31 March 2016
Argentina: Better Prospects Over the Longer Term
- Rich natural resources
- Skilled workforce
- Well-developed agricultural sector
- High inflation
- Balance of payment pressures
- Lack of access to international capital markets
In the presidential run-off election held in November 2015, Mauricio Macri, mayor of Buenos Aires and the candidate for Cambiemos, an opposition alliance, narrowly defeated Daniel Scioli, of the ruling Front for Victory (FV), the dominant faction of the Peronist political movement led by outgoing president Cristina Fernández de Kirchner. The country experienced its second sovereign default in 13 years last year, as the government refused to follow a U.S. court ruling that sought to force it to pay litigant holdout creditors in full, and instead defaulted on a coupon payment owed to holders of global bonds issued during the debt restructurings of 2005 and 2010, effectively cutting off the country’s access to international capital markets.
Inherited a weak economy with anemic growth, dwindling foreign exchange reserves, large budget deficit and high inflation, Macri has promised to put an end to more than a decade of protectionism and state intervention, in order to restore the country’s macroeconomic stability and put the economy back on a path to growth. Another crucial challenge will be the negotiation of a deal with holdout creditors that would allow Argentina to regain access to international capital markets and restore market confidence.
Argentina is a major food producer in the world. It has an export-oriented agricultural sector. A diversified industrial base is led by food processing, motor vehicles, textiles, and chemicals. In recent years, the country experienced sluggish growth, amid the continuation of interventionist and populist economic policies, failure to settle with the holdout creditors, the slump in commodity prices, as well as the slowdown of major trading partners such as Brazil and China. Real GDP is estimated to grow by 1.7% this year, following a 0.5% growth last year, partly due to the increased government spending in the run-up to the presidential election.
Facing a strong pressure on the balance of payments, the Kirchner government imposed restrictions on foreign-currency transactions to protect the dwindling foreign reserves. It also agreed an US$ 11 billion, three-year currency-swap arrangement, with China. Meanwhile, the double-digit inflation has long been Argentina’s major problem, partly due to currency weakness and the previous administration’s reliance on the printing of money to finance the budget deficit. According to PriceStats, a price-monitoring company, inflation remained high at 26.4% in May (latest available data), albeit it was well below the peak of over 40% in late 2014.
Macri has already scraped some taxes on farm exports and lifted capital controls. The official rate of the peso had been about 50% more expensive than the black market rate. By allowing the peso to float more and depreciate sharply, Argentina could improve its business climate, and boost its export competitiveness of its goods in the international market therefore spur exports demand, but it could further push up imported inflation in the short run and lead to social unrest. Closing fiscal gap will require austerity measures and a reduction of energy subsidies (worth over 3% of GDP per year), which are politically difficult.
Hong Kong-Argentina Trade
Total exports from Hong Kong to Argentina increased by 23.4% from HK$3,094 million in 2013 to HK$3,817 million in 2014. The top three export categories to Argentina were: (1) telecommunications, audio & video equipment (+59.4%), (2) electrical machinery, apparatus & appliances, & parts (+4.5%), and (3) office machines & computers (+13.9%), which represented 77.8% of total exports to Argentina.
ECIC Underwriting Experience
The ECIC imposes no restrictions on covering Argentine buyers. Currently, the insured buyers in Argentina are mainly small and medium sized companies. For 2014, the number of credit limit applications on Argentina decreased by 23.5%, while the amount of credit limit applications and insured business increased by 114.9% and 30.3% respectively. Major insured products were chemical products, electronics, and printed matters, which represented 55.4% of ECIC’s insured business on Argentina. The Corporation’s underwriting experience on Argentina has been satisfactory, with no payment difficulty or claim payment case reported from December 2014 to November 2015.