Why Argentina Downgraded from an Emerging Market to a Frontier Market?

After the Argentina case study I was very curious to know its situation in the last decade or so.

I went through various interesting articles which could throw light on the current economical and political situation within in the country. I am writing this blog compiling the best possible information from all the sources I have gone through (Sources which I have mentioned at the end) & my understanding from them.

Till 2008 Argentina was clinging onto its emerging market status. MSCI Barra, (MSCI Inc., trading as MSCI Barra, is a provider of investment decision support tools to investment institutions) whose stock indexes are tracked by investors with $3 trillion in funds, downgraded Argentina to a “frontier” economy from an “emerging market” in February 2009, citing its restrictions on foreign capital. (Frontier markets are countries with investable stock markets that are less established than those in the emerging markets. They are also known as "pre-emerging markets”). That put South America’s second-biggest economy, after Brazil, in a category with Sri Lanka and Kazakhstan.

On March 20, the Merval stood at 672.31, down more than 50 percent from a year earlier. By comparison, Brazil’s Bovespa and Mexico’s Bolsa declined about 40 percent during the same period. After more than five years of annual economic growth faster than 8 percent under Kirchner, it shrank to 1.1 percent this year, putting it on track for the first recession since 2002.

Access to fresh international loans was blocked by lawsuits from holders of $20 billion of bonds the country defaulted on in late 2001; an additional $140 billion of outstanding debt trades at default levels.

Some of the reasons can be attributed to the following events of the past:-

Protest Against Dictatorships

Protests against the government and banks left more than two dozen people dead in December 2001. Within a few weeks, Argentina had five different presidents, and the following year the poverty rate rose to 50 percent while the economy shrank 10.9 percent.

Kirchner won the presidency in May 2003 with 22 percent of the vote after his opponent, former President Carlos Menem, declined to compete in a runoff.

Controversial Policies

Kirchner’s policies were controversial. Ignoring advice from independent economists and the International Monetary Fund, he fought inflation by prodding supermarkets to cut prices. He told domestic business leaders to “share” more of their wealth.

Underestimation

Kirchner’s former economy minister, Roberto Lavagna, and research institutes including the Buenos Aires-based Latin American Economic Investigations Foundation, or FIEL, said that the government numbers underestimated inflation by at least half.

Snubbing Leaders

Kirchner was also famous for snubbing visiting dignitaries including former Vietnamese President Tran Duc Luong and former Hewlett-Packard Co. Chief Executive Officer Carly Fiorina when they visited Argentina.

Souring Relations with the U.S

Argentina’s relations with the U.S. soured after prosecutors in Miami said they’d arrested four people for being illegal agents of Venezuela’s Chavez. Their alleged mission was to cover up the $800,000 donation to Fernandez’s presidential campaign.

30 Cents on the Dollar

He offered foreign investors who held Argentina’s defaulted bonds 30 cents on the dollar -- the worst terms since at least World War II -- and refused to negotiate.

Fernandez, who became a senator from Buenos Aires after the couple moved to the capital, shepherded his legislative efforts through the Senate. She also backed laws overturning amnesty for military officers accused of human rights abuses during Argentina’s 1976-1983 “Dirty War” and helped extend emergency economic powers for the president that allowed Kirchner to redirect government spending without consulting Congress.

One way in which Kirchner used his authority was to designate his successor. On July 2, 2007, Kirchner announced that his wife Fernandez would be the Peronist party’s candidate to succeed him in October elections. The popularity of her husband’s policies carried the day, and she won 45 percent of the vote -- double the amount received by her closest rival, former lawmaker Elisa Carrio.

 ‘Prospects Weren’t Good’

President Fernandez repeatedly clashed with the country’s powerful soybean farmers, whose crops are the country’s biggest source of export revenue.

With inflation quickening and the government still blocked from international credit markets, in March 2008 Fernandez turned her eyes toward agriculture to raise funds. Argentina is the world’s third-biggest soybean exporter and prices for the crop were booming. A bushel of soy that cost $11.25 on the day Fernandez took office surpassed $15 per bushel barely two months later -- a windfall for the government, given a tax rate of 35 percent on exports.

