Political risk in Argentina

Political risk in Argentina

            During the last decades, that is, 2000-2010, the political risk in Argentina has highly appreciated. The rule of law and institutional quality no longer exists in the dissimilar administrations and this nation is now facing the outcomes. The approval of laws affecting the private material goods and contracts, expropriation procedures, failure to pay of sovereign debt, undefined parameters in the conceding of regulatory authorization and the infringe of law by the government. In spite of the institutional and political risk it must be considered that, since the historical standpoint, the Argentine politics have recently attained a constant democratic system (Smith, pp 90). Considering the political climate of current years there are basis to believe that, the next presidential election could be the beginning point for an improved political climate in this country. Studies have reflected that, the government dishonor for laws, not forgetting the high stages of corruption, is amongst the major allege of the community. At a similar time, disagreeing parties are organizing efforts in the congress to impose, or restore some of the constitutional restrictions to the executive power. The opposition leaders are also working to arrive at an agreement on the basic public guiding principle for the subsequent government, which comprise of replacing of rules of laws and institutions in order to encourage investments.

Political risk in Argentina

Notwithstanding the portrayed political risk, several statistics mirrors that, Argentina’s economy has grown and developed at an average yearly rate of nine percent between 2003 and 2008. Argentina also remains the third largest economy in America, as it ranked behind Mexico and Brazil in the year 2008 in terms of gross domestic goods. From the current economic perspectives, the global economic points of view for the subsequent years are also favorable for this country, which is well-off in natural resources with a developing global demand (Felipe, pp 30).

Foreign direct investment has played a major role in the Argentina’s economy since the nation’s modern history. During the season of the well known agro-export model, under which the primary goods exports drove a potent economic expansion, foreign direct investment was one of the major channels of technology shift. Foreign direct investment was vital in various areas, as Argentina was one of the chief destinations, entailing, export associated activities (for example, railroads), sections where demand was increasing as a result of urbanization and economic modernization (for example, banking and public utilities) and finally the industries focused at meeting flourishing domestic demands (for example, chemicals and foods)

A major go down for the Argentine society and economy. From1999-2002, real GDP turned down by more than eighteen percent (Felipe, pp 37). There was also a banking collapse, resulting in non-payment on the external debt and enormous peso deflation during a period of sharply rising poverty and unemployment rates. This let loose a deep political crisis.

After the deflation, the new government who took over the office in January 2002 employed, among additional measures, the denomination in pesos of interior contracts and compulsion and of public services rates. In various cases, privatized utilities’ rates had been set in US dollars during the ninety’s. Bank credits and deposits denominated in U.S dollars were also pacified but inequitably, with the government recompensing the banks for the differentiation. Banks became main objects of popular legal suits and anger due to the pacifications of the deposits.

An economic recuperation commenced in the second quarter of 2002 and from then GDP has grown gradually. While GDP growth was depreciating in 2002, over the subsequent four years the economy developed at around nine percent per annum. Furthermore, even if poverty and unemployment rates fell, they are still very high by Argentina’s historical principles.

            By late eighty’s, under threatening macroeconomic situation, with vital business interests having severe difficulties adapting to the fresh regulations of the game, and with rising social discontent as a consequence of the economic restructuring, the Argentine economy endured the external shocks of the Brazilian and Russian. The two core consequences of these crises were, initially, a sudden stop in capital inflows, and next, a new round of peso over-valuation because of the Brazilian deflation, but also to the US dollar appreciation. Under such conditions, exterior debt indicators reached risky levels, raising the nation risk premium and resulting in increasing capital flight. This nation suffered three years of recession along with devaluation. By the year 2001, the nation was in the most horrible crisis in its history (Bethel, 45).

            FDI was not a solution for Argentina’s economy in the ninety’s, but has also not been the main cause of social problems like environmental degradation, unemployment or increasing income inequality. However, it appears that Argentina let pass the opportunity to harvest more gains from the huge FDI inflows that the nation received in the past decade. While TNC affiliates showed better microeconomic performance than local firms, the latter reaped almost no spillovers from the foreign presence.

