Argentina’s Fraudulent Numbers Paint a Grim Picture for Investors

By Jon TontiThe scandal about the deceptive inflation data being pushed by the Argentinian National Institute of Statistics and Census (INDEC), and it being disregarded as a credible source by media outlets and investment firms has been one of the most earth-shattering stories to rise from the Southern Cone this year.

In late February The Economist stopped publishing INDEC figures citing that “Since 2007 Argentina’s government has published inflation figures that almost nobody believes.” Additionally, there was and is “an extraordinary abuse of power by a democratic government, independent economists have been forced to stop publishing their own estimates of inflation by fines and threats of prosecution,” reported The Economist.

INDEC reports a current inflation rate of 10.6% (April 2012) and says that on average products in the country’s CPI index have gone up roughly 44% in price since 2007; independent measurement by PriceStats, a firm that specializes in the daily monitoring of inflation rates around the world using web scraping technologies to track online pricing, puts Argentina’s 2012 annual inflation rate at 25% and its cumulative inflation rate since 2007 at 137%.

Nearshore Americas talked with Peter Ryan and Juan Gonzalez last year around this time in a piece we did called “Are Higher Costs Crippling Argentina’s Call Centers?” where both Peter and Juan expressed opinions about the countries prospects.  Below we are going to talk about some of the current quantitative data (from recognized credible sources) that is telling Argentina’s story.

Repressed?

The Heritage Foundation’s 2012 Index of Economic Freedom ranks economies as Free, Mostly Free, Moderately Free, Mostly Unfree, and Repressed.  Argentina’s economic freedom score (assigned by the study) has fallen from 55 in 2008 to 48 in 2012 as Argentina ranks 158^th freest and is categorized as repressed.

“Its overall score has decreased by 3.7 points, the third worst decline in this year’s Index. With lower scores on six of the 10 economic freedoms, Argentina now ranks only 27th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below the regional and world averages,” stated the Heritage Foundation.

“Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector”

The Heritage Foundation cites “extensive government intrusion into free markets” as a cause for eroding economic freedom.  That general tendency goes hand-in-hand with the reported billions of dollars of losses suffered by inflation-linked bond holders who were effectively swindled out of their money when inflation data was manipulated by INDEC at the behest of the Argentinian government.

The nearshore industry’s disenchantment with the Argentina’s lack of business friendliness will not be addressed by the Argentine government anytime soon.  “Regulatory encroachment on private businesses has continued to increase, undermining previous years’ structural reforms. Populist spending measures and price controls distort markets and undermine productivity growth, and the financial sector remains hobbled by government interference. Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector,” said Heritage.

Doing Business

Not coincidentally, in ease of doing business Argentina ranks 24^th out of the 32 countries surveyed in Latin America and the Caribbean in the recent Doing Business report issued by the World Bank and the International Finance Corporation.  Despite a continued poor ranking in “Dealing with Construction Permits” and “Registering Property” in the context of Latin America – ranking 32^nd (last) and 24^th respectively – Argentina rose 26 spots worldwide in terms of registering property and two spots in dealing with construction permits.  The country lost 3 spots in the “Protecting Investors” category and stands at 20^th place in Latin America with 4.7 on the strength of investor protection index while the Latin American average is 5.1.

It is a metric comprised of three indicators: requirements on approval and disclosure of related-party transactions, liability of CEO and board of directors in a related-party transaction, and the type of evidence that can be collected before and during the trial according to the IFC.

Broad Consensus

Unfortunately, the consensus among independent monitors of Argentina’s economic and political situation is that Argentina is backsliding.  Disillusionment among Argentines is common; sources inside Argentina see familiar shrug when they ask an Argentine why Cristina was reelected.

The World Bank strikes a familiar tone with other monitors, “The state’s role in the economy has grown, and the financial sector remains constrained by government influence. Institutional weaknesses, including corruption and a weak judiciary, continue to hold back Argentina’s overall economic freedom and development.”