Don't Cry for Me Argentina Nnew

8/8/2019 Don't Cry for Me Argentina Nnew

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Maastricht School of Management, MSM

Maastricht, the Netherlands

Regional IT Institute, RITI

Cairo, Egypt

Presented By:Ibrahim Kamel

Miral Mourad

Odette Morkos

Suha Osman

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BackgroundCauses

Impact & EffectsAttempted SolutionsCurrent Economic StatusLessons LearntRecommendationsDomestic Case-EgyptReferences


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Official name:Argentine Republic

Population: 40.2 million (UN, 2009)Capital: Buenos Aires

Area: 2.8 million sq km (It is the eighth

largest country in the world by land area)

Major language: Spanish

Currency: peso


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Main exportsMain exports: Food and live animals, mineral fuels,cereals, machineryGNI

per

capitaGNI

per

capita: US $7,200 (World Bank, 2008)GDPGDP -- real growth rate is :real growth rate is :8.7% (07 est.)Unemployment rateUnemployment rate:8.5% (07 est.)Life expectancyLife expectancy: 72 years (men), 79 years (women) (UN)Population belowpoverty linePopulation belowpoverty line:26.4% (Jun 2007)

Argentina is rich in resources, has awell-educatedworkforce and is oneof South America's largesteconomies.Argentina is the second largest country in SouthAmerica


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fromfrom 19761976 toto 19831983(Military dictatorship):(Military dictatorship):--Huge debtwas acquired to implement projects ofNational

reorganization process . These projects were unfinished anddebts had to paid .

Defeat in the Falklands War (against UK 1982) destroyed theinfra structure .

Introduction of neoliberal economic platform.

The State takeover of private debts.

By end of 1982 the industry severely affected andunemployment 20%.


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Argentinas history of crisisyAccording to monthly data from 1885 to 2003, there

were 19 crises in 118 years of history, which implied32

crisis years. That is, Argentina had a crisis yearevery3.7 years. It seems very difficult to match that record.The five deep crises identified correspond to the

years, 1890-91, 1929-32, 1975-76, 1989-91 and 2001-02.

y

The latest crash in 2001/ 2002, brought about a 15%decrease in real GDP and pushed vast sectors of thepopulation below the poverty line.


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fromfrom 19761976 toto 19831983(Military dictatorship):(Military dictatorship):--Huge debtwas acquired to implement projects ofNational

reorganization process . These projects were unfinished anddebts had to paid .

Defeat in the Falklands War (against UK 1982) destroyed theinfra structure .

Introduction of neoliberal economic platform.The State takeover of private debts.

By end of 1982 the industry severely affected and unemployment20%.


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FromFrom 19901990 toto 19991999 (convertibilityregime &GDP growth(convertibilityregime &GDP growth ))

convertibility regime (Pesso at parity with US dollar) was introduced

and had lead to:1. Decrease the three decades of chronic inflation, (12 months

afterwards inflation was controlled and its annual rate fell to 10%(end1993) and the rate kept falling after 1993 to level below 5% and toeven deflation level at certain period.

2. numerous structural reforms, including privatization and opening of

the economy.3. improvements in tax administration and greater control on

expenditure.

4. Large domestic credit growth and a consumption and investmentboom due to large capital inf lows to the economy.

5. The real GDP grow to an average of8% (1991-1994).


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Despite a few recessionary episodes were experienced, theywere short lived and, except for the one that followed the

Mexican crisis in early 1995, relatively mild. interest rates rosesharply, output fell substantially, and unemployment increasedto over 18 percent.

The 1998 recession (both prolonged and severe) was triggeredand then compounded by a series of adverse external shocks theRussian default and the LTCM(Long-Term CapitalManagement) crisis in August-September 1998 and thedevaluation of the Brazilian real in January 1999.


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Lower export takings have limited the country's ability to earn theforeign currency needed to repay dollar-denominated debts .

The debts grew enormously ( because the IMF kept lendingmoney and government spending continued to be high andcorruptionwas rampant) and the country showed no true signs of

being able to pay it.

Decline in industrial activity has denied the government the cashto balance budgets, while levels of unemployment and"underemployment" top 30%.


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In 2000, Argentina began to experience severely diminished access tocapital markets. The IMF responded to this by providing exceptionalfinancial support.Uneven implementation of promised fiscal adjustment and reforms, a

worsening global macroeconomic environment, and political instability, ledto the complete loss of market access.

