Argentina growing but fears of a new bust linger

By Kevin Gray

BUENOS AIRES (BestGrowthStock) – Argentina’s economy has rebounded dramatically since its virtual collapse nearly a decade ago but many investors fear it is still locked in a boom-bust cycle and could easily unravel again.

Although the government expects 5 percent growth in 2010, driven by robust public spending and an expected record year for farm exports, President Cristina Fernandez’s policies may be undermining the prospects of steady growth in the future.

Economists and business leaders warn Fernandez’s moves to increase state intervention have sowed uncertainty in two critical areas: agriculture and the oil and gas industry.

“The economy has grown with a focus on the short-term, not the long-term,” said Fausto Spotorno, chief economist at the Orlando J. Ferrers & Associates consulting group.

Argentina roared back from a devastating crisis in 2001-2002 and over the next five years the economy averaged 8 percent growth a year. However, the rapid expansion also exposed the country’s shrinking energy supplies, which have steadily fallen since the late 1990s.

Sporadic blackouts hit the country two years ago, leading Fernandez to order energy-saving light bulbs to be distributed, although power supplies were steadier this summer.

Still, few companies have invested in new exploration and production, put off by a highly regulated domestic market where export taxes and caps and price controls keep domestic energy prices low.

Argentina froze domestic utility rates during the crisis and Fernandez, worried about the political consequences of a price spike, has largely kept them in place, making residential rates among the cheapest in Latin America.

“Pricing has been politicized,” said Daniel Montamat, an energy consultant at Montamat y Asociados in Buenos Aires. “There is no longer certainty over planning for long-term projects.”

With private investment shrinking, the government has stepped in to pick up the slack, but many projects have been delayed and government spending on energy imports has soared.

“It’s a problem when investment depends on state resources,” Montamat said. “When times are good, the projects have a chance of going forward, but when times are tough they get squeezed.”

Freddy Thomsen, a political and economic analyst, said Argentina’s energy problems would likely impact decisions by investors and could threaten future economic growth.

“It is part of the infrastructure that every business needs,” he said. “Considerations for any long-term investment will look at energy availability and find Argentina more uncertain than neighboring countries.”

FARMING HELPS, BUT OUTLOOK UNCERTAIN

With a storied ranching tradition and renowned for its tender grass-fed beef, Argentina has also enjoyed one of the country’s greatest agricultural booms in recent years.

Farmers using new seeding techniques and technology helped Argentina, one of the world’s top soy, beef and wheat producers, regain its glory as a global farming heavyweight.

A sharp currency devaluation in 2002 made exports more competitive and the increase in farming activity, whose exports are taxed, help filled government coffers. The farming explosion also rippled through the broader economy, helping to stoke economic growth.

Across the sprawling Pampas plains stretch seemingly unending fields of soy, a booming export crop and a key source of state revenue.

But protests by farmers over Fernandez’s attempt to hike taxes on soy exports, which stand at 35 percent, triggered a damaging farm strike two years ago.

Struggling to tame inflation, the government has also sought to regulate the farming sector and keep down domestic food costs using pricing controls and export curbs, further angering farmers.

“Artificially cheap food prices mean disincentives for production in the future,” Thomsen said.

While this year promises to be a bumper soy harvest, it also reflects how farmers have retreated from producing beef, dairy and other products because of price controls and are increasingly turning over their plots of land to soy.

That raises the risk of Argentina becoming overly dependent on one crop, analysts say.

“It’s hard to think we’ll be able to change things with this government,” Eduardo Buzzi, a farm leader, told Reuters.

Argentina’s growth this year will be helped in large part by loose fiscal and monetary policies, which critics say will stoke already high inflation.

Fernandez, who took power in late 2007, has a tense relationship with some business leaders and her erratic and sometimes unpredictable policymaking has crimped foreign investment in the farm and oil and gas sectors.

While technically an emerging market, Argentina last year saw its local stock market, once one of Latin America’s most prominent, downgraded to “frontier” status by the equity index provider MSCI because of restrictions on capital flows.

Argentines have watched enviously as Brazil, its giant northern neighbor and for many here a political and economic measuring stick, has become one of the world’s most attractive emerging market economies.

Like Argentina, Brazil is now an agricultural powerhouse and has become the world’s largest beef producer.

Major oil finds have transformed it into a global energy giant and a smart combination of free-market policies and anti-poverty programs have helped build up large areas of the economy, drawn huge foreign investment, and won broad support for the government of President Luiz Inacio Lula da Silva.

In contrast, Argentina is still struggling to get back into international debt markets after it defaulted on around $100 billion in debt in 2002.

Fernandez’s approval ratings stand at around 25 percent.

Although she has not led Argentina into the radical bloc of Latin American governments led by Venezuelan President Hugo Chavez, she has upset many voters with her combative style and by expanding the state role in the economy.

Critics say Fernandez should have followed the market-friendly policies of Lula and the center-left coalition that led Chile for two decades until it recently lost power.

Fernandez’s term ends next year and, although she is able to seek re-election, most analysts believe her husband Nestor Kirchner will attempt a return to power. He oversaw Argentina’s years of rapid growth after the crisis but stepped aside so she could succeed him in 2007.

The Kirchner-Fernandez double act is much less popular than it was in 2007, however, and will face serious challenges in the next election.

Until then, Thomsen says Argentina will remain a puzzle for investors. “It’s neither Brazil or Chile, or Venezuela. If you’re a foreign investor, you don’t know whether you should or shouldn’t be here.”

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(Editing by Kieran Murray)

Argentina growing but fears of a new bust linger