Therein lies one of the bigger challenges facing the year-old administration of President Nestor Kirchner. Argentina is enjoying a remarkable rebound from the economic collapse of two years ago, which toppled a democratically elected government and triggered the largest default on a country’s foreign debt in history. Led by a thriving agricultural sector, the economy grew by 8.7 percent in 2003–the first such increase in five years–and is set to expand by another 7 to 8 percent this year. But already the recovery is looking fragile: factory owners are facing natural-gas shortages as the Southern Hemisphere winter nears, no settlement has been reached with the country’s increasingly restive private creditors and the sky-high prices fetched by soya and other commodities are bound to crash sooner or later. Even the country’s enormously popular chief of state sounds a note of caution. “I believe we are improving, and I hope we’ll find ourselves at the gates of purgatory when my term in office ends,” President Kirchner told NEWSWEEK last month (box). “But we’re still going through hell.”
Nearly half of Argentina’s 36 million people still live below the official poverty line, its crushing foreign debt stands at $180 billion and it will take the country years if not decades to bounce back from a recession that shrank the economy by 25 percent. Yet even for those long accustomed to Argentina’s recurring cycles of boom and bust, the turnaround in the national mood under Kirchner is striking. The rumpled, walleyed politician who took office a year ago this month was an unknown commodity to most of his countrymen; he garnered a mere 22 percent of the ballots cast in the 2003 presidential voting. Today Kirchner faces no opposition worthy of the name outside his own Peronist Party, and has consistently enjoyed approval ratings in excess of 70 percent. “Argentina hasn’t seen as skillful a politician since the days of Juan Domingo Peron,” says the veteran pollster Manuel Mora y Araujo. “This country wants some things to change fundamentally, and Kirchner is an option for change who goes down well with people.”
The 54-year-old Kirchner has achieved those poll numbers without resort to his party’s traditional free-spending nostrums. The government budget is showing a primary fiscal surplus for the first time in memory that is equal to 3 percent of the country’s $150 billion gross domestic product. As a result Kirchner has drawn praise from the same International Monetary Fund (IMF) that took a hard line toward Argentina when the economy went into free-fall in December 2001. “Argentina has certainly done very well in rebounding from the crisis, and a lot of it has to do with extremely good policies on the fiscal side,” said the IMF’s research director Raghuram Rajan last month. “If the debt is restructured and there is an amicable settlement, that will pave the way for Argentina to re-enter global [financial] markets.”
But that’s a big if. Argentina coughed up $3.15 billion in past-due debt payments to the IMF in March but has left its private creditors dangling. Negotiations deadlocked last year after Economy Minister Roberto Lavagna offered to pay those individual and institutional creditors a mere 25 percent on the face value of $88 billion in government-issued bonds. Lawsuits started flying, and earlier this year two American judges ruled in favor of some irate creditors and threatened to impound the Washington-area residences of Argentina’s ambassadors to the United States and the Organization of American States, as well as two other properties belonging to the Argentine Navy (one of the judicial orders was later lifted).
Lavagna plans to unveil a fresh proposal to restructure the country’s privately held debt no later than next month. “We want Argentina to regain its credibility and we want to be serious,” says Kirchner, who will meet with businessmen and officials of the Inter-American Development Bank later this week when he travels to Washington and New York. “We arrived at the figure [of 25 percent] with a great deal of effort, and we hope they understand why we can’t pay more.”
With agricultural exports expected to rise by another 7 percent this year, Argentina is coming under pressure to better its offer to private bondholders. The IMF wants the Kirchner government to run an even larger primary fiscal surplus that would free up more money for debt repayments. Argentine officials have rejected that idea for now, which some think is short-sighted. “Economic growth is being fueled largely by high commodity prices and low interest rates, but that will only take them through another year,” warns one U.S. official. “If they don’t solve their debt and energy problems [now], Argentina won’t be able to sustain its growth and will eventually collapse.”
A looming energy crisis ranks as the Kirchner government’s biggest misstep to date. The president publicly slapped down Lavagna and other senior government officials last year for endorsing a hike in the rates that privately owned utility companies can charge for electricity, phones and other services. Foreign-owned natural-gas producers have been denied price increases for more than two years, and the prospect of energy shortages in the coming winter months has triggered a round of finger-pointing between the industry and the government, which criticizes the companies for not spending more of their profits on new production facilities.
The energy crunch has forced the government to adopt some costly stopgap measures. Kirchner signed an accord last month to purchase imported Bolivian natural gas at more than twice the going rate paid to foreign-owned companies operating in Argentina. The president also provoked a diplomatic row with neighboring Chile by unilaterally slashing Argentine gas exports, which violates existing contractual obligations according to officials in Santiago.
Such a step only reinforces Argentina’s reputation as the ultimate deadbeat country. Indeed, the same man who backed Kirchner in last year’s election, former president Eduardo Duhalde, recently lamented that “we still can’t call ourselves a reliable country.” Some U.S. companies appear willing to take their chances. Agribusiness conglomerate Cargill is investing $200 million on new soybean-crushing plants. Both Ford and General Motors are stepping up production of vehicles and spare parts at their factories, and Lockheed is building two dozen AT-63 Pampa military jet trainer planes. But international financiers and most nonagricultural foreign companies are staying on the sidelines.
That does not bode well for the sustainability of the current boom. Kirchner has three more years to sell them on the merits of his country and economic policies, but to do so, the president will have to resist the clamor from his own constituents to spend the government’s growing surplus on behalf of ordinary Argentines instead of big U.S. banks and bond-holding Italian pension funds. A pro-Kirchner public-employees’ union staged a one-day nationwide strike last week to press demands for higher wages, and other organized-labor groups are bound to follow. Kirchner will have to put those claims aside if he wants to derail the economy’s perennial roller-coaster ride. “Every five years Argentina has a tremendous economic collapse and then a great recovery,” notes the Buenos Aires economic consultant Jose Luis Espert. “That’s been the reality for the past three decades, and the fact that Argentina has grown by 20 percent in the last two years tells me nothing.” Kirchner has at least put Argentina back on the road to recovery–but he still has a long way to go.
