Ankita Bhawsinka 2A-05 Argentina Economic Crisis (1999-2002) - Impact on Foreign Trade

General Overview
The origins of Argentine Economic Crisis, in the late 1990s, can be traced back to huge debts acquired by its militant government about two decades earlier. With series of blotched projects, corrupt political dealings and the Falklands War preceding the election of a democratic government in 1983, Argentina did not have the means or leadership to cope with rising unemployment and inflation and falling GDP. 1989, in Argentina, saw introduction of a wide range of new economic policies, most important of which was the fixing of the Peso to the US dollar at a rate of one to one, with the objective of restoring Peso as a stable currency. Initially stabilizing the inflation and the economy in general, the move backfired when the dollar dramatically appreciated relative to the Japanese Yen in 1996, the European currencies in 1999-2000, and the Brazilian Real in 1999, the Peso also increased in relative value. In December 2001, Argentina defaulted on its $155 billion debt, which was the largest sovereign debt default in history.

Impact on Foreign Trade

With 53% of Argentinas total trade flows going to Brazil and Europe, Argentinas export market evaporated, when valuation of Peso went up. Inversely imports increased, resulting in accumulation of $22 million debt on imported capital alone. The effects were felt throughout the economy. With the notable exception of the service sector, the entirety of the economy immediately began to flounder. The manufacturing sector, which includes Argentinas largest exporter, agriculture, was hit particularly hard. In January 2002, the one to one dollar peg was finally abandoned. In a matter of days, the Peso lost significant value in the unregulated market, officially dropping to 1.4 pesos per dollar. This would usually suggest an increase in exports, but since the county was structured for an import heavy market, export income came slowly. Accordingly, the value of the Peso continued to drop, bottoming out at approximately 4 pesos to 1 dollar. Export sluggishness also reduced tariff revenue and government saving, which caused inflation to rise significantly, reaching 20.2% in April 2002.

Argentinas Response to Crisis Impacts

To avoid a run on the banks, the government proceeded to put a cap on withdrawals, which meant residents had no means of buying necessities. The Ministry of Economy required all bank accounts denominated in dollars to be exchanged into pesos at the official rate. Effectively, this meant that peoples savings were cut by 75% overnight. Nationwide, wealth plummeted, businesses closed, imported products became virtually inaccessible, and the unemployment rate soared to nearly 25%. In response to these issues, the government began to promote their exports with subsidies and improved access to credit for export related industries, which saw a positive impact. Behind skyrocketing soy prices, Argentine exports eventually began to gain footing in international markets. GDP has grown since 2003. Argentina has managed to amass a $77 billion trade surplus in 2003-2008.

Ankita Bhawsinka 2A-05

Highlights
Abandoning of one to one dollar peg was one of the major policy decisions taken by the government, which led to drop in the valuation of Peso. With following policies to aid and increase exports, Argentina was able to capitalize on its devaluation of currency.

Canada-Argentina Bilateral Trade

Canada and Argentina have a positive relationship that is reinforced by numerous trade agreements, such as the Foreign Investment Promotion and Protection Agreement (FIPA) and the Canada-Mercosur Trade and Investment Cooperation Arrangement (TICA). There are potential opportunities for Canadian companies to develop a strong trade and investment relationship with Argentina, particularly in the agriculture, food and beverage sectors. The countries total trade within this sector has significantly developed and increased over the years, reaching almost $250 million in 2009. In 2001 the Argentine economy was forced into a serious economic crisis, which resulted in devalued currency, negative economic growth, and capital flight. The Argentine government responded by using tighter fiscal controls and focused spending as a way to revive the economy. As a result, the country has experienced growing domestic consumption, increased investment, solid export demand, and favorable external conditions. Consumer confidence and spending increased, creating several opportunities for Canadian exporters of agri-food products. The traditional Argentine fresh food category, as well as the more recent food processing sector, has become lucrative markets for exporters. Canada-Argentina Bilateral Trade (2009)
Argentina Total Trade Exports Imports Trade balance Canada-Argentina Trade Exports Imports Trade balance Canada-Argentina Ag Trade Exports Imports Trade balance $107.3 billion $63.3 billion $44 billion $19.3 billion $875.8 million $175.3 million $700.5 million ($525.2 million) $243.4 million $11.0 million $232.4 million ($221.4 million)

Current Scenario
Argentina had a $16.7 billion trade surplus in 2009. Foreign trade was approximately 31% of GDP in 2009 (up from only 10% in 1990) and played an increasingly important role in Argentina's economic development. Exports totaled approximately 18% of GDP in 2009 (up from 15% in 2002), and key export markets included MERCOSUR (25% of exports), the EU (19%), and NAFTA countries (9%). The production of grains, cattle, and other agricultural goods continues to be the backbone of Argentina's export economy. High-technology goods and services are emerging as significant export sectors. Continuing Argentine arrears to international creditors and a large number of arbitration claims filed by foreign companies are legacies of the 2001-2002 economic crisis that remain to be resolved. From May to June 2010, the Government of Argentina offered a debt restructuring for private holders of defaulted bonds. Two-thirds of the private bondholders participated, leaving approximately $6 billion in private default claims still outstanding.