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COUNTRY BRIEFS


AUSTRALIA-ARGENTINA RELATIONS

Australia and Argentina have a mutually beneficial relationship based on many shared interests and similar perspectives - we are both large Southern Hemisphere nations with relatively small populations and strong resource bases.

Australia's principal engagement with Argentina is through the Cairns Group, the G20, the UN, the Commission for the Conservation of Antarctic Marine Living Resources (CCAMLR), the Antarctic Treaty and the International Whaling Commission (IWC). We share common interests in international peacekeeping, the prevention of WMD proliferation, disarmament, Antarctica, international environment policy, trade liberalisation and economic cooperation policies.

Australia and Argentina play an active role in the G20 forum in addressing the global financial crisis and in identifying reforms to the global financial system. Argentina's role as an interlocutor on the WTO Doha Round negotiations and in the Cairns Group is important to Australia. As major wine producing nations, Australia and Argentina work together through the World Wine Trade Group to advance favourable international trade conditions in relation to wine.

Australia also participates in the CER-Mercosur Dialogue, bringing together Australia, New Zealand and Mercosur member countries, including Argentina and Brazil. The dialogue was established in 1996 as a mechanism to strengthen cooperation on global trade policy issues and to promote inter-regional trade and investment.

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POLITICAL OVERVIEW

Background

Argentina is a presidential democracy, with universal suffrage and compulsory voting. Under the current constitution (last reformed in 1994), the President is the head of state and the Congress is bicameral.

Argentina is a federation of 23 provinces, plus the Federal Capital District (Buenos Aires City). The system of government (at both the federal and provincial levels) is based on the separation of powers into the Executive branch, the Legislative branch and the Judiciary. The President and Vice-President are chosen by direct popular vote for a four-year presidential term, and may run for one consecutive re-election. The President appoints the ministers.

Argentina returned to civilian government in 1983 following a period of military rule. Since that time, the country's democratic institutions have been consolidated. This has however not been matched by similarly enduring financial and economic stability. In 2001, a profound economic crisis provoked serious civil unrest and resulted in the resignation of then President De la Rúa in December. After a period of transition under a caretaker administration, presidential elections were held in 2003 in which t Néstor Kirchner came to power. With high public approval ratings, Kirchner's Government focused on restructuring Argentina's foreign debt and promoting economic growth.

In 2007, President Kirchner announced that he would not seek re-election and that his wife, Cristina Fernández de Kirchner, would take his place on the ballot in the presidential elections that year. Fernández was comfortably voted in as Argentina's first elected female president and took office in December 2007.

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POLITICAL OUTLOOK

President Fernández is supported by a large bloc of the Peronist Party (PJ), which has dominated the Argentine political scene since 1946. However, both prior to and after the 2007 presidential elections, Néstor Kirchner sought to expand the PJ's power base beyond the traditional party structures by canvassing outside support, in particular from the centre left. Kirchner's sudden death on 27 October 2010 following a heart attack altered the Argentine political outlook. He was widely seen as the likely PJ candidate for the presidential elections in 2011. Since June 2009, when the government lost its legislative majority in Congress, it has faced difficulties in securing support for its policy initiatives. However, the government has pushed ahead with its developmentalist economic program, assisted in this effort by opposition disunity. In this context and with the death of Kirchner, there has been increasing jockeying for positions in both the government and opposition, with a view to presidential elections due in October 2011.

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ECONOMIC OVERVIEW

For latest economic data refer to Argentina Fact Sheet (PDF) (http://www.dfat.gov.au/geo/fs/arge.pdf)

Background

Argentina has a fundamentally market economy based on an abundance of natural resources, a highly literate population and an export-oriented agricultural sector. Although Argentina is an industrialised country, its exports continue to be dominated by agricultural products, although exports of industrial goods have grown strongly in recent years. In the last decade, soybeans have become the country's main commodity export.

