulations and Mercosur
To reduce the volatility of capital inflows, decree 616/2005 of June 2005 requires 30% of incoming funds to be locked for one year without interest after entry to the domestic market. …