US crisis hits Argentina

As the world awaits news of whether the US government will step in to rescue the global financial system, South American nations – including Argentina – are already feeling the effects of the crisis.

President Cristina Kirchner initially ventured to assert that Argentina would remain largely untouched by the crisis. While claiming this economic sturdiness as some kind of achievement of hers, it’s really just due to the fact that credit plays such a small role in Argentina’s economy, where people buy houses in cash and relatively few have access to credit cards.

But the country is already learning that their president was quite mistaken. Soy – one of Argentina’s most important exports – has already fallen to US$384 per tonne, a drop of 35% over the last two months. Given the government’s high (and controversial) export duties on grains, including soy, which is taxed at 35% of export sales, this will have a serious impact on revenues next year – some say the government will gather up to 10 billion pesos less in 2009.

Meanwhile, inflation is still putting pressure on consumers – and despite the fact that official statistics downplay the inflation rate, it’s also making it hard for the government to rein in public spending. Already the government has had to cut energy subsidies and raise tariffs on services, but some say in the new year public infrastructure projects will also be affected.

Neighbouring economies will also affect Argentina’s economic health. There are fears that if Brazil’s growth slows, Argentina’s exports to its major trading partner will drop, while Argentine business is nervous about Brazilian imports flooding the local market.

And of course credit – hard enough to get in Argentina – will become even tighter, with mortgages only offering variable rates. Argentine consumers will, like others elsewhere, put major purchases on hold and cut overall spending while they wait and see what happens.

All of this throws in doubt the capacity of Argentina to make good on bold plans to pay its debt to the Paris Club and to strike a deal with those still holding Argentine bonds that were subject to the country’s 2002 default.

The Kirchners have benefited extraordinarily well from a rapidly growing Argentine economy, overhwlemingly driven by high commodity prices. With the US economy going into recession, the US will buy fewer products from China, slowing that country’s growth and causing a drop in demand for Argentina’s soy and other food products. The Kirchners have every reason to be nervous.

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