Toro's Running of the Bulls Market Blog

A Comparison Between the US and Argentina

Interesting historical parallels between America and Argentina at The Financial Times.  Not entirely comprehensive but good nonetheless. 

Peronism endured, and indeed endures: Argentina’s ­current president calls herself a Peronist, and so did her predecessor, who happens to be her husband. One reason is that, in a limited way and under its own distorted terms, it succeeded. The state had become strong. The government owned and ran not just natural monopolies such as water and electricity but anything that looked big and strategic – steel, chemicals, car ­factories. The economy did industrialise. But it was still falling behind. In 1950 Argentine income per head was twice that of Spain, its former coloniser. By 1975 the average ­Spaniard was richer than the average Argentine. Argentines were almost three times richer than Japanese in the 1950s; by the early 1980s the ratio had been reversed. Argentina’s was a fragile and superficial progress that masked relative decline.

I tend to compare Argentina with Canada more so, given the sizes of the respective economies.

Venezuela Can't Keep the Lights On

Who does Venezuela they think they are, California?

Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez.

The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.

Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services. ...

Experts say Venezuela for years has skimped billions of dollars in electrical investments, leaving generation 20 percent below the level necessary for a stable power grid and increasing the risk of national outages. Officially Venezuela has a capacity of 22,500 megawatts for a population of 28 million people, but a sizeable proportion is not working, analysts say.

And while Chavez has won praise for investing in health and education, his government has done little to repair local distribution systems that deliver electricity to end users, from barrio residents to business and industries. ...

Pastora Medina, a legislator representing San Felix and nearby cities suffering chronic power problems, this month tried to bring the issue up in the national Congress in Caracas, but the legislature's leadership refused to let her speak.

Several hours later, as the legislature discussed a South American integration plan created by Chavez, Congress itself lost power for around 10 minutes.

But it is going to be much more difficult for Chavez to merely keep up with the spending he has already implemented, let alone new spending, given that the price of oil has been cut in half.  

The same tumbling oil prices that led OPEC to slash output last week threaten to send Venezuela's economy into a tailspin, and put an end to President Hugo Chavez's ambitions to expand his socialist revolution at home and abroad.

To cope with plummeting oil revenue, the source of half the government's spending, Chavez may have to cut domestic handouts and foreign aid. The first items likely to go will be arms purchases from Russia, oil subsidies for Cuba, and job-creating local projects such as bridges and subways, economists say. ...

Venezuela may be poised to repeat the economic collapse it suffered in the 1980s at the end of its last oil boom. Former President Carlos Andres Perez, employing policies similar to Chavez's, lavished petrodollars on public works projects, foreign aid and nationalizations in the late 1970s, setting the stage for a 1983 currency devaluation and spending cuts that sent millions of Venezuelans into poverty. ...

Chavez is already spending beyond his means, posting a $7 billion budget deficit in the first half of 2008, a period of unprecedented oil prices, on a $63.9 billion budget for the year.

Economists' estimates of the minimum oil price Chavez needs to sustain his economic policies range from $120 a barrel to $65. Oil fell 93 cents, or 1.4 percent, to a 17-month low of $63.22 a barrel today on the New York Mercantile Exchange.

Below $80 a barrel, it's likely that Chavez will devalue the bolivar for the first time since 2005, sparking a surge of inflation and a drop in real wages because of Venezuela's reliance on imports, said Gustavo Garcia, an economics and public finance professor at the Instituto de Estudios Superiores de Administracion, a Caracas business school.

Venezuela's benchmark 9.25 bond due in 2027 fell 20.5 cents to 50.79 cents on the dollar from 79 cents a month earlier, pushing the yield to 18.83 percent, according to JPMorgan Chase & Co.

The government, which has historically calculated its spending plans based on a conservative forecast for oil prices, is projecting a $60-a-barrel average for the 2009 budget, and output well above today's level. Oil options contracts to sell crude at $50 by December almost tripled Oct. 24.

Argentina Steals Savings to Fund Their Own Incompetence

From Bloomberg

Argentine bonds plunged, sending benchmark dollar yields over 24 percent, and stocks sank to a four-year low on speculation the government will nationalize pension funds in a bid to attain financing and stave off a second default this decade.

President Cristina Fernandez de Kirchner will unveil a new pension fund plan at 4 p.m. New York time today, the country's social security administration said in a statement. Fernandez will nationalize the system, giving the government control of $29 billion in retirement accounts, La Nacion reported, citing government officials it didn't identify.

Fernandez has struggled to raise cash to cover growing financing needs as the global financial crisis drives down prices on the country's commodity exports and erodes demand for higher- yielding, developing-nation debt. The government's borrowing needs will climb to $11.2 billion next year from $6.6 billion in 2007, Credit Suisse Group said in an Oct. 8 report.

``The government is explicitly saying that it has problems meeting debt maturities and this is a last ditch measure to do so,'' said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.

Yields on the government's 8.28 percent bonds due in 2033 surged 4.35 percentage points to 24.77 percent, the highest since the country issued the debt in a 2005 restructuring, according to JPMorgan Chase & Co. The bond's price sank 7.91 cents to 29 cents on the dollar, leaving it just cents above the price on defaulted securities that investors held out of the 2005 renegotiation....

