Argentina´s economy is going through a rough winter

Argentina´s economy is going through a rough winter

Since the declaration of the default, July 30th, a freezing wind-chill is hitting the economy and the future is truly uncertain. This last week has been one of the worst for the national government as regards markets. Despite having a national holiday, the Central Bank lost U$S 168 million in foreign reserves, the worst downfall since March 2014. And this trend seems to find no limit; in less than one month, the gap between the dollar blue and the official one has increased from 49, 6% up to 64, 8%.

Since 2003, when Nestor Kirchner assumed the presidency of Argentina, his government, thanks to the aid provided by the economist Roberto Lavagna and Martin Redrado, managed to increase the foreign reserves of the Central Bank up to USD 52.190 million.

Breakpoint

Unfortunately, from 2010 onwards this tendency stopped and started its way around. In 2010, Martin Redrado resigned from the Central Bank as a consequence of a long struggle with Cristina Kirchner who was elected president in 2007. This second term for the marriage Kirchner did not seem to make any change, instead, they just wanted to deepened their so called national and popular model. In this year, the devaluation of the currency forced the government to acknowledge two kind of exchange rate: the official one and the blue (but they always insisted it was an illegal market, not promoted by the government).

In three years, the gap between both exchange rates increased alarmingly degrading the local activity and the purchasing power for all its inhabitants. More obstacles were introduced by this government which only led to a non-declared recession.

Argentina is a well-known country for its cycles. Every seven to ten years a new economic crises arises and this time is no different from the past. A very important variable is the foreign reserves. You may see that from 2010 onwards, while the gap between the exchange rates grew wider, the foreign reserves decreased consequently and progressively. You shall ask yourself why? The reason is quite simple. The government cannot assure the stability of the economy and this triggers a huge warning for individuals and companies. There is no trust nor legal assurance.

We all hope in 2015 there will be a change in course and the investments that have been reluctant to come to Argentina, will find their way home.

Pablo de Sala.