No One Cries for Argentina Embracing 25% Inflation of Fernandez

As an immigrant to Argentina in 1992, Zheng Jicong had to learn Spanish and adapt to local customs. As he’s built a chain of three supermarkets in Buenos Aires, he’s still adapting to inflation that’s about six times the rate in his native China.

Zheng, 35, says he has to change prices in his stores daily as suppliers send him new lists, with increases on some products ranging from 5 percent a month to as much as 5 or 10 percent in a single week.

“If I didn’t change the prices, maybe I’d end up selling goods at a price below the new costs,” Zheng says. “In Argentina, you have to get used to this.”

A decade after it defaulted on $95 billion of bonds following a four-year recession, Argentina is again witnessing an upsurge in inflation, Bloomberg Markets magazine reports in its May issue. While official numbers put the rate at about 11 percent, independent economists estimate that the number may be about two and a half times as high.

That would place Argentina second only to Hugo Chavez’s Venezuela, where the International Monetary Fund estimated in October that prices rose 33.3 percent last year, the highest in the world.

Accelerating Spending

Accelerating spending by President Cristina Fernandez de Kirchner’s government is stoking prices, economists say. Outlays on everything from highway construction to pensions climbed 37 percent last year from 2009 -- and increased 39 percent in January of this year alone. Fernandez’s largesse is made possible in large part by the global commodities boom.

Foodstuffs such as soybeans, wheat and flour accounted for about 70 percent of the country’s export revenue in 2010, according to Agritrend SA, a Buenos Aires-based research company.

Export tax revenue, led by a 35 percent levy on soybeans, rose 11.2 percent in February from a year earlier to 3 billion pesos ($740 million).

Argentina’s 40 million people are spending, too -- as a way to protect themselves from rising prices. They’re buying everything from flat-screen televisions to cars and even property. Sales of such goods as home appliances, toys and clothing soared 39.5 percent in December from a year earlier, the biggest increase for that month since at least 1998. Auto sales gained 43.3 percent in unit terms, the most since 2004.

Wages Increased

Demand for construction supplies such as cement, steel and paint was up 20 percent in December. Consumption helped push economic growth to 9.2 percent last year from 0.9 percent in 2009. Fueling that growth -- and inflation -- is government support for annual wage increases of 30 percent or more.

Prices -- and wages -- have been rising so fast that in November and December, the Central Bank of Argentina was unable to print enough money to meet the demand for cash from consumers and companies trying to cover year-end salaries and bonuses. As Argentines lined up at empty ATMs in the middle of a heat wave, the central bank took the unprecedented step of hiring Brazil’s mint to crank out 160 million 100-Argentine-peso notes, so that there would be enough cash for individuals eager to buy holiday gifts and start their summer vacations.

“If we have an inflation rate of 25 percent to 30 percent, that means an important monetary expansion,” says Roque Fernandez, a former president of the central bank and an economy minister in the 1990s. “What we didn’t know until then was that there were problems with issuing that amount of bills.”

Central Bank Response

In most countries, scenarios like that would strike fear in the hearts of policy makers and consumers. Not in Argentina.

Inflation is a result of companies being unable to meet consumer demand and should be resolved by boosting loans for production, Mercedes Marco del Pont, the current central bank president, says. She plans to increase the money supply by 28 percent this year to accommodate economic growth, a move she says won’t affect inflation.

“The price problem doesn’t have monetary roots,” the Yale University-educated central banker, 51, says. “The conditions that could cause inflation to accelerate don’t exist in Argentina.”

In fact, Marco del Pont says, the global economic slump of the past few years has shown how central bank intervention can play a role in developing the country’s economy. “The bank has a goal of stability not only in the financial system but also in the real economy,” she says.

‘We Had It Much Worse’

Many ordinary Argentines, who remember the days in 1989 when the annual inflation rate exploded to 5,000 percent, are taking today’s numbers in stride, too.

“We had it much worse,” says Carlos Roberto Acosta, a 35- year-old taxi driver from Avellaneda, on the outskirts of Buenos Aires. “I was a teenager working in a store when we had hyperinflation,” Acosta says. “I remember the owner coming up to me one day and saying ‘Don’t sell anything’ because we didn’t know how much it would cost to replace it.”

Much of the country’s economy is geared toward coping with inflation. “It’s all about adaptation,” says Marcos Katz, who runs a fabric store in General Guemes, a town of about 30,000 people in the northwestern province of Salta. He says he visits bigger cities such as Cordoba or Buenos Aires once a month to look at the prices in larger stores. “I try to keep up with their pace,” he says. “That’s what a lot of small-business men do.”

‘Banks Are a Dreadful Thing’

Katz, who’s been in business since 1974, says he’s learned to work mainly without banks after living through bouts of hyperinflation. “Banks are a dreadful thing,” he says. “You get a lot of financing from your suppliers.”

One consequence of Argentina’s long history of inflation is that people often pay in cash for even the largest purchases, such as homes or cars.

“It’s easy for Argentines to remember how to face inflation,” says Claudio Loser, an Argentine who led the Western Hemisphere Department at the International Monetary Fund during the 2001 crisis. “They defend themselves against inflation by investing.”

Eduardo Costantini knows that well. In four days during October, the head of Buenos Aires-based real-estate and asset management group Consultatio SA says he sold 900 lots in an undeveloped housing project outside Buenos Aires for a total of $75 million, without even advertising.

Costantini, 64, says Argentines are wary of investing abroad because of financial turmoil and are unsatisfied with near-zero interest on dollar bank deposits -- not to mention the negative real interest rates on peso deposits.