After decades of economic stagnation, economic reforms in the 1990s opened the market to foreign competition. Privatisation and economic deregulation saw foreign investment soar and GDP grow, with large domestic conglomerates and multinationals dominating the industrial base and utilities. For a decade, economic policy was based on the Convertibility law of 1991, which sought to end hyperinflation and attract investment by establishing a currency board system that maintained parity between the Argentine peso and the US dollar. However, the law, together with a lack of fiscal discipline, ultimately reduced Argentina's flexibility to deal with external shocks and exacerbated problems such as unemployment. Argentine exports became uncompetitive, exacerbating chronic fiscal deficits and swelling public debt.

In December 2000, the De la Rúa Government resorted to a US$39 billion IMF bail-out, to address concerns that the country would default on its debt. This package afforded Argentina only a short respite. Throughout 2001 subsequent government initiatives and fiscal changes failed to cap public spending.

In October 2001, the government was forced to restructure public debt (US$90b) through a voluntary bond swap to once again avoid default. This still failed to stem capital flight from the local financial system, obliging the government to place restrictions on cash withdrawals and transfers abroad. These measures eventually led to a default to private creditors of US$98 billion, political and social conflict, the collapse of the financial system and the fall of the government in December 2001. A transitional government, led by President Duhalde, applied emergency measures to devalue the peso and set a floating exchange-rate regime. After a long negotiation, Duhalde's Government obtained a transitional IMF aid package that prevented Argentina from defaulting on its debt commitments to the IMF.

Economic and trade policy directions

After coming to power in May 2003, President Kirchner's Government made progress in stabilising inflation and maintaining the primary surplus, together with a strong trade surplus. The government introduced policies that put the economy back on a firm footing and laid the foundation for a decade of strong growth, falling unemployment and poverty reduction. However, significant progress on structural reform, including restructuring the banking system, implementing tax reform, and establishing a new fiscal relationship between the central government and provinces was yet to be achieved.

Tension between Argentina and the IMF - particularly due to the unresolved issue of the debt renegotiation - led to the postponement of the stand-by agreement in August 2004. Negotiations with the IMF resumed following a successful debt swap in February 2005 and the US$9.5 billion owed to the IMF was repaid in January 2006.

Argentina successfully renegotiated its large debt with the majority of private creditors in 2005 and 2010 – although a small percentage of creditors refused to settle. In order to support a managed float, with the objective of maintaining a low peso to stimulate exports and import replacement, Argentina recommenced issuing some debt to foreign creditors in 2006, with Venezuela becoming a major customer.

President Fernández has adhered closely to the economic policies pursued by her immediate predecessor, including anti-inflation measures such as domestic price accords, export taxes and utility tariff freezes, and strong growth in public expenditure. The recent introduction of measures aimed at slowing the flow of manufactured imports have met with criticism inside Argentina as being protectionist, and caused tensions within Mercosur and with major trading partners.

In March 2008, the government introduced a sliding scale export tax scheme for grains and oilseeds. In response, the leading farmers' associations in Argentina organised nationwide protests and roadblocks against the new measures, halting operations in the grains, beef and dairy sectors, with the objective of having the new tax scheme removed or substantially adjusted. The government's proposed export tax measures for grains and oilseeds were narrowly rejected in the Senate in July 2008. However, this failed to resolve the conflict with farmers, who continue to seek a reduction of all export taxes on agricultural products.

The impact of the global financial instability, in particular weak demand and lower prices for Argentina's commodity exports, dampened economic growth in 2008 (+6.8%) and 2009 (+0.7%). In order to mitigate the effects of the crisis, the government announced a number of stimulatory measures, including increasing spending on public works, providing subsidised credit lines and extending a targeted taxation moratorium.

In late 2008, President Fernández secured congressional approval for the nationalisation of private pension funds. In early 2010, Fernández issued a decree to transfer US$6.5 bn in Central Bank reserves to the Treasury, in order to guarantee debt payments. This and other measures (such as the renationalisation of flag air carrier Aerolíneas Argentinas in September 2008) appear to presage a wider role for the state in the economy as the government grapples with multiple economic challenges.

Argentina's most important trade agreement is Mercosur. Together with Brazil, Paraguay and Uruguay, Argentina formed the Southern Cone Common Market known as 'Mercosur' in 1991. Mercosur is an imperfect customs union, with a common external tariff applied on most products. Mercosur represents a potential market of almost 240 million people with a combined GDP of around US$2 trillