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Argentina's populist pre-election bonanza raises economic concerns

By Jude Webberin Buenos Aires

 

Published: September 6 2007

When it comes to forecasting Argentina's inflation these days, there is consensus among economists: whatever figure the government announces will be wrong.

 

The state statistics institute Indec - where the government has been intervening in the compilation of data all year in an effort to keep 2007 inflation in single digits - is due to announce August figures today that are again expected to look suspiciously low.

 

Prices rose as much as 1.5 per cent in August, according to some private estimates. With President Nestor Kirchner doling out $1.3bn (€951m, £643m) in tax rebates, pension increases and family benefits in a classic populist bonanza before next month's elections, many believe that inflation will accelerate further and end the year 15-20 per cent - compared with the official target range of 7-11 per cent.

 

The government has no need to resort to such ploys to buy the poll for Mr Kirchner's wife, Cristina Fernandez, who is vying to succeed him as president. She has a yawning lead over a splintered and uncharismatic opposition and is expected to win a comfortable first-round victory on October 28.

 

But the "happy October" hand-outs, as they are called in the media, are meant to keep purchasing power strong amid growing inflation to ensure that Argentina's consumer-led boom can continue - with the economy on course for a fifth year of Chinese-style growth rates.

 

Luis Secco, an economist, said: "We must not forget we're in a situation where inflation is clearly unsustainable and the government isn't saying how it's going to slow things down."

 

With no end to rising prices in sight, wage demands will certainly intensify in 2008.

 

The government this year agreed to a 16.5 per cent pay rise with the General Workers' Confederation (CGT), a labour body comprising several trade unions, resisting pressure to be more generous. Hugo Moyano, the CGT leader, has made clear his support for Ms Fernandez is not unconditional.

 

Argentina was haunted by hyper-inflation in the 1980s. This is not a threat now but observers fear financial turmoil could be brewing.

 

"Unless things change, Argentina has a date with crisis sooner or later," said Fernando Navajas of the Foundation for Latin American Economic Research. To tame inflation the government must rein in spending, which "has surpassed expectations even in an election year", according to Sebastian Briozzo of Standard & Poor's.

 

Government subsidies to anchor low prices risk creating a vicious circle and "stagflation" - derailing an economy that worked well.

 

The construction sector is seeing growth slow in what could be a warning sign.

 

Argentina has time to turn things round, says Mr Briozzo. "There's still room for manoeuvre. Lower spending increases will affect demand . . and the government is lucky that evenwith a slowdown, economic growth [expected to be at least 5 per cent in 2008] will continue to be quite high."

 

Copyright The Financial Times Limited 2007

 
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