Argentina Country Brief
Australia - Argentina Relations
Australia and Argentina have a mutually beneficial relationship based on many shared interests and similar perspectives - we are both large Southern Hemisphere nations with relatively small populations and strong resource bases.
Australia’s principal engagement with Argentina is through the Cairns Group, the UN, the Commission for the Conservation of Marine Living Resources (CCAMLR), the Antarctic Treaty and the International Whaling Commission (IWC). We share common interests in international peacekeeping, the prevention of WMD proliferation, disarmament, Antarctica, international environment policy, trade liberalisation and economic cooperation policies.
Australia and Argentina play an active role in the G20 forum in addressing the global financial crisis in identifying reforms to the global financial system. Argentina’s role as an interlocutor on the WTO Doha Round negotiations and in the Cairns Group is important to Australia. As major wine producing nations, Australia and Argentina work together, through the World Wine Trade Group, to advance favourable international trade conditions in relation to wine.
Australia also participates in the CER-Mercosur Dialogue, bringing together Australia, New Zealand and Mercosur member countries, including Argentina and Brazil. The dialogue was established in 1996 as a mechanism to strengthen cooperation on global trade policy issues and to promote inter-regional trade and investment.
Political Overview
Background
Argentina is a presidential democracy, with universal suffrage and compulsory voting. Under the current constitution, the President is the head of state and the Congress is bicameral.
Argentina is a federation of 23 provinces, plus the Federal Capital District (Buenos Aires City). The system of government (at both the federal and provincial levels) is based on the separation of powers into the Executive branch, the Legislative branch and the Judiciary. The President and Vice-President are chosen by direct popular vote. A new constitution approved in 1994 established a four-year presidential term, with provision for one consecutive re-election. The President appoints the ministers.
Argentina returned to civilian government in 1983 following a period of military rule. Since that time, the country's democratic institutions have achieved an unprecedented level of stability.
A deep recession foreshadowed the economic collapse of 2001 (see Economic Overview below). The economic crisis, which peaked in mid-December 2001, provoked serious civil unrest and resulted in the resignation of then President De la Rúa. After a period of transition under a caretaker administration, presidential elections were held in May 2003 in which President Néstor Kirchner came to power. Kirchner, from the Partido Justicialista (PJ, or Peronists), governed as part of a broader “Frente para la Victoria” coalition. With high public approval ratings, Kirchner’s Government focused on restructuring Argentina’s foreign debt and promoting economic growth.
In July 2007, President Kirchner announced that he would not seek re-election and that his wife, Cristina Fernández de Kirchner, would take his place on the ballot at the 28 October 2007 presidential elections. As predicted by pre-election polling, Fernández was comfortably voted in as Argentina’s first elected female president. She won 45 per cent of the primary vote - a wide enough margin to avoid the need for a second round ballot - and took office in December 2007.
Political Outlook
President Fernández is supported by a large bloc of the Peronist Party (PJ), which has dominated the Argentine political scene since 1946. However, both prior to and since the 2007 Presidential elections, Néstor Kirchner has sought to expand the PJ’s power base beyond the traditional party structures by canvassing support from both the centre left and centre right.
President Fernández faces mounting challenges as a result of the current global economic downturn, including tensions with the farming community over export taxes and a deteriorating fiscal and financing outlook (see Economic Overview below).
The Government brought the mid-term legislative election (for half the lower chamber, and a third of the Senate) scheduled for October forward to June 2009, in a move widely viewed as an effort to both improve the Government’s chances in the election and limit its campaign spending needs. The move back-fired, however, as President Fernández’s ruling party suffered a major defeat, losing its legislative majority and all key battleground districts, including Buenos Aires Province where Néstor Kirchner led the party’s ticket.
The Fernández Government emerged from the elections significantly weakened, but it remains unclear how this will affect Government policy. The Government has announced several cabinet changes since the election: the Economy Minister, Carlos Fernández, has been replaced by Amado Boudou, formally head of the social security agency and the Cabinet Chief, Sergio Massa, will be replaced by Aníbal Fernández, the former Justice Minister. The new Justice Minister is Julio Alak, formally president of the national airline, Aerolíneas Argentinas. The health and education Ministers have also changed.
The next presidential election is due in 2011.