The South American country hasn't had access to international capital markets since it defaulted on $95 billion of bonds in 2001. Holders of some $20 billion of those bonds rejected the government's 2005 payout of 30 cents on the dollar, the harshest sovereign restructuring since World War II.

Why would we expect any different?  Economic incompetence is a hallmark of Argentina, especially from this duo who have run the country the past five years.

Progress in Peru

From The Fox Street Journal.

Peru has been experiencing fast growth – better than 6% annually – for almost seven years, and it has largely occurred on the coast and in the capital city. But the mountain and jungle regions of the country have not kept up. They remain vulnerable to the siren song of left-wing populism. ...

A fundamental change that has won converts to market reforms in the past two decades is price stability. In 1990, inflation reached 7,000%, but over the past six years it has averaged 2.3%. That means that even before any other changes in government policy, every Peruvian has enjoyed a tax cut and a boost to his savings power.

Yet price stability on its own would have left the country well below its potential. Far more impressive is the restructuring of the economy, which has led both to growth and to a more equal distribution of opportunity. While a boom in commodity prices has certainly fueled development of late, Peru is also sprouting entrepreneurs in a variety of nontraditional industries. And these innovators are making their way onto the global stage.

The key reform that has made all this possible is the opening of the economy, which until 1990 had very high tariffs designed to protect local industries.

Peruvian journalist Jaime Althaus documents the effects of the opening in his 2007 book (Spanish only) titled "The Capitalist Revolution in Peru." Far from "deindustrializing" the country, Mr. Althaus argues, trade liberalization has strengthened Peruvian manufacturing. Under high tariffs, the industrial sector served mainly as an auto and electronics assembler, using inputs from abroad. But when protection ended, local manufacturing began to discover its comparative advantages.

There were plenty. High growth rates – averaging 11% a year from 1990-2002 – have occurred in sectors that make china, porcelain, knitted fabrics, plastic products and basic chemicals, to mention a few. ...

The agricultural sector on the coast has also revived, in part because private-property rights there (though not in the interior) have replaced the collectivized system of the 1970s. As a result, investment has poured in. Modern farming has put the coast on the map as a global supplier of asparagus, grapes, sweet yellow onions, mangos and organic bananas. All of this has been supported by the deregulation and privatization of key sectors like telecom and banking. And the biggest beneficiaries of openness have been consumers.

Canada v Argentina

At one time, Argentina rivaled Canada in terms of wealth. Up until 1930, Argentina grew along the same trajectory as Canada.  However, in response to the Depression, Argentina turned inward and instituted disastrous policies, many of them populist, inward-looking, and economically insane, whereas Canada responded to the Depression and its aftermath (and the war) in a far more methodical and competent matter. 

Unfortunately, Argentina has never been able to shake its tendency towards populism and, at times, hostility towards international markets.  Today, the GDP of Argentina is well below that of Canada.

From the Worthwhile Canadian Initiative blog.

Oil Hits $100 and Production Falls in Venezuela

Eating the seed corn.  From Reuters.

Even with oil at $100 per barrel, Venezuela's leftist President Hugo Chavez faces a continued slump in the nation's energy industry that could slow his oil-financed campaign to create a socialist society.

Still recovering from defeat in a December referendum that would have let him run indefinitely for reelection, Chavez is likely in 2008 to struggle with falling productivity in the oil industry, which provides around half of government revenues.

Oil sector GDP shrank by 5.3 percent in 2007, according to central bank figures, extending a decline of 14.7 percent since Chavez was elected in 1998 despite oil prices jumping from near record lows to historic highs in the same period.

The figure does not necessarily reflect Venezuela's oil income, which has soared on record prices, but rather demonstrates changes in the total amount of production, transport and processing of oil and gas.

Economists say oil GDP is falling because of massive spending of energy revenues -- state oil company PDVSA paid out more than $13 billion for social programs in 2006 -- that keeps Chavez popular but leads to industry underinvestment. ...

Global energy agencies say Venezuela, the fourth-largest exporter of oil to the United States, is only producing around 2.4 million barrels per day -- 20 percent below official figures of close to 3 million bpd.   

PDVSA continues to suffer repeated operational problems, with a growing number of outages at the company's refineries.

Good News from Brazil

As The Economist notes, poverty is falling and inequality is narrowing in Brazil.

Bravo Costa Rica

Costa Ricans voted in favour of a free trade agreement with the United States in a referendum.

Costa Rican voters gave their approval for a free trade agreement with the U.S. yesterday, handing President Oscar Arias a victory and signaling a desire for closer ties with the country's biggest trading partner.           

With 98 percent of votes counted in the national referendum, 51.6 percent backed congressional approval for the agreement while 48.4 percent were opposed, Costa Rica's electoral tribunal said on its Web site.           

Arias, winner of the 1987 Nobel Peace Prize, staked much of his political agenda on passage of the accord, known as DR- CAFTA, arguing it would boost growth, cut unemployment and benefit the poor in Central America's second-biggest economy. Opponents, including former presidential candidate Otton Solis, said the treaty would put small farmers out of business and give foreigners too much control over the $22 billion economy.

