24 de outubro de 2011


Argentina Sees Peril Next Door

Brazil's Economic Slowdown Threatens the Prosperity of Its Neighbor to the South


by MATT MOFFETT

[ARGENTINA]













BUENOS AIRES—Argentina depends so much on Brazil's giant economy that folks here say when it coughs, Argentina catches cold.
Now that Brazil's economy has been slowing down and its currency weakening—partly due to shockwaves from the euro crisis—industrialists here fear that Brazil will buy fewer Argentine goods while trying to export more of its own products.
The real's fall to about 1.77 from 1.59 per dollar since late August, "is really important" said Teddy Karagozian, president of TN&Platex, a Buenos Aires textile maker. So, he added, is Brazilian economists' projected slowdown of growth to as low 3%, less than half of last year's level. "There are lots of implications for Argentina," he said.
Brazil's central bank Wednesday night cut the nation's benchmark interest rate, threatening to further widen the currency gap.
Consider the chocolate war brewing between the two neighbors. In the past couple of weeks, Argentine chocolate and candy exports to Brazil have been bottled up, due to Brazil's move last month to impose import-licensing requirements for sweets.
[ARGENTINA]
Argentine industrialists say the move underlines Brazil's way of responding to tougher times with protectionism. Not so, said a Brazilian trade ministry spokesman, who said Brazil was just trying to gather more information on imported products.
Argentina must also cope with another spillover effect from the global financial turmoil: the recent weakness and volatility in the major Argentine cash crop, soybeans—whose value has fallen 10% over the past three months. Export taxes on soybeans, as well as other crops, account for close to 10% of government tax revenue, helping to fund politically popular social spending.
President Cristina Kirchner, who looks like a shoo-in to win re-election Sunday, has had to take time from campaigning to confer with advisers on the fast-changing economic scene. She is riding high on an economy that has been growing at about 9% this year. But "more complicated times are coming," said Argentine economist Ricardo Delgado.
Argentina's deputy economy minister, Roberto Feletti, said in a radio interview last week that Argentina "is in a good situation," despite the global unrest. He emphasized the importance of the ties to Argentina's neighbor to the north. "The relationship with Brazil is decisive for Argentina, in terms of industry and exports and also politically," Mr. Feletti said.
Argentines certainly hope Brazil comes through all right, since it is the market for about 20% of total Argentine exports, and 40% of manufactured ones. Even before the real weakened, Argentina had been running an annual trade deficit of around $4 billion with Brazil.
The real had been rising against the dollar since the middle of last year, but fell some 17% against the greenback during the third quarter, due to international market pessimism triggered by the uncertainty in Europe, as well as an unexpected interest-rate cut by Brazil's central bank on Aug. 31.
No one wants to carry the parallel too far, but Argentine industrialists point out that in 1999 a devaluation of the real contributed to a recessionary spiral that would eventually end in an Argentine financial crisis.
The economies of both rivals have done well in recent years, thanks to strong global commodity prices. But their governments have applied contrasting strategies for managing prosperity.
"Argentina prioritized growth at the expense of inflation and Brazil bet on less growth with deflation of the exchange rate and maintaining stability," José Ignacio de Mendiguren, head of the Argentine Industrial Union, the major industry association, said recently. "I like our model better."
Indeed, brisk domestic demand has pushed production by Argentine shoemakers to a record 115 million pairs this year, eight million more than in 2010, said Alberto Sellaro, president of the Argentine shoemakers' trade group.
Even more vulnerable to the economic turbulence in Brazil is the big Argentine auto sector, said Gustavo Segre, the Sao Paulo-based CEO of Center Group, a trade and business consultancy. About 80% of Argentine auto exports go to Brazil, he noted. Mr. Segre said Brazilian car dealers' stock has been running far above the normal level, which will likely mean cutbacks to Argentine plants.
One scenario for Argentina is accelerating the depreciation of the peso to keep pace with the real, said Maria Belen Avellaneda Kantt, an analyst at the Argentine Center for International Studies. But Argentina can't speed up the devaluation too much because it further kindles inflation, already running at around 25%, and also tends to fuel capital flight among Argentine savers, economists say.
The full effect of the weaker real may not be felt until year- end, said Miguel Faraoni, who runs a toy-making company called Chikitos, and also heads the toy industry association. More competition near Christmas isn't something Argentine toy makers relish. He said local industry needs some sort of assistance after the election because even without a weaker real, "for 10 years, the trade balance in the toy industry has been favorable to Brazil by 300% to 400%."
Write to Matt Moffett at matthew.moffett@wsj.com

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