Economic Overview
For latest economic data refer to Argentina Fact Sheet (pdf)
Background
Argentina has a fundamentally market economy based on an abundance of natural resources, a highly literate population and an export-oriented agricultural sector. Although Argentina is an industrialised country, its major exports are dominated by agricultural products, minerals, and fats and oils. In the last decade, soybeans have become the country’s main commodity export.
After decades of economic stagnation, economic reforms in the 1990s opened the market to foreign competition. Privatisation and economic deregulation saw foreign investment soar and GDP grow, with large domestic conglomerates and multinationals dominating the industrial base and utilities. For a decade, economic policy was based on the Convertibility law of 1991, which sought to end hyperinflation and attract investment by establishing a currency board system that maintained parity between the Argentine peso and the US dollar. However, the law, together with a lack of fiscal discipline, ultimately reduced Argentina's flexibility to deal with external shocks and made problems such as unemployment harder to resolve. Argentine exports became uncompetitive, exacerbating chronic fiscal deficits and swelling public debt.
In December 2000, the De la Rúa Government resorted to a US$39 billion IMF bail-out, to address concerns that the country would default on its debt. This package afforded Argentina only a short respite. Throughout 2001 subsequent government initiatives and fiscal changes failed to cap public spending.
In October 2001, the government was forced to restructure public debt (US$90b) through a voluntary bond swap to once again avoid default. This still failed to stem capital flight from the local financial system, obliging the government to place restrictions on cash withdrawals and transfers abroad. These measures eventually led to a default to private creditors of US$98 billion, political and social conflict, the collapse of the financial system and the fall of the government in December 2001. A transitional government, led by President Duhalde, applied emergency measures to devalue the peso and set a floating exchange-rate regime. After a long negotiation, Duhalde's Government obtained a transitional IMF aid package that prevented Argentina from defaulting on its debt commitments.
Economic and Trade Policy Directions
After coming to power in September 2003, the President Kirchner Government made progress in stabilising inflation and maintaining the primary surplus. However, Argentina failed to make significant progress in achieving structural reform, including restructuring the banking system, implementing tax reform, and establishing a new fiscal relationship between the central government and provinces. Tension between Argentina and the IMF - particularly due to the unresolved issue of the debt renegotiation - led to the postponement of the stand-by agreement in August 2004. Negotiations with the IMF resumed following a successful debt swap in February 2005 and the US$9.5 billion owed to the IMF was repaid in January 2006.
Argentina successfully, if controversially, renegotiated its large debt with the majority of private creditors in mid-2005 - although dealing with those who refused to settle remains an issue for the Fernández Government. In order to support a managed float, with the objective of maintaining a low peso to stimulate exports and import replacement, Argentina has recommenced issuing some debt to foreign creditors. Venezuela has become a major customer, purchasing more than US$5 billion in Argentine bonds in recent years.
President Fernández has adhered closely to the economic policies pursued by her immediate predecessor, including unorthodox anti-inflation measures such as domestic price accords, export taxes and utility tariff freezes. The recent introduction of measures aimed at slowing the flow of manufactured imports have met with criticism inside Argentina as being protectionist, and caused tensions within Mercosur.
In March 2008, the Government introduced a sliding scale export tax scheme for grains and oilseeds. In response, the leading farmers’ associations in Argentina organised nationwide protests and roadblocks against the new measures, halting operations in the grains, beef and dairy sectors, with the objective of having the new tax scheme removed or substantially adjusted. The Government’s proposed export tax measures for grains and oilseeds were narrowly rejected in the Senate in July 2008. However, this failed to resolve the conflict with farmers, who continue to seek a reduction of all export taxes on agricultural products.
In late 2008, President Fernández secured congressional approval for the nationalisation of private pension funds. This and other measures (such as the renationalisation of flag air carrier Aerolíneas Argentinas in September 2008) appear to presage a wider role for the state in the economy as the Government grapples with multiple economic challenges. Further nationalisations have been canvassed, as has the introduction of tighter capital controls.
Argentina's most important trade agreement is Mercosur. Together with Brazil, Paraguay and Uruguay, Argentina formed the Southern Cone Common Market known as 'Mercosur' in 1991. Mercosur is an imperfect customs union, with a common external tariff applied on most products. Mercosur represents a potential market of almost 240 million people with a combined GDP of around US$2 trillion in 2008.
