Argentina's Ever-Changing Fortunes

On the brink of financial ruin just five years ago, the country's economy is now booming, but most prefer stability to the cycle of ups and downs

Buenos Aires is legitimately called the Paris of Latin America. It is arguably the most beautiful capital in the hemisphere, with its broad boulevards lined with stately mansions, grand hotels, and chic boutiques.

And today, this city on the banks of the Rio de la Plata is booming. Its world-class restaurants serving Argentina's legendary beef and wine are packed well past midnight, and its pedestrian promenades teem with tourists from around the world. The port is jammed with ships loading wheat, soybeans, and beef, all of which are fetching record prices, thanks to strong demand from China. Argentina is even enjoying China-like growth: The economy is on track to expand by at least 8% this year, for the fourth year in a row.

It's hard to believe that just five years ago, Argentina was in financial ruin. The government had sharply devalued the currency and defaulted on nearly $100 billion in foreign debt. The President was forced to resign, and the country churned through an astonishing four more presidents over the next 10 days of economic and political chaos.

From Haircut to Halo

When banks finally were reopened, Argentines found their dollar deposits had been converted to pesos, and were worth a third of their previous value. The economy shrank 11% in 2002, and downtown Buenos Aires filled with thousands of "cartoneros" who pawed through trash looking for anything they could recycle and sell.

How did Argentina manage to rebound so handily after falling to such depths? And why are investment bankers once again flocking to a country that told the International Monetary Fund and thousands of bondholders to take a hike—and a 70% haircut—when it walked away from its international debt obligations?

The answer lies in Argentina's fertile pampas, the flat grasslands that radiate out from Buenos Aires. Agro-industry accounts for half of Argentina's exports and a third of employment. Production costs are so low and world prices so high that even the taxes of up to 30% that the government levies on agricultural exports leave farmers with hefty margins.

New Power Couple

That doesn't mean everybody's happy. Last year, the government suspended beef exports for three months and recently froze wheat exports to keep consumer prices under control. "These export taxes could hurt investment and long-term economic stability, but it's clear the government has its own election-year priorities," says Luciano Miguens, president of the 141-year-old Rural Society, Argentina's association of farmers and ranchers.

President Nestor Kirchner, who was a little-known governor from an oil-rich southern Patagonian province before he took office in 2003, is widely expected to win a second term if he runs in the October presidential elections. Why wouldn't he run? Because he's limited to two, four-year terms in office, and if he steps aside to let his dynamic wife Cristina, an experienced senator, run as the Peronist Party's candidate in his place, he could run again when her term ends—possibly extending the family's grip on the presidency for 12 years. The thinking is his slightly younger, more attractive and dynamic politician-wife would reenergize the party by injecting new blood, generating a bit of excitement.

The duo, who bring to mind Argentina's most famous 1950s power couple—Juan Domingo Perón and the legendary Evita—enjoy high popularity ratings. And Argentines, relishing unprecedented growth, aren't likely to vote for change. As Kirchner himself said two years ago in a blistering speech recounting how the IMF refused to bail Argentina out of its foreign debt crisis, "There is life after the IMF, and it's a good life."

Good Times, Bad Times

Kirchner has kept the good times rolling by keeping the peso undervalued, which boosts exports, and by slapping price controls on two-thirds of the market basket of goods used to calculate the consumer price index. Electricity rates have been frozen for more than two years. Last year, official inflation was 9.8% but some economists believe the figure is being manipulated: Recently, Kirchner fired the head of the government's statistics agency when official inflation calculations came out higher than he had hoped. Economists say prices eventually will have to be corrected, and that could cause an economic slowdown that would come as a rude shock to Argentines accustomed to China-style rates of growth.

Argentines have an uncanny way of muddling through difficult times, and relaxing and enjoying the good times. Perhaps it's because for the past 25 years they've survived a series of booms and busts, including a 1980s bout with hyperinflation. When officials pegged the Argentine peso to the U.S. dollar in 1991 at a rate of one to one, few believed the stability would last for a decade. But it did, and in the 1990s Argentina became the darling of international investors, at one point accounting for 25% of all emerging-market bond issues. But the government financed its deficit spending with dollar borrowing and by the end of the decade, the exchange rate was unsustainable.

Today, thanks to record exports, Argentina boasts a 3% fiscal surplus. Kirchner appeals to voters because he's down to earth and has delivered results, believes pollster Analía del Franco. "The bottom line is that today, there are more people doing well than people who are doing poorly."

That is evident in Puerto Madero, the formerly seedy docks section of Buenos Aires area that is now home to super-chic hotels and luxury condos. Thanks to travel magazine articles promoting Buenos Aires as the exotic destination of the moment, the country attracted 2.1 million tourists last year, a number expected to triple within nine years, especially now that Argentina has signed a tourism agreement with China. Some of the foreigners are snapping up bargain-priced apartments, while others are buying farms, estancias (ranches), and vineyards.

The Struggle Continues

Life, however, is no picnic for Antonio Espíndola, who one recent afternoon was pushing a rickety cart down elegant Calle Arroyo, dressed in ragged jeans, a scruffy shirt, and shoes that had seen much better days. He picked up a metal canister and tossed it into the cart to sell for scrap. We chatted for a while, and I asked him how he thinks the country is doing these days.

"They say the economy is booming, and I guess it is," he says. He lost his job as a restaurant dishwasher after the peso collapse, and since then has spent 12 hours a day scavenging for recyclable items. On an average day, he makes around $6 or $7, barely enough to pay the rent on his one-room apartment and buy a bit of food. "I'm hoping to find work in construction, but I don't know if that's going to happen," he shrugs.

Espíndola isn't the only one who's down and out in the Paris of Latin America. Unemployment, which peaked at 14.5% in 2003, is down to 10%—still high for a country that until the 1930s was one of the world's 10 richest. But for many Argentines, today's strong growth rates hold the promise of a slow but steady recovery of the country's potential.

"For us, the 1990s were a magical time but they were just an illusory bubble, a fantasy—we thought we could fill up our shopping carts indefinitely," says del Franco, the pollster. "Today, society is more rational—we want growth without the glamour." After a quarter century of peaks and troughs, Argentines crave stability above all else.

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