Fernandez’s popularity plummeted to 20 percent during a face- off with farmers in 2008. It stood at 29 percent in February, according to Poliarquia Consultores, a polling organization in Buenos Aires.

Cash Beneath Mattresses

The slump was the latest in a series of economic crises Argentina had faced since the Great Depression. Today, middle-class and wealthy families keep thousands of U.S. dollars in cash stuffed under mattresses or in home safes for just such emergencies.

Fernandez, who gives hour-long speeches without notes, relies in part on a shrinking list of defectors from opposition parties to form a majority. Even her fellow Peronists had been deserting her, leaving her with a slim one-vote margin in the upper house of Congress.

‘Oligarchs’

Fernandez attacked the farmers, calling them “oligarchs” who drove expensive sport utility vehicles and supported the country’s military dictatorships in the 1970s.

On the rural highways of Argentina, farmers manned roadblocks, letting passenger cars go by while trucks were left idling. They held roadside prayer services and cooked midnight barbecues to get through the winter nights.

Shift in Momentum

Facing a stalemate, Fernandez sent her tax proposal to Congress, counting on her ruling coalition’s support to step up pressure on the farmers.

Senate debate began on July 16, 2008, and continued past midnight. Vice President Cobos, a member of the Radical party who served as a president of the Senate, oversaw the deliberations.

In the early morning hours, sensing that momentum was shifting against the government, Cobos sat in his offices trying to convince Fernandez’s cabinet chief that a final vote should be delayed, he says. The idea was rejected.

Call for Voting

In the ornate Senate chamber, Fernandez’s coalition was crumbling. Cobos rejoined the debate and, after all the senators had spoken, called for the voting to begin.

Ten seconds later, an electronic scoreboard read 36-36. Cobos called for a second vote.

Again, it was a tie.

“I don’t believe in backing a law that won’t help resolve this situation,” Cobos told the hushed chamber. “I can’t go along with this. ... My vote isn’t for, it’s against.”

At a public park in Buenos Aires, where they had gathered to watch the proceedings on a giant outdoor screen, farm leaders and their supporters burst into celebration, dancing and praising Cobos.

Two weeks after the vote, Fernandez told him that their relationship would be purely “institutional.” It was the last time they spoke.

‘Instability’

Amid the controversy, Fernandez had been making herself scarce in the capital. Rather than coming to the presidential palace, she prefered to do her day-to-day work at home with Kirchner, who handpicked her to be his successor.

She also made frequent visits to a vacation home in her husband’s native Patagonia. The newsweekly Noticias branded Fernandez the “Part-Time President” for her travel and work schedule in a February 2008 cover story.

Grab for Pensions

With the tax increase on soybeans scuttled, Fernandez needed other sources of cash. The government’s borrowing needs totalled about $20 billion in 2009, up from $7 billion in 2008.

So Fernandez turned to the country’s private pension system, managed by companies such as Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA and London-based HSBC Holdings Plc. About 3.6 million Argentines kept their retirement savings in the private system and 450,000 received monthly payments. In addition to $24 billion in assets, the pension funds also took $4.5 billion in contributions that year.

Trumpets and Drums

“While the world’s biggest economies are undertaking policies to protect banks, we’re doing this for our retirees and our workers!” Fernandez said. The crowd blew trumpets and banged on drums.

Citigroup Inc. strategist Geoffrey Dennis called the decision the death knell for Argentina’s equity markets. That day, Argentine bond yields soared above 24 percent from 8.3 percent on the day Fernandez took office.

Pedrajo, the foreign investor, says. “This isn’t a model for growth. It’s not a model for sustained health. And it’s a very bad model for attracting new private capital.”

There again, Fernandez changed her tune. She was now willing to consider a deal with holders of about $20 billion in defaulted debt. Barclays Plc, Deutsche Bank AG and Citigroup submitted a plan to Fernandez that aims to resolve the outstanding claims.

With Fernandez in charge, the only thing worth betting on was that the outcome will not be what anyone expects.

Sources :- Bloomberg  &  frontiermarkets.wordpress.com

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written by Tejas Nahar (tejas.pgdm14c@greatlakes.edu.in)