             

Chavez Didn't Read His History Books

The President of Venezuela, Hugo Chavez, is a proponent of Bolivaran socialism, a doctrine with roots that lie in the teachings of Karl Marx.  Marx, despite his incorrect readings of history, probably would have made a good trader as he seems to understand the repetitiveness of human nature when he said that "history repeats itself, first as tragedy, second as farce."

His erstwhile student and modern-day standard-bearer, Sr. Chavez, seems to have missed that class.  It appears that Venezuela is heading down the path taken by Latin America in the 1970s and 1980s, when economic incompetence and quadruple-digit inflation ran rampant across the continent. 

Hugo Chavez's economy is starting to unravel in the currency market.

While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16 percent, the highest in Latin America, as President Chavez tripled government spending in four years. Exxon Mobil Corp. and ConocoPhillips are pulling out after Chavez demanded they cede control of joint venture projects.

The currency, the bolivar, has tumbled 28 percent this year to 4,750 per dollar on the black market, the only place it trades freely because of government controls on foreign exchange. That's less than half the official rate of 2,150 set in 2005. Chavez may have to devalue the bolivar to reduce the gap and increase oil proceeds that make up half the state's revenue.

``This has been the worst managed oil boom in Venezuela's history,'' said Ricardo Hausmann, a former government planning minister who now teaches economics at Harvard University in Cambridge, Massachusetts. ``A devaluation is a foregone conclusion. The only question is when.'' ...

Chavez, an ally of Cuban President Fidel Castro who calls capitalism ``evil,'' weakened the currency 11 percent in 2005. He imposed restrictions on foreign exchange in 2003 to halt capital flight that has driven down the bolivar more than 70 percent since he took office in 1999.         

A devaluation would give the government more bolivars from its oil export tax receipts, helping fund Chavez's policies to provide free healthcare, housing and discounted food to millions of Venezuelans. The government says social programs helped cut the poverty rate to 34 percent in the first half of 2006 from 49 percent eight years earlier. ...

Chavez, who is seeking to end presidential term limits, has taken $17 billion of foreign reserves from the central bank and expropriated dozens of farms that he deemed underutilized.         

He nationalized Venezuela's biggest private electric and telephone utilities and took majority stakes in oil projects owned by Exxon, the world's largest producer, and ConocoPhillips, the third-biggest in the U.S. Foreign direct investment was a negative $881 million in the first half as foreign companies pulled out money.         

Chavez terminated the broadcast license of the country's most-watched television network in May, sparking weeks of student protests. He has threatened to take over cement makers, hospitals, banks, supermarkets and butcher shops, saying they weren't obeying price controls. ...

Contreras called the government-set prices on many products ``fantasy prices'' that are below production costs. Items including milk, chicken, coffee and flour have disappeared from store shelves in Caracas at times this year because companies refused to sell at a loss. ...

Harvard's Hausmann said the growth in public spending has been so rapid that the government needs oil prices to keep rising to hold its deficit in check. He estimates the public sector deficit will equal about 5 percent of gross domestic product this year. The Finance Ministry forecasts the public sector will post a balanced budget this year, Public Credit Director Luis Davila said last month.         

``For the macroeconomic house of cards not to come crashing down, the price of oil has to go up at double digit growth rates,'' Hausmann said. ``If oil stays at $70, they're going to hit the wall.''         

                                    

Why Price Controls Don't Work - Example #3,547,591

Economic populism has come home to roost in Argentina as the country is facing an energy shortage after imposing price controls five years ago, with predictable results.

LAST year, as the southern hemisphere's winter stretched Argentina's vulnerable energy infrastructure to near breaking-point, Guillermo Moreno, the internal commerce minister, sought to assure the public that the fuel shortages would be only temporary. “It will rain diesel,” he vowed. Now, as the country faces its worst energy shortage in nearly 20 years, even a sprinkle of diesel would be a relief.

The end of May brought an unseasonably early cold snap, leading homes to turn up their heaters. This, coupled with the failure of a power plant, caused the collapse of both the power grid and the fuel supply system. In Buenos Aires, two of the wealthiest districts were plunged into darkness. Across Argentina, electricity supplies to industrial users were severely curtailed, causing temporary workers to be laid off. Service stations ran out of the compressed natural gas that powers many Argentine cars, including 90% of the capital's taxis. At least this meant fewer jams, the official news agency noted brightly.

Analysts have long predicted that the consequences of the government's populist energy policies would begin to be felt this winter. During Argentina's 2001-02 economic crisis, the government forcibly converted all energy tariffs from dollars to pesos, representing a cut of nearly two-thirds in their real value. Since then, only a handful of modest increases have been permitted, resulting in energy prices that are some 40% lower than those in neighbouring countries.

This has caused private-sector energy investment to grind to a virtual halt, while the economy has grown by nearly 9% a year. As a result, Argentina's proven gas reserves have fallen from more than 20 years' worth of production in the mid-1990s to less than ten years' worth today, and it can no longer produce enough electricity to cover exceptional demand.