Buenos Aires, Argentina – Gabriel Mendoza’s tourism business has changed dramatically over the past two years as Argentina inches closer to an economic crisis.
“It’s always the same. Every 10 or 15 years, the bomb explodes and there’s another crisis,” Mendoza told Al Jazeera. “My only hope is that this time it passes quickly.”
Last December, Argentina’s government made US dollars more difficult to purchase and raised taxes on credit card purchases of foreign goods to 35 percent – meaning that international airline tickets have become pricier.
Mendoza said it now takes him ten times longer to sell tourism packages, because he has to do paperwork for the new taxes twice a month – increasing his costs at a time when demand is in decline due to a slowing economy. Economists expect Argentina’s economy to contract this year and possibly tumble into its second crisis since the 2001-2002 collapse, when the unemployment rate hit 25 percent.
In the early 20th century, Argentina’s per capita income surpassed those of France, Germany and Italy. But for much of the past century, its economy has suffered from boom-and-bust cycles and periods of severe inflation, in which money rapidly loses its value.
It's always the same. Every 10 or 15 years, the bomb explodes and there's another crisis. My only hope is that this time it passes quickly.
A 44-year-old father of three, Mendoza has downsized his operation to just him, outsourced cheap air fare sales and trimmed costs by using Internet-based telephone services. He is now focusing on selling big-ticket travel packages and finding new streams of revenue.
“Your imagination is the only thing that will save you during these downturns,” Mendoza said. “We learn and get by.”
The trouble is that getting by is getting harder in Argentina.
The country suffers from one of the world’s highest inflation rates. Inflation is expected to surpass 35 percent this year after an average annual rate of 25 percent since 2010. A global commodity boom – which was the fuel for the agriculture powerhouse’s robust recovery from the 2001-2002 crisis – is slowing, along with the pace of consumption, investment and manufacturing.
To keep the economy from imploding, Argentinean President Cristina Fernandez de Kirchner has reined in spending on public works, social welfare programmes and subsidies. The central bank has devalued the Argentine peso by 20 percent against the dollar and raised interest rates to record levels.
The effects? Foreign currency reserves have stabilised after a three-year decline, but the economy has started to contract. Car sales plunged by 25 percent in the first quarter of the year, while construction dropped 5.2 percent in February compared to one year ago.
This is only the beginning, said Esteban Fernandez Medrano, an economist at MacroVision Consulting in Buenos Aires. “We will start to really feel the effects of the slowdown in the second half of this year,” he told Al Jazeera.
Benchmark interest rates have more than doubled to 30 percent this year and analysts expect this to depress borrowing by companies, leading to a cutback in investment. Meanwhile, consumers are expected to reel in spending on credit cards as interest rates surpass 37 percent.
Chipping away at subsidies
More than one million workers went on strike recently to protest rising inflation and stagnant wages [Reuters]
Adding to the cost of living, the government started this month to chip away at its spending on subsidies, which reached 82bn pesos ($10.2bn) in 2013. The first cuts – of up to 13bn pesos ($1.6bn) – will affect natural gas and water subsidies. This will likely increase residential rates for these public services by an average of 300 percent and by up to 900 percent for larger consumers.
The hikes may not be popular, but the government has little choice but to reduce spending, said Gaston Rossi, an economist at LCG, an economic consulting firm in Buenos Aires. He estimated that 20 percent of government expenditures are on public utility subsidies designed to keep gas and electricity rates at among the world’s lowest.
Government spending grew by an average of 32 percent a year between 2010 and 2013 and likely surpassed 40 percent in the first quarter of this year, Rossi told Al Jazeera. The high spending is raising inflation because the central bank prints pesos to pay for the subsidies, he explained.
The planned cuts are not enough, Rossi argues. “It is like a boat filling with water and you only have a bucket to empty it,” Rossi said. “It’s not enough.”