Nowhere to Invest

“If you buy dollars, you are dead,” says Costantini, an art collector who founded the Museum of Latin American Art in Buenos Aires. “If you invest abroad, you don’t know what will happen because of the uncertainty, and if you deposit money in banks, they pay nothing.”

The construction boom has boosted business for Ceramica Fanelli SA, a brickmaker in Buenos Aires that’s investing 5 million euros ($7 million) for equipment from Italy that will increase its output by 50 percent this year.

“Production is being outpaced by demand,” says Claudio Moretto, the company’s commercial director. “It’s incredible, the pressure I’m getting from our clients.”

There’s a dark side to the increased demand, says Moretto, 50, who estimates inflation was 25 percent last year and forecasts a similar leap in 2011. “We can’t pass on to clients all of our cost increases, so the company’s margins are narrowing,” he says.

Inflation’s Dark Side

Rampant inflation threatens the whole country’s long-term economic health, says Roberto Lavagna, who as economy minister for Fernandez’s late husband and predecessor, Nestor Kirchner, led the country’s debt restructuring in 2005.

Argentina, Latin America’s third-biggest economy, has sunk to sixth in the region as a destination for foreign direct investment. It attracted just $2.2 billion in the first six months of 2010, according to the United Nations, compared with $17.1 billion for Brazil, $12.2 billion for Mexico and $8 billion for Chile.

“There’s a combination of a satisfactory situation regarding economic growth on the one hand but with imbalances that are reflected in high inflation and an investment rate that is below what the country needs on the other hand,” Lavagna says.

Costs for Importers

Inflation in Argentina is putting a lot of pressure on costs for importers, says Hector Trevino, chief financial officer of Coca-Cola Femsa SAB, Latin America’s largest soft- drink bottler. The Mexico City-based company saw its Argentine freight costs jump almost 70 percent and salaries climb 35 percent during the fourth quarter of 2010, he said in a conference call with analysts in February.

“The impact that we have had in freight cost in Argentina and salaries is tremendous,” he said.

Companies with employees in Argentina, which raise wages to keep pace with inflation, feel a similar pressure.

“In 2010, payroll costs in Argentina were up about 20 percent in dollar terms,” Antonio Brufau, chief executive officer of Repsol YPF SA (REP), Spain’s biggest oil company, said in a Feb. 24 news conference in Madrid. In 2011, those costs will rise as much as 25 percent in pesos, he added.

After presidential elections in October, the next government will have to make hard decisions on whether to tighten fiscal and monetary policy, says Lavagna, who now runs the Institute of Applied Economics and Society in Buenos Aires.

Fernandez Leads Polls

Fernandez hasn’t yet announced whether she’ll seek a second term. According to a Jan. 24 to Feb. 3 survey by pollster Management & Fit, Fernandez would win 27.1 percent of the votes in a presidential election, followed by opposition leader Ricardo Alfonsin, son of former President Raul Alfonsin, with 6.6 percent, and Buenos Aires Mayor Mauricio Macri, with 5.4 percent. About 38 percent of those polled were undecided or didn’t say whom they’d vote for.

Fernandez, 58, owes her lead in the polls partly to her continuing many of the policies of her husband, whom she succeeded in December 2007. She has kept the peso weak, so local goods have remained cheap and exports have been strong. Since Fernandez took office, the Argentine peso had fallen 22.4 percent as of March 24, the most among major Latin American currencies. As a result, unemployment tumbled to 7.3 percent in the fourth quarter of 2010 from 22 percent in 2002.

Kirchner, who died of a heart attack in October, also created or kept price caps on everything from electricity to beef. And he threatened foreign investors who stepped out of line, calling for a national boycott of Royal Dutch Shell Plc (RDSA) for raising fuel prices in 2005. The company backed down.

Index Underreported

And when inflation remained stuck at about 10 percent in 2006, Kirchner replaced the officials in charge of the CPI report. Since then, Lavagna says, the government has underreported the consumer price index. The bureau says prices rose just 10.9 percent last year, while research firm Ecolatina, which Lavagna founded 30 years ago, says the gain was 26.6 percent.

“What we said when we took office is that consumption ensures an active market, ensures growth,” says Lavagna, who left Kirchner’s government in 2005 and finished third in the 2007 presidential race. “But consumption that generates investment is one thing. Consumption that generates inflation is another thing.”

Fernandez last year invited the IMF to visit the country to help create a national inflation index. In February, her government began threatening independent research institutes, including Ecolatina, with fines of as much as $125,000 for not revealing how they calculate their CPI estimates. Jorge Todesca, a former deputy economy minister who heads Finsoport, one of the firms that received letters from the government, said the move is aimed at intimidating researchers and the companies they talk to.

Beef Prices Double

Threats or not, there are increasing signs that Fernandez won’t be able to use artificial means to hold off inflation. The price of beef -- a sacred staple in a country that’s the No. 2 consumer of meat per capita in the world -- more than doubled as ranchers couldn’t meet demand from depleted herds. Argentina’s trade surplus shrank to $241 million in December from $1.2 billion a year earlier. Despite the economy’s growth, it’s failing to attract enough investment to meet consumer demand, Loser says.

“The first effect of any inflationary process is euphoria, because people go out and spend,” Lavagna says. “But later come the costs of that policy.”

Once the party ends, Argentina’s next president will have to tally those costs.

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

To contact the editors responsible for this story: Laura Colby at lcolby@bloomberg.net or Joshua Goodman at jgoodman19@bloomberg.net

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