By2001, intensified capital flight and a series of deposit runs (throughmassive tax evasion and money laundering) began to have a severe impact onthe health of the banking system. In December 2001, authorities imposed apartial deposit freeze.This allowance limit and the serious problems it caused in certain cases,many Argentines engaged in a form of popular protest that became known asCacerolazo (banging pots and pans). These protests occurred especially

during the period of2001 to 2002.

At first the cacerolazoswere simply noisy demonstrations, but soon theyincluded property destruction, often directed at banks, foreign privatized

companies, and especially big American and European companies.


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1. Fiscal policy (excessively lenient)

Poor transparency of financial operations

widespread tax evasion,

the limited ability of the federal governmentto control the expenditures of the provincial

governments. Irresponsible policies were pursued, such asusing proceeds from privatization for currentexpenditures instead of debt reduction.


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2-The convertibilityregime :

Pegging the PESO to the USD

although the USD appreciating & thebrazilin real devaluating

Causing a loss in competitiveness,slow in growth & exports

Aligning monetary policy with thatof the US leading to1.Increase debt service ratio2.Widening the current accountdeficit


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3-Decline in capital flows:-

Following the sharp reduction inglobal capital flows to emerging

market economies in 1998, and slowdevelopment of domestic financialmarkets, Argentina, found it costly toraise funds in the internationalmarkets.This was due to convertibilityregime and relatively small size of itsexport sector.Outcome:-the fall in inflows was not suddenbecause most of the debts had longmaturities.


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4- Structural reform :-

Attempts to reform the labor market came to a virtual halt inthe mid-1990s and progress in the liberalization of other areaswas slow, such as :-1.Product markets2.Foreign trade3.Utilities and Infrastructure

Even though lots of trade barriers were removed, Argentinawas still relatively a closed economy, limiting its ability to earnforeign exchange to repay its external debt .


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5- Institutional and political factorslimited the ability of the federal government to take decisive

actions when confronted with a crisis.

Provinces are entrusted with public expenditures:

Reducing flexibility of fiscal policy

Corruption and other governance issues have also been citedas factors undermining the credibility of the authorities.


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7-Debt dynamics:the combination of a large existing stock of external debt,

rising country risk premia and sluggish growth caused the ratioof debt to GDP to rise uncontrollably.


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7-The banking system:

The final stage of the crisis, a weakening of prudentialdefenses in the banking system, which contributed to the loss ofconfidence in the currency and complicated attempts to restorestability once the convertibility regime collapsed.

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The origin and causes of the 2001 disaster are at the core of the currentpolicy debate.

For some analysts, The fixed exchange-rate regime was the a main drive for the destruction of the

Argentine Economy , despite having allowed the Argentine economy to recover fromhyperinflation and grow at unprecedented rates for a good number of years before itscollapse.

For others, macroeconomic mismanagement,

Argentina fell victim of an unusual sequence of external shocks that outbreak inemerging market economies in the second half of the 1990s, In particular the capitalmarket crises in Asia and Russia,

The sharp decline in commodity prices, the strong appreciation of the US dollar andthe successive devaluations in Mexico and Brazil.

Finally, was not the exchange-rate regime per se the centre of Argentinas problemsbut its lax fiscal policy that, the argument goes, allowed the public debt to balloon tounsustainable levels.

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- ToResolve theMassive fiscal budget deficits:In 2000, Government raised Income tax.In 2001, Government imposed taxes on financial transactions.

R

esu

lts:Worsening Recession,Povertyand Unemployment - Climbing BudgetDeficitsWeakerGovernmentPosition - LossofConfidence & Capital Outflows Increased Inflation andDevaluation

Climbing Budget Deficits Weaker Government Position

IncreasedDevaluation

Year 2000 & 2001

IncreasedIncome Taxes

CapitalOutflows

HigherRecession

IncreasedFinance Taxes

Climbing I.R.(40-60%)

Loss ofConfidence &

Capital Out Flows

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Unemployment & Poverty Inflation

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-Again,ToResolve theDevaluation & BudgetDeficits:At End 2001, Government moved toDual Exchange Rate systemR

esults:Failure in reassuring the public & depositswithdrawalAt Start 2002, Government moved to Floating Exchange Rates.

