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Argentina Crisis in 2001

Argentina Crisis in 2001. Professor Ramon A. Castillo-Ponce June 1st, 2006 Presented by Shing Wong Yafan Wu Wanichaya Phunpruk. Summary. Exchange rate policy Factors lead to devaluation Economic impact on Argentina Post-Crisis. OVERVIEW.

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Argentina Crisis in 2001

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  1. Argentina Crisis in 2001 Professor Ramon A. Castillo-Ponce June 1st, 2006 Presented by Shing Wong Yafan Wu Wanichaya Phunpruk

  2. Summary • Exchange rate policy • Factors lead to devaluation • Economic impact on Argentina • Post-Crisis

  3. OVERVIEW • Location - Southern South America, bordering the South Atlantic Ocean, between Chile and Uruguay • Area – 2,766,890 sq km, • Population – 39,921,833 (2006) • Currency--Peso

  4. Origins • 1983: democracy in the country was restored with the election of President Raúl Alfonsín. The new government's plans included stabilizing Argentina's economy, for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and inflation began increasing • 1989: Argentina's inflation reached 200% per month, topping 3,000% annually.

  5. Fix Rate Policy • 1991:Carlos Menem's government installed what was known locally as a "convertibility system" to rid Argentina of hyperinflation and give the country a confidence shock. Under the Convertibility Law, the peso and the U.S. dollar both circulated legally at a 1-to-1 exchange rate

  6. Result of Convertibility Law • The dollar peg helped bring inflation under control • Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth

  7. Crisis began to turn sour in 1999. • Adverse external shocks • A reduction of capital flows after the East Asian and Russian crises of 1997–98 • The Brazilian devaluation (economic growth was negative for three years in a row.) • Commodities export shock • The convertibility plan locked in the overvaluation • Weak fiscal policy • Weak tax administration: tax avoidance and evasion

  8. Argentina crisis in 2001 • Argentina quickly lost the confidence of investors, and the flight of money away from the country increased. • Argentine workers began to withdraw their savings • Government’s responses

  9. Con’t • During the last week of 2001, the government facing the impossibility to meet debt payments, defaulted on the larger part of the public debt, totally 93,000 million dollars • In January 2002,government abandoned its peg to the U.S. dollar. • the currency has depreciated 356% against the U.S. dollar in the year to September 20. • Output declined 15% and inflation to rise to 72% in 2002

  10. Fiscal Policy • Debt Sustainability 1. During military dictatorship (1976-1983 years), Argentine external debts are from 8,200 million surges to 43,500 million dollars 2. Argentina’s public debt was almost entirely denominated in foreign currencies

  11. Fiscal Policy • Weak tax administration leading to widespread tax avoidance and evasion 1. Frequent changes in tax law and senior management in tax administration 2. Lack of a computer based accounting system 3. Politicization of the tax administration

  12. Adverse external shocks • The Brazilian devaluation: caused the Argentina less competitive in the exporting markets • A secular appreciation of the U.S. dollar caused Peso to be overvalued

  13. The end of convertibility: Immediate effects • Peso’s devaluation and inflation • Many private companies came close to bankruptcy • Argentine products were rejected in some international markets

  14. Post-Crisis • Economic Recovery • Debt Repayment • GNP, Unemployment Rate, and Wealth Distribution

  15. Economic Recovery • In 2003, Argentina’s economy started to climb • Agricultural exports hit record high, foreign investments and tourism returned • Exported less expensive and became competitive abroad • Demand from developing countries increased (China is a major buyer of soy products) • Considerable amount of foreign currency inflow

  16. Debt Repayment • In 2005, growing fiscal surplus made possible to pay IMF with no negotiation • 12/15/2005, it announced to pay IMF the whole debt of 10 billion USD • The payment made 3 years earlier than scheduled date

  17. Evolution of International Currency Reserves

  18. GNP/Unemployment Rate

  19. Poverty in Argentina Date ofmeasurement Extremepoverty Under povertyline Oct 2002 27.5% 57.5% May 2003 26.3% 54.7% 2nd sem 2003 20.5% 47.8% 1st sem 2004 17.0% 44.3% 2nd sem 2004 15.0% 40.2% 1st sem 2005 13.6% 38.5% Wealth Distribution

  20. Q & A

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