LatinFinance - Special Edition - August 2013 - 72

2
THE
FUTURE
OF LATIN
FINANCE

The last decade was one of missed opportunity for Argentina, says Martin
Redrado, its former central bank president. Whoever leads it through the next
one cannot do so in global financial isolation. By Ben Miller

Martín Redrado
A case for change

72 l atinfina nce.com - 25 Years - August 2013

invest $6 billion, and who because of the
changing conditions – mainly the exchange
rate misalignment – are going abroad,”
Redrado says.

©REUTERS

in 1988, you couldn’t have a conversation
about latin america’s financial markets
without discussing the opportunities in
argentina.
fast forward 25 years and things couldn’t
be more different. more than a decade
of largely self-imposed isolation from the
international financial community, and of
increasingly erratic populism, have undermined an economy that was once the envy
of the region.
for the country’s former central bank
governor martín Redrado, if the 2000s represented latin america’s golden decade,
for argentina, it was a decade of missed
opportunity. Redrado, a consultant who
now also advises opposition candidates, left
the central bank in 2010 after clashing with
the administration of cristina fernández
de Kirchner over the use of central bank
reserves to pay debt.
fiscal accounts, international reserves,
the currency and the trade deficit have all
deteriorated in recent years, Redrado says.
last year, the central government and the
provinces ran a fiscal deficit for the first
time in 15 years, despite the government’s
using the central bank as a “checkbook” for
spending since 2010.
the reserves that are being used to pay
domestic and international debt had once
been used to help shield the economy from
foreign exchange volatility. the peso fell to
5.5 per dollar in august, from less than 4 in
august 2010.
argentine exports abroad now face
stronger headwinds. “inflation has eaten up
any competitive advantage that argentina
has had,” says Redrado. What used to be a
natural trade surplus has evolved into an
artificial one, through a combination of
restrictions on imports and squeezes on
exports.
“there is a gradual erosion in the economy. at this point the only engine it has is
the engine of public sector expenditure

WRONG WAY: Years of isolation from
the international financial community,
and of increasingly erratic policies, have
led to a “gradual erosion” in Argentina’s
economy, says former central bank head
Martín Redrado

and consumption,” Redrado says. By pushing whatever is left into consumption, the
government is trying to keep the Kirchner
model alive.
Redrado predicts GDP growth of 2.3%
this year and 2.1% in 2014. lack of investment is the main culprit. “Without a new
economic approach this process will continue to yield mediocre growth,” he says.
Despite the government’s hostility towards foreign capital, argentina continues
to attract investment in oil: state operator
YPf agreed this year to a $1.5 billion joint
venture with chevron for shale oil and gas
exploration. But Redrado says a decision
by Vale earlier this year to scrap a planned
potassium investment in the country is
evidence that economic mismanagement is
taking its toll.
“Vale’s investment was a signal of
people who were planning to come and

Commodities lifeline
the resilience of commodity prices, in particular for soy, will be crucial in mitigating
further economic deterioration, although
Redrado expects only a moderate price
decline.
“china has the macro tools to continue
to have, not the growth that we have seen in
the last few years, but a considerable growth
of around 7% to 8%,” he says. “commodity
prices may drop around 15% or so. that
is coming from an all-time high – so that is
important but not dramatic.”
While argentina’s economic deterioration of the past couple of years could hasten
political change, today’s predicament is
nothing compared to the calamity that
befell the country in 2001, when the country was forced to default on its debts. today,
levels of corporate debt and foreign external
debt are both relatively low. there is no currency mismatch, and commodity prices are
still 2.5 times higher than they were in 2001.
nevertheless, the crucial factor is
“whether the government, with the current
restrictions, is able to keep the trade surplus, in order to have enough dollars so that
argentina inc can muddle through,” he says.
amid ever choppier global financial
waters investors are likely to be more selective when evaluating prospects in emerging
countries, Redrado says. But he laments
that argentina’s reengagement with the
international financial system is unlikely
under the current government.
Ultimately, he says, only countries that
are “more integrated with the rest of the
world will continue to have [capital] flows
from the developed world.” Words, perhaps, for argentina to heed – no matter who
wins the 2015 elections. LF
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LatinFinance - Special Edition - August 2013

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