Climbing Budget Deficits Weaker Government Position

FloatingPeso

Year 2000 & 2001

DualExchange Rate

FinancialCrisis

Loss ofConfidence

FreezingBank Deposits

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Maintain peaceful relations with the poorest sectors of society through welfare programs (ex. Heads ofHouseholds), in exchange, beneficiaries had to engage in a work or training activity

Success in negotiating some temporary loan agreements

A new tax program is implemented coupled with creating a culture of taxpayers

Government negotiated position with its private creditors that would involve at least 75% reduction in thevalue of defaulted independent debt, plus likely reductions in interest rates on new bonds

Increasedexport competitiveness by the convergence factor for foreign trade in no energygoods whereexporters received a reimbursement, and importerspaid a tax, equivalent to the difference between theexchange rate pegged to the U.S. dollar

Government imposed limits on cash withdrawals from banks by remaining deposits frozen until at least2003.

Attempted to impose a harsher budget aimed at restoring the $ 2.7 billion loans suspended by IMF &international agencies.

Further cuts in the public sector workforce and a reduction in the salaries of government servants.

Delayed the payment of pension and decreased expenditures in the social sector by 70%.28-1-2010 26


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The economy soon began to recover, GDP grew robustly by 8-9% in each of the years 2003-2005, led by strongexports

Unemployment dropped from 21% in 2002 to 10% at the end of2005.

The Peso strengthened to its current level of3:1.1 participants limiting their ability to raise prices

Signs of economic recovery started to appear; a GDP expected growth of5%, inflation was decreasing, as well ascountry risk premium, Peso was appreciating against the US dollar from 3.8 in June 2002 up to 2.8 in April 2003

Foreign currencyreserves ofArgentina'sCentral Bank, inmillionsofUSD

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IMF supported tax increases to reduce the government deficit

IMF encouraged the devaluation process & discouraged the dollarization

IMF disregarded Congress approval to increase the IR at least 3% for countries

facing problems in their BOP and kept on lending with2.29%.

IMF allowed Argentina to delay repayment of $2.8 billion for 1 year in order not to letit default and yet Argentina defaulted.

IMF took steps to strengthen its banking system, welcoming foreign ownership and

improving regulation and supervision

The IMF agreed to lend Argentina $13.5 billion, handed out in stages over threeyears, to help the country repay past loans. In return, Argentina would reform itseconomy and negotiate in good faith with the private creditors who hold $88 billion ofsovereign debt it no longer services

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Lessons learntThe lessons from Argentina crises are summarized as:

y Choosing the right exchange rate regime

y

The central importance of bankingregulations/transparency

y The proper sequence of reform measures (capitalaccount liberalization)

y

The importance of contagion


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Egypt pegged its currency to the dollar in 1991 butabandoned its peg in mid-2000. Pressure on the pound hasincreased since 1998, as capital f lowed out of the countryfollowing the Asian crisis, while tourism was affected by theaftershocks of terrorist attacks at home and abroad.

Moreover, the appreciation of the dollar against the euro andthe yen intensified the loss of competitiveness.

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Egypt initially addressed the pressures throughexchange market intervention and tighter creditpolicies, but official reserves continued to declineand economic growth slowed. Exchange rate

pressures did not decrease after an initialdepreciation in mid-2000, and, in January2001,the country adopted an adjustable currency band

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However, pressures on the pound intensified again after

September 11, leading to a depreciation of more than 35%against the dollar from mid-2000 to early2003.

Foreign currency remained in short supply in the formal

market at the prevailing official exchange rate, and a parallelexchange market emerged.Following the recent move to afloating regime, the exchange rate depreciated by20%, and theavailability of foreign exchange in the formal market improved.

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Domestic extension


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Summary The Argentine crisis was a CURRENCY, a BANK and DEBT largersovereign DEFAULT in history) crisis and Inter-related butcausedby a combination of different factors.

y

1980s Argentina implemented successive inflation stabilizationplans involving currency reforms, price controls, and othermeasures.

y 1990s Argentina adopted a currency board (peso-dollar peg).

y 2001-2002 Argentina defaulted on its debts and abandoned thepeso-dollar peg.

y Its rigid peg of its peso to the dollar proved painful as the dollarappreciated in the foreign exchange market.

y 2001 Argentina restricted residents withdrawals from banks inorder to stop the run on the peso, and then it stopped payment on itsforeign debts.

y 2002 Argentina established a dual exchange rate system and a

single floating-rate system for the peso.


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Source:http://www.oecd.org/dataoecdSource:http://en.wikipedia.org/wiki/ArgentinaSource: www.mecon.gov.ar/progeco/dsbb.htmSource:http://www.epinet.org/subjectpages/trade.cfmSource:www.eurostat.statisticsSource: Banco Central de la Repblica Argentina, Argentina's Central BankSource: http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htmSource: bbc.uk.coSource:www.wikipedia.org

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Thank you

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Don't Cry for Me Argentina Nnew