Economic Outlook
The Argentine economy is expected to have recorded growth of 6.5 per cent in 2008. The impact of the current global financial instability, in particular weak demand and lower prices for Argentina’s commodity exports, are likely to dampen economic growth expectations in 2009. Official inflation figures remain high at 6.8 per cent on a year on year basis to February 2009, and non-official measures of inflation are as high as 20-25 per cent. Declining demand is expected to ease inflationary pressures throughout 2009. Export earnings have fallen sharply since the last quarter of 2008, affected by drought, lower prices and government intervention. As a result of these trends, the Economist Intelligence Unit expects that the current account deficit will move from an anticipated surplus of 2.5 per cent of GDP to a deficit of 0.5 per cent of GDP in 2009.
President Fernández faces serious challenges in managing the implications of the current global economic downturn. In late 2008, the Government announced a number of stimulatory measures, including increasing spending on public works, providing subsidised credit lines and extending a targeted taxation moratorium.
Another issue is the maintenance of a fiscal surplus - important for Argentina’s future economic health - and how this is achieved. There is a degree of domestic criticism of the reliance on export taxes on primary products (which now account for 18 per cent of revenue) and bank taxes to bolster that surplus. The Economist Intelligence Unit expects that weaker agricultural export earnings will negatively impact public finances, leading to an overall budget deficit in 2009.
The issue of energy security is a key long-term economic and policy challenge. Oil and gas production has stagnated in the face of artificially low domestic consumer prices. Similarly, electricity demand has increased due to strong economic growth, but generation capacity has been flat for several years, exacerbated by a failure to lift the freeze on tariffs fully since the 2001 devaluation. The government has announced several measures on both the demand and supply sides, but alleviating the energy imbalance will remain a challenge for President Fernández.
Bilateral Relationship
Several recent senior government and officials’ visits have helped to enhance Australia’s relationship with Argentina. In April 2007, a delegation of Argentine ministers and officials visited Australia to attend the opening of the new research reactor at Lucas Heights in Sydney. The Argentine company INVAP, together with the Australian firms John Holland and Evans Deakin, won the tender to design, build and commission the replacement reactor. The project is a good example of the potential for increased business links between Australia and Argentina. In April 2008 Australia’s then Parliamentary Secretary for Trade, Hon John Murphy MP, visited Buenos Aires for talks with Government and private sector contacts. An Australian Parliamentary delegation visited Argentina in August 2008 and met with many of their Argentine counterparts.
Argentina and Australia have signed an investment protection agreement, which provides additional security to Australian investors by protecting against the possibility of expropriation of Australian investments and providing for an international dispute settlement mechanism. A double taxation agreement entered into force in 2000. In November 2003, Australia signed a bilateral Memorandum of Understanding on scientific and technological cooperation with Argentina.
Since the onset of the global economic crisis, Australia and Argentina have intensified their cooperation and exchange on issues related to the G20, of which both countries are members.
Approximately 11,000 Argentine‑born persons live in Australia, many of whom migrated to Australia in the 1970s, during a period of economic and political turmoil in Argentina. Australia’s Argentine community also includes a network of second and third generation Argentine Australians.
Bilateral links with Argentina were boosted in November 2008, when Qantas commenced a thrice-weekly non-stop flight from Sydney to Buenos Aires.
Bilateral Economic & Trade Relationship
Trade with Argentina is modest, with the balance in trade generally favouring Argentina since the onset of its economic crisis in 2001. Two way merchandise trade in 2008 of AUD 660 million is the first time it has exceeded the half billion dollar mark. Australian exports to Argentina are varied, and include coal, medicaments, fertilizers and civil engineering equipment. Australian imports from Argentina include animal feed, leather and soft vegetable fats and oils.
Australian investment in Argentina is estimated at around A$161 million. Sectors of interest include mining, agribusiness, entertainment, port management, freight equipment and workers' compensation insurance.
Export Opportunities
Export and, in particular, investment opportunities for Australia can be found in mining and most areas of primary production and agribusiness sectors as well as the revitalisation of Argentine industry and the overhaul of communications, transport and public utilities. Other sectors with promise are environmental management, wine, construction and building materials and high-tech machinery. Australian expertise in distance education, vocational training, tele-medicine, English as a second language and postgraduate studies could also find markets in Argentina. With appropriate marketing, tourism could become another potential growth area.