Feb. 4 (Bloomberg) -- Jorge Contrera checked a pair of soiled shoes from top to bottom, tried to buff them with his shirt sleeve, then paid 40 pesos ($5) for his 8-year-old daughter’s present. Before Argentina’s devaluation last month, he planned to surprise her with a new pair.
“Do you know how I feel buying my daughter used shoes?” said 29-year-old Contrera, a welder who’s currently working as a delivery man. “The new shoes just went up and I don’t have the cash.”
Like Contrera, many Argentines see their standard of living falling as the fastest pace of inflation in a decade erodes their purchasing power and confidence in President Cristina Fernandez de Kirchner’s economic policies. Last month’s 19 percent devaluation of the peso, which drove up prices on products from cars to refrigerators, highlights Fernandez’s dilemma. If she adopts unpopular belt-tightening measures, she could face social unrest, said Mariel Fornoni, director of polling firm Management & Fit.
“It’s a critical moment for the government and there’s no reason to believe things will get better,” Fornoni said in an interview. “There’s a real risk of growing protests in coming months.”
Since Jan. 27 the government eased some currency restrictions and raised interest rates by more than six percentage points in an effort to reduce dollar demand that has drained central bank reserves by 34 percent to $28 billion over the past year.
Real interest rates remain negative and unless the government cuts spending, including energy subsidies, Argentina’s vicious cycle of inflation, capital flight and devaluation will continue, Mark Mobius, chairman of San Mateo, California-based Templeton Emerging Markets Group, wrote in a note to clients on Jan. 30.
While Argentina’s Merval stock index nominally has risen 112 percent since Fernandez’s Oct. 2011 re-election through yesterday, those gains evaporate if returns are converted to dollars at the rate investors use to avoid currency controls.
Economy Ministry press official Jesica Rey didn’t respond to an e-mail message from Bloomberg seeking comment on government measures to curb surging inflation. In a series of Twitter posts from a summit in Havana last month, Fernandez said banks, importers and exporters were behind “speculative” movements in the markets, without giving more details.
The peso’s plunge this year is the largest among 169 currencies tracked by Bloomberg, and investors have dumped government dollar bonds that have lost 15.7 percent, according to data compiled by Bloomberg and JPMorgan Chase & Co.’s EMBIG index. The cost to protect the nation’s debt against non-payment over five years with credit-default swaps has jumped 10.26 percentage points this year to 26.64 percent as of 2 p.m. in New York, the highest in the world.
For the first time since at least 2008, salary gains last year fell short of consumer price increases, according to Buenos Aires-based consulting firm Elypsis, which estimates its own inflation index.
In January inflation accelerated to 6 percent from 3.5 percent a month ago and will come in around 4 percent in February, said Luciano Cohan, chief economist at Elypsis. Prices rose an estimated 28 percent in 2013.
“These higher levels of inflation are provoking discontent, and government measures to control it are increasingly ineffective,” Cohan said by phone from Buenos Aires.
Ricardo Villalba, a 37-year-old kitchen hand, came to buy meat and grapes at a market in the Constitucion neighborhood of Buenos Aires. After balking at the 30 pesos-per-kilo price of grapes and a jump in beef to 55 pesos, he changed his mind.
“Of course I’m unhappy, I’ll eat a fried egg tonight,” Villalba said.
The government, which says annual inflation was 10.9 percent in 2013, was censured by the International Monetary Fund last year for underreporting consumer price increases. The IMF has given the country until March to release a new index.
Cabinet Chief Jorge Capitanich yesterday accused Royal Dutch Shell Plc’s Argentine unit of conspiring against the country’s interests after it raised fuel prices following the devaluation. The company rejected the charges, saying it was due to the relative increase in crude oil costs as a result of the weaker currency.
Argentina’s annual wage bargaining period will be key for Fernandez to keep part of her base content. Police strikes over wages in December triggered violent looting in at least half of the country’s 23 provinces. Labor unions are preparing for wage negotiations in March in which the CGT, the nation’s largest trade federation, has already asked for a 3,000 peso upfront payment and a 30 percent salary increase.
Disapproval of Fernandez increased to 58.4 percent in December from 29.4 percent when she was re-elected in October 2011, according to the latest M&F national poll of 1,600 people, which had a margin of error of 2.45 percentage points.
Attempts to contain inflation through price caps and subsidies, which have ensured some cost stability for basic foods, energy and transport, are becoming more expensive and less effective.
South America’s second-largest economy posted a record $6.1 billion energy deficit in 2013 after running a surplus for 20 years through 2010. As domestic gas output falls, the government has turned to imports of liquefied natural gas from as far away as Singapore and Qatar, selling the fuel to homes and factories at a sixth of the price paid to suppliers.
Government attempts at regulating prices on basic goods have a limited impact, with supermarkets agreeing to cap 194 of an estimated 40,000 products, said Cohan of Elypsis.
The specially-marked items from milk to sugar and beer are not always available, and many smaller grocery stores don’t participate.
At a Carrefour SA supermarket in the southern zone of the capital, only one bottle of “fixed price” vegetable oil was available at 7.54 pesos. Around the corner, a fully stocked grocery store sold the same oil at a 33 percent markup.
After electronics and household appliance stores hoisted prices by as much as 30 percent in the days following the devaluation, the government threatened to fine or close businesses that didn’t cap the increases at 7.5 percent.
In December, half of Argentines said they expected their personal economic situation to worsen in the coming months, the highest percentage since August 2012, according to the latest survey by M&F.
The economy will grow 2.3 percent this year, down from an estimated 3.2 percent in 2013, according to the median forecast of 21 economists surveyed by Bloomberg.
Price increases and a luxury tax on high-end models may particularly hit the auto industry, which last year sold a record 963,917 units as many consumers turned to vehicles as a way to park their savings in durable goods. Sales of imported luxury cars rose faster than other models, as Argentines sold dollars on the black market and then bought the cars at the official exchange rate, saving about 40 percent.
Fiat SpA said it sees “double digit” declines in Argentina’s car market in 2014, according to a presentation on its fourth-quarter results posted on its website Jan. 29.
“After how prices increased for some of the cars, you’d have to be crazy to buy now,” said Ramon Herrera, who runs a car dealership named after his family. He expects sales to drop about 50 percent this year.
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