South America Continues Its March Leftward

Bolivia Moves Far Left

With the election of Evo Morales as the new President of Bolivia, foreign firms operating there -- especially oil and gas multinationals -- can expect to be squeezed hard in the coming months. By most accounts, Evo Morales is not a pragmatist like Kirchner here in Argentina or Lula in Brazil. He is more in the mold of Chávez and Castro.

Argentina Continues Leaning Leftward

For Argentina, this comes right on the heels of the firing of the popular (and highly regarded) economy minister Roberto Lavagna, who many credit with reversing the economic decline of the country. Additionally, a few days later, Kirchner announced the complete repayment of the IMF debt. The debt was paid off in full and ahead of schedule.

It was likely not a decision that Lavagna would have supported -- as it depleted a significant amount the country's foreign currency reserves. Additionally, the interest rates on the loans provided by the IMF are typically lower than what Argentina can get from the private sector, meaning Argentina will be paying more to finance its external debt, since it will no longer be using IMF money.

Instead, it was a political decision on the part of Kirchner. Kirchner will now be free of the IMF's intervention in his economic programs. With both Lavagna and the IMF out of the way, Kirchner is free to exercise absolute control over the country's economy. During the announcement, he thanked Venezuela's Chávez for helping make it all possible. Chávez purchased $1 billion of Argentina's bonds this year.

The Effects of Kirchner's Plans Are Still Unknown

It remains to be seen what Kirchner will be doing with this new autonomy. So far, the market has pushed down the peso/dollar exchange rate to 3.05:1, from the previous level of 2.95:1. So for now, expatriates will be getting things 4% cheaper. It remains to be seen what will happen in the long term.

The markets didn't take kindly to the firing of Lavagna either, sending the MERVAL stock index down 5% on the day Lavagna was fired.

With the IMF debts repaid and Lavagna gone, my guess is that we won't see any increases in the utility rates that are being charged by the foreign multinationals that own the utilities here. With the IMF no longer negotiating on behalf of the multinationals, I can't think of any reason why Kirchner would be willing to give any ground on prices now, given his worry about inflation. A raise in utility prices would no doubt only exacerbate the inflation situation.