Furthermore, FDI never appeared to add to diversification of the nation’s productive organization, development of its trade specialization trend, rising capital formation or access to fresh markets in developed countries. Its effect on the balance of payments was not as encouraging as expected because of high profit remittances.

            The Argentina’s capital market is overcoming the legacy of unwilling foreign creditors, and as a result, like her neighbors, we can expect a very dissimilar investment, external capital flows in future and advanced savings pattern, with intense effects for growth as well as for the institutional form of the economy. The main causes of such changes are, new demographic patterns, exterior capital market displaying higher interest in rising markets and a shift in prices.  

            In last years, with an effort to battle inflation that had reached two thousand percent, the government substituted the nation’s usual currency (peso) with a new one named the austral. However, the inflation continued to appreciate and reached five thousand percent which almost made the nations currency out of worth. In rejoinder the government changed the currency again substituting the austral with the Nuevo peso Argentino. Finally the inflation was brought under regulation when the government fixed the Nuevo peso to the dollar. As this almost wiped out inflation, it also suggested that the government had less control over the worth of its currency. Immediately the currency was pegged to dollar, it became known as the peso. The Argentine peso is set at one for one exchange rate with U.S. dollar, whilst the dollar varies freely on globe markets; it has resulted to a noteworthy degree of monetary stability to the Argentine economy and currency. The country’s banking system and currency are over-seen by the Argentine Central Bank, this bank sustains the currency reserves of U.S twenty five billion dollars that would cover nine months of imports. The central bank has also organized U.S seven billion dollars emergency fund that is financed by the international banks and organizations. This fund might be used to shield the country’s financial stability (Davis, pp 49).

Argentine peso (ARS) to 1 US dollar

Month/yearExchange rate
Jan 20093.93 ARS
Mar 093.94 ARS
May 093.92 ARS
July 093.93 ARS
Sep 093.93 ARS
Nov 093.90 ARS
Jan 20103.94 ARS
March 103.94 ARS
May 103.93 ARS
July 103.95 ARS
Sep 103.94 ARS
Nov 103.94 ARS
Average3.93

            Several industrial goods imported prior to nineteen sixty’s are currently produced in Argentina. This nation removed all non-tariff barriers to trade in 1991 and lowered tariff rates. The major non-tariff barrier, is the tariff quota system, which is applicable to auto parts and auto imports. A flow in imports during year 91/92 changed the trade balance form a huge surplus to a deficit rank. The strong rise in imports is elaborated by various factors which comprise of, the dynamic development of the domestic economy which led to higher import demand, the lessening of import tariffs and abolition of non-tariff barriers that released pent up demand for imports and lastly the actual appreciation of peso that made imports less costly since the local currency cost of products increased by much lower than the accumulated inflation since the commencement of the convertibility plan.  

The incapability of Argentine government to stay within its means is not amazing, however, this is a nation well known for economic and political corruption. The government payments assists in supporting corruption and several Argentines plan their economic affairs to illicitly avoid tax payment, sometimes justifying their acts as lessening the support for a corrupt structure.

Recommendations

Despite the world economic crisis, many firms located in Argentina reported last year to have yielded encouraging results than before and every business person is optimistic for higher economic growth in the coming years. I believe that this nation is good for investment especially for every manager who plans to start a business as there is hope for up-coming businesses. 

References

Bethel, L. The Cambridge History of Latin America. Japan. Rutledge publishers. 1995

Davis, C. Argentine Economic Crisis. Chicago. Chicago Publishers. 2010.

Exchange rates. Retrieved 1st Dec 2010 from http://www.exchange-rates.org/history/ARS/USD/T         

Felipe, A. Remarking the Argentine Economy. London. WBC Publishers. 1995

Smith, W. Authoritarianism and the Crisis of the Argentine Political Economy. New York. Macmillan Publishers. 2008

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