The Argentine Economic Crisis:1999-2002 Araik Akopyan, Eddy Alvarado, Heng Sun, Justin Smith
Prior to the Crisis • 1989-1994, President Menem switched to a free-market approach. • The switch reduced the burden of government by privatizing, deregulating, cutting tax rates, and reforming the state. • On April 1, 1991, the president established the Convertibility Law. • The Convertibility Law ended the hyperinflation by establishing a pegged exchange rate with the United States dollar.
Prior to the Crisis Cont. • The exchange rate was 10,000 Argentine australes to 1 USD. • On January 1, 1992 the peso replaced the austral, hence, 1 peso = 10,000 australes = 1 USD.
Prior to the Crisis Cont. • The inflation rate plummeted from 1344% to an annualized 27%. • In 1994, the inflation rate went down below 4%. • Argentines were allowed to use dollars freely, and the country developed a “bi-monetary” system in which loans and bank deposits in dollars became widespread. • Real GDP per person leaped more than 10% a year in 1991 and 1992. • Real GDP slowed down to a more normal rate of 4% in 1993 and 1994.
Prior to the Crisis Cont. • Before 1998, Argentine economic growth grew at a relatively slow pace. • In the mid of 1998, Argentina felt the effects of currency crisis in Russia and Brazil. • The prime rate rose from below 8% a year in August 1998 to a high of 19% in late September. • The economic crisis was inevitable.
What Caused the Crisis • External events of 1998 and 1999 • The January 2000 tax increase • Additional tax and Monetary Policy Blunders • The Argentine government entered into a “debt trap” by mid 2001 • Government policies “contaminated” the private sector in late 2001 and 2002
External events of 1998 and 1999 • Brazilian currency crisis • Russian currency crisis • High interest rates • Foreign investments decreased in major developing countries
The January 2000 Tax Increase • Increase in tax rates • 3 big tax increases: January 2000, April 2001, and August 2001. • High tax rates encourage tax evasion: • 23% estimated of the economy in underground and 30% to 50% of all transactions evaded taxes.
Additional Tax and Monetary Policy Blunders • President De La Rua wanted to avoid devaluation of the peso: • Cut government spending • Increase tax rates • Financial transaction tax = a fee payable on every bank deposit or withdrawal. • Domingo Cavallo is appointed as the economy minister. • April 17, 2001 he introduced a bill to switch the exchange rate link of the peso from the U.S dollar alone to a 50-50 combination of the dollar and Euro. • On June 15, he announced a preferential exchange rate for exports.
The “Debt Trap” of 2001 • The Argentine government entered into a “debt trap” by mid 2001. • Shrinking economy decrease in the tax revenue can not finance the debt. • Country Risk Premium • Private sector was better off than the public sector.
Government Policies of 2001 & 2002 • The final phase of the crisis • December began with a freeze on bank deposits, in response to large withdrawals on Nov 30. • The freeze was known as “corralito,” meaning little corral. • IMF cuts off lending. • General strike occurred. • Cavallo and President De la Rua both resigned.
Debt Restructuring • Argentina defaulted on most of its foreign debt in 2002, causing a capital flight • The country’s foreign reserves were virtually all gone • In 2005, Argentina was able to get 76% of its defaulted bonds to be exchanged by others at about 30% of their original value
Convertibility Ends • President Eduardo Duhalde ends the 1:1 peso to dollar exchange rate in January 2002 • A provisional exchange rate of 1.4 pesos per dollar was implemented at first • By 2002, the exchange rate had dropped to 4 pesos per dollar • This led to rampant inflation, peaking at 10.4% in April 2002
Effects on Argentine Companies • Aerolíneas Argentinas came close to bankruptcy • Many countries put restrictions on Argentine agricultural exports due to fears of them being sub-standard from the poor conditions they grew in • Television companies were forced to make mostly reality shows due to their cheaper cost compared to traditional ones
Road to Recovery • Import substitution industrialization • Export-oriented industrialization • Increase the amount of available credit for businesses • Increase social welfare spending while cutting other types of government spending • Amount of foreign currency reserves in Argentine Central • Bank (millions of USD)
International Monetary Fund • In January 2006, Argentina paid back all of its remaining debt to the IMF in one single payment of $9.18 billion USD • This payment represented 8.8% of Argentina’s total public debt and decreased the country’s reserves by one-third • The payment was made ahead of schedule, and therefore saved about $1 billion USD in interest
Social Effects • Poverty and the income gap grew tremendously during the crisis • The wealthiest 10% received more than 31 times more income than the poorest 10%
State of Affairs 2003-2008: GDP • Five consecutive years of 8% real growth in GDP. • In 2008, official real growth rate of 6.8% • Argentine GDP reaches $326.7 billion • Approximately $8,219 per capita • Investment increased 9% for the year and represents approx. 23% of GDP.
State of Affairs 2003-2008: Unemployment & Poverty • Unemployment was 8.4% in 1st quarter of 2009. • Poverty drops since the crisis of 2001-2002. • Last half of 2008, poverty level was 15.3%.
State of Affairs 2003-2008: Benefits • Rich natural resources • Highly educated population • Globally competitive agricultural sector • Diversified industrial base
Catalytic Factors Supporting Renewed Growth: 2003-2008 • Flexible Exchange Rate Regime • Sustained global and regional growth • Domestic aggregate demand via: • Monetary distribution policies • Policies that control a countries supply of money, availability of money, and cost of money or rate of interest. • Fiscal distribution policies • Income distribution policies • Favorable international commodity prices • Interest rate trends
Fiscal surpluses since 2003 • The government accumulates over $44.9 billion • Higher tax burdens • Tax collection efforts • Recovery’s strong impact on tax revenues
Current State of Affairs: Effects of Current Crisis • Global meltdown currently results in the end of Argentina’s economic expansion • Deterioration of domestic and international demand • Complications of fiscal situations of both federal government and the provinces
Current State of Affairs: Exchange Rate Policy • Based on a managed float • Average exchange rate of 3.16 pesos per dollar in 2008 • 3.87 pesos per dollar in September of 2009
Current State of Affairs: Trade & Exports • $13.2 billion trade surplus in 2008 • Foreign trade approximately 39% of GDP in 2008 • Played an increasingly important role in Argentina's economic development • Exports totaled approximately 22% of GDP in 2008 • Key export markets included MERCOSUR (23% of exports) • the EU (19%) • NAFTA countries (10%) • Two-way trade in goods with the U.S. in 2008 totaled about $13.3 billion • Total two-way trade in services in 2008 was $3.4 billion
Current State of Affairs: Trade & Exports • The production of grains, cattle, and other agricultural = backbone of Argentina's export economy. • High-technology goods and services are emerging as significant export sectors. • The decline in global commodity prices, slower global and domestic growth, and some changes in trade policy in late 2008 and in 2009 had an impact on foreign trade, with imports and exports falling 39% and 21% annually, respectively, in January-July 2009.
Current State of Affairs: Argentina and America • 500 U.S. companies operating in Argentina • Employing 155,000 Argentine workers • U.S investment in Argentina concentrated in: • Manufacturing sectors • Information sectors • Financial sectors
Current State of Affairs: Debt of Argentina • Outstanding debts include: • Over $20 billion in default claims by international bondholders and between $7 billion and $8 billion owed to official creditors • Debts paid by Central Bank reserves • Government of Argentina, launching a debt swap of up to ARS 8.3 billion in inflation-linked debt for a new 2014 floating rate bond