Argentina - June 2008
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.
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. The most recent of these meetings was hosted by Brazil in November 2004.
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 civil unrest that resulted in the deaths of 27 people and the resignation of President De la Rúa. Argentina then experienced a fortnight of significant political instability, with a succession of three presidents, each remaining in office no longer than a week. Finally, on 1 January 2002, Eduardo Duhalde was appointed President. Duhalde retained his position until full 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. During his term in office Kirchner enjoyed high public approval ratings, with his coalition achieving a majority in congressional elections in October 2005. 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
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 – now President of the PJ – has sought to expand the PJ’s power base beyond the traditional party structures by canvassing support for his wife from both the centre left and centre right.
President Fernández faces serious challenges, including addressing energy shortages and growing inflation. Her government, in attempting to address the latter threat, has taken several decisions which aim to control the domestic prices of staple foods. As part of this policy, and since taking office the Fernández Government has maintained the previous government’s export tax policies, and in March 2008 Fernández introduced a sliding scale export tax scheme for grains and oilseeds.
In response, the leading farmers’ associations in Argentina have 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. Other sectors of the economy, and Church and community leaders, have called on both sides to negotiate an end to the stand-off.
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 appease concerns that the country would default on its debt. This package afforded Argentina a short respite, but soon a deeper economic crisis developed. Throughout 2001 subsequent government initiatives and fiscal changes failed to cap public spending. In October, 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 with multinational organisations.
Economic and Trade Policy Directions
After coming to power in September 2003, the Kirchner Government pursued a departure from the free-market orthodox policies of the 1990s. His government met targets set for increasing GDP growth, stabilised inflation and maintained the primary surplus. The economic rebound that followed Argentina’s economic crisis made these goals relatively obtainable.
However, Argentina failed to advance substantially in desirable structural reforms, 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 predecessor, including unorthodox anti-inflation measures such as domestic price accords, export taxes and utility tariff freezes.
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. Venezuela is seeking to join Mercosur which works as an imperfect customs union, with a common external tariff applied on most products. Mercosur represents a potential market of almost 220 million people with a combined GDP of more than US$1 trillion.
Argentina has signed a number of investment protection agreements, including one with Australia. This agreement provides additional security to Australian investors by protecting against the possibility of expropriation of Australian investments and providing for an international dispute settlement mechanism. Argentina also has double taxation agreements with key partners, including one with Australia which entered into force in 2000. In November 2003, Australia signed a bilateral Memorandum of Understanding on scientific and technological cooperation with Argentina.
Economic Outlook
Argentina’s real GDP growth for 2007 was 8.7 per cent. Though slowing from the 2005 and 2004 growth rates (of 9.2 per cent and 9 per cent respectively), economic growth is being led by a revival in domestic demand, increasing exports, and favourable external conditions. The official inflation rate is just under ten per cent. However, a number of media commentators and private analysts consider that the government has manipulated the consumer-price index to keep inflation to a single digit. It has also made use of export taxes and restrictions, and price agreements with producers to hold down domestic prices. President Fernández has said that addressing inflation is a priority.
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 and bank taxes to bolster that surplus.
The issue of energy security is a key 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 problematic 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 Parliamentary Secretary for Trade, Hon John Murphy MP, visited Buenos Aires for talks with Government and private sector contacts.
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 relations with Argentina will be boosted in November 2008, when Qantas commences 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. Australian exports to Argentina are varied, and include coal, medicaments, fertilizers and civil engineering equipment. Australia’s exports to Argentina totalled approximately A$115 million in 2007. Australian imports from Argentina amounted to approximately A$260 million in 2007, and included animal feed, leather and soft vegetable fats and oils.
Australian investment in Argentina now stands at A$161 million. Sectors of interest include mining, agribusiness, entertainment, port management, freight equipment and workers' compensation insurance.
Export Opportunities
Export and investment opportunities for Australia can be found in the revitalisation of Argentine industry and the overhaul of communications, transport and public utilities. Similar changes are under way in mining and most areas of primary production and agribusiness, sectors of particular expertise for Australia. 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.