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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. - PowerPoint PPT Presentation
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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
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
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.
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
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
Inflation Rate
1989 5,103%
1991 84%
1992 17.5%
1993 7.4%
Crisis began to turn sour in 1999.
Adverse external shocks A reduction of capital flows after the East Asian an
d Russian crises of 1997–98 The Brazilian devaluation (economic growth was n
egative 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 evasi
on
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
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 dollarsIn 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
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
Fiscal PolicyWeak 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
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
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
Post-Crisis
Economic Recovery
Debt Repayment
GNP, Unemployment Rate, and Wealth Distribution
Economic Recovery
In 2003, Argentina’s economy started to climbAgricultural exports hit record high, foreign investments and tourism returnedExported 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
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
Evolution of International Currency Reserves
GNP/Unemployment Rate
0%
2%
4%
6%
8%
10%
12%
14%
16%
2003 2004 2005
GNP
Unemployment rate
Wealth Distribution
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%
Q & A