Economy Minister Axel Kicillof defended the subsidies last month, saying the cut is only partial and that the government has “not changed our minds” on the benefit of subsidies for economic growth, he said. “The subsidies increase disposable income, and this represents an improvement in people’s purchasing power.” The subsidies “invigorate domestic consumption” and in turn production instead of just boosting the returns of utility companies, he said.
‘Don’t screw with the workers’
But people are increasingly worrying about how to stretch out their earnings to cover bills and basic living expenses every month.
More than one million workers walked off the job earlier this month to demand wage hikes above inflation, saying that they don’t want to pay the price of the government’s economic adjustment. A protest poster expressed much of this angst: “Don’t screw with the workers.”
This was the second and largest national strike during the Kirchner administration, a sign of the growing discontent with her economic policies.
“This is an historical problem for workers in Argentina. Politicians tend to push for the economic growth of the country but not its development. So when a crisis hits, they want us workers to pay the price of adjustment,” said Maximiliano Arranz, adjunct secretary of ASIMM, a union representing bicycle and motorcycle couriers that took part in the strike.
“We don’t want to pay this price,” he told Al Jazeera. “We don’t want to accept wage reductions. With inflation as high as it is, it is getting a lot harder to make it to the end of the month.”
Ricardo Cirielli, secretary-general of the Aviation Technicians Association, another union that participated in the strike, said inflation is eating up the purchasing and savings power of salaries. He said lower-income earners are getting hit the hardest as fuel, food and medicine prices rise at a faster clip than inflation. Some economists, he said, suggest that the rate of inflation could surpass 40 percent this year. “Salaries are increasingly falling further behind the rise in prices,” he told Al Jazeera.
Adding to the woes, inflation is saddling workers with heavier tax burdens by pushing them into higher income tax brackets even while the risk of job losses increases with the slowing economy, he said. “If private companies do not grow and create jobs, there will be a rise in unemployment,” Cirielli said, adding that cutbacks in hours, suspensions and layoffs are already hitting a range of sectors, from automobiles to construction and real estate.
Kirchner responded to the strike with few words, calling on unions to work with her to maintain employment levels and reduce informal labour, or those who get paid under the table and hence don’t pay taxes. This is in line with her stance on limiting wage hikes to below inflation to avert layoffs, as unemployment holds steady at less than 7 percent. During the last crisis it was at 25 percent.
“The government is playing it cautious,” Carlos Germano, a political analyst in Buenos Aires, told Al Jazeera. “There is a high level of exasperation in society. If the government were to come out in force against the unions, that would be like throwing gasoline on the fire.”
We can't plan our lives, we can't plan projects, we can't progress. We can only just get by.
Surviving the periodic slumps
Argentineans are used to their economy’s endless oscillations. Many learned the hard way during the last crisis, and are doing what they can this time around to shield themselves from the downturn.
Flavia del Giovaninno, a 48-year-old schoolteacher and mother of two, said that despite the rise in inflation, she and her husband decided to remodel their house and replace their car as planned. But they called off a winter vacation. “We still could go, but it is wise to be cautious,” she told Al Jazeera. “You never know what may happen.”
Ignacio Ugarte, a 38-year-old guitar teacher, is diversifying his income sources by starting to grow lettuce with a hydroponics system he built on his rooftop. He plans to grow lettuce year-round and sell it to chefs and speciality grocery stores. Ugarte said he hopes this secondary business will help him survive the periodic slumps in his income from guitar classes, when the economy sours or inflation surges.
“People are paring down costs to the basics, and that doesn’t include extras like guitar classes,” he said. “Inflation is killing me.”
His wife, Agustina Amorena, a 35-year-old administrative worker at a public university, told Al Jazeera they have already taken several measures to cut spending. They put their three children in public school, let go of their nanny, go out less, bargain-shop and walk more.
Although they are getting by, Ugarte said Argentina’s frequent economic crises are demoralising. “We can’t plan our lives, we can’t plan projects, we can’t progress,” he said. “We can only just get by.”