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Feb 5, 2013 | 14:47 GMT

Argentina Freezes Prices for Consumer Goods

Argentina Freezes Prices for Consumer Goods
ALEJANDRO PAGNI/AFP/GettyImages
Summary

Argentina is facing international pressure over some recent financial malfeasance, but that pressure will have little effect on a country that is predominantly focused on domestic issues. On Feb. 1, the International Monetary Fund censured Argentina for inaccurately reporting inflation data. In response, Buenos Aires struck a deal Feb. 4 with consumer goods providers to freeze prices on nearly all of their goods for 60 days, retroactively applicable on Feb. 1. The move does not address real underlying challenges facing the Argentine economy, such as rapid monetary expansion. Rather, it is designed to show Argentine citizens that the government is taking action on an increasingly controversial issue.

Certainly, inflation is a problem for Argentina. Independent organizations regularly report that annual inflation of the Argentine peso ranges between 25 percent and 30 percent, while the official rate generally hovers around 10 percent; for some products, annual inflation may be as high as 50 percent. While the economy has not quite reached the point of hyperinflation, it is still a sensitive political issue and a significant driver behind middle class protests, frequent labor unrest and continuous wage negotiations.

The challenge posed by government-imposed price freezes, which are designed to benefit the end consumer, is that they frequently disregard the cost of inputs along the supply chain. Argentina already has price controls on a variety of goods, including basic consumer goods such as dairy products and electricity. Companies across the country in these industries are struggling to stay open, because although their sale price is controlled, their costs are not. Any prolonged attempt to freeze the prices of consumer goods affected by February's decision will affect domestic producers and exporters, which are required to purchase goods or currencies with a devaluing peso and sell them at a fixed price. It is unclear whether the government offered concessions to supermarkets, such as Carrefour and Wal-Mart, to agree to the price freeze, but exceptions to government-imposed import and profit repatriation restrictions would be logical options with established precedence in other sectors.

Nevertheless, Argentina cannot afford at this point to revise the statistical methodology it uses to achieve the low official rate. Argentina is already walking a tight fiscal rope, and with significant amounts of inflation-linked bonds in its portfolio, admitting to higher levels of inflation would make the country liable for a higher debt load. For a country already experiencing a serious balance of payments challenge in the form of a rising energy import bill, more debt would pose a serious challenge.

With this in mind, the government may find it difficult to honor its promise to reform its statistics methodology in the fourth quarter. Nevertheless, there are some reasons they would want to put this and ongoing legal troubles in the United States behind them. Argentina has long been alienated from the International Monetary Fund, which was intimately involved in the 2001-2002 economic collapse that put more than half of Argentina's population into poverty and forced the country to default on more than $90 billion worth of debt. The country has little regard for the International Monetary Fund, and although the organization has threatened to halt loans to Argentina, Buenos Aires has no intention of resorting to International Monetary Fund assistance. But February's censure comes in addition to an ongoing suit in a New York State district court, where outstanding bondholders are suing for the full value of bonds that Argentina defaulted on in 2002. These issues combined put Argentina in a riskier borrowing category.

Although it would be a boon for Argentina to be able to re-enter the international capital markets on better footing, the initial cost of doing so may be too high. The Argentine government is trying to keep social expenditures — and thus its popularity — high while maintaining enough foreign currency to manage the company's currency exchange regime and import bill. These price freezes should be seen in the context of upcoming legislative elections, in which Argentine President Cristina Fernandez de Kirchner hopes to win enough support to make constitutional changes, potentially extending term limits to allow her re-election.

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