BUENOS AIRES—President Cristina Kirchner’s mixed signals about how she plans to address longstanding problems in Argentina’s economy are adding to uncertainty that is causing capital flight, analysts say.
In the gap between Mrs. Kirchner’s re-election last month and her December inauguration, Argentines aren’t clear which policy makers are in charge and what the strategy is, the analysts say. In recent days, government policy has veered from market-intruding controls on foreign-currency transactions to market-friendly reductions in some utility subsidies to consumers.
The dissonance seems to reflect internal struggles within Mrs. Kirchner’s team on whether Argentina will moderate its free-spending and interventionist policies in the second term, or whether it will offer more of the same, even though fewer resources are available. The outcome of the apparent debate won’t become clearer until Mrs. Kirchner announces her new cabinet, sometime closer to the Dec. 10 start of her second term.
One government official said the recent turmoil was a temporary blip, partly related to economic uncertainty in Brazil and Europe. The official said Mrs. Kirchner was politically strong, following her landslide re-election with 54% of the vote, and that there were signs in the past few days that the worst of the dollar drain had passed.
Others point to underlying problems.
«For a while, most of the decisions were easy because the government was dealing with abundance,» said Gabriel Torres, an economist at Moody’s Investors Service. «It was a question of, ‘Do we spend 100% of the money coming in or 110%?’ »
But after years of fast growth and heavy government spending, fueled by high farm commodity prices, Argentina will be hard-pressed to maintain business as usual, Mr. Torres said.
The big trade and fiscal surpluses that once provided Argentina with an economic cushion have withered. The peso, once undervalued to keep industry competitive, has appreciated against the dollar over the past couple of years.
Many Argentine savers and investors started switching from pesos to dollars a few months ago, anticipating that the government would devalue the currency after the election. But then, at the end of last month, the interventionist wing of the government moved to try and throttle the dollar outflow by requiring that foreign-currency purchases receive prior approval from Argentine tax authorities.
Overseeing the currency controls has been Guillermo Moreno, the internal commerce secretary whose zeal has prompted some in the business community to dub him «El Loco,» the Crazy Man. Previously, Mr. Moreno had been responsible for enforcing price controls that are unpopular in the business community.
Mrs. Kirchner herself has tried to counter the flight to the dollar, jawboning companies to reinvest profits rather than transferring them out of the country. At the recent opening of a General Motors Co. plant, she praised the company’s investment as exemplary and decried business executives who «make formidable sums of money and don’t reinvest and take them out of the country.»
Even though transactions on the foreign-exchange market have plummeted recently due to the exchange controls, the central bank has experienced a slow, steady drain on hard currency reserves. Reserves have fallen to $46 billion from $52 billion in August.
In part, the loss of reserves has persisted because the currency controls boomeranged and made Argentines even more jittery. Some Argentines with dollar-denominated local bank accounts have been withdrawing money to place under the mattress.
Late Friday, Miguel Angel Pesce, vice president of the central bank, said the rate of withdrawals had declined in an «important» way by the middle of last week, and that the scenario was improving. Still, Argentina lost $1.7 billion in dollar deposits, about 11% of the total, in the first two weeks after the exchange controls announcement on Oct. 28, the bank said.
The negative repercussions of the currency moves have been partially offset by initiatives this month to reduce government subsidies that have kept consumers’ electricity, water and gas rates at rock-bottom levels. Those subsidies cost about 4% of Argentina’s gross domestic product and are no longer affordable, economists say.
The subsidy reductions will be initially limited to industrial users and residential users located in wealthy neighborhoods of Buenos Aires, said planning minister Julio de Vido and economy minister Amado Boudou, two cabinet officials who are favored by the business community.
But other Buenos Aires residents will be required to fill out forms justifying that they actually have an economic need for the subsidies, said Mr. De Vido, who is a candidate to succeed Mr. Boudou as economy minister when the latter moves on to serve as Mrs. Kirchner’s vice president in December.
It is still unclear how far the government will go in cutting subsidies among residential users, analysts say. Steep cuts would increase the utility bills paid by the mass of the population and likely cost the government political support.
Investors have been left to put their own interpretation on the mixed signals. During a recent conference call with investors, Franco Bernabe, CEO of Telecom Italia SpA, a telecommunications giant that is a big investor in Argentina, praised the subsidy cuts as representing «a very positive approach on problems that have been developing for over a long period of time.»
Nevertheless when pressed by a stock analyst on Argentina’s currency policy, Mr. Bernabe acknowledged that companies were facing «moral pressure from the government» against transferring dividends outside of the country. He nevertheless said that Argentina was on «the right track.»
Source: http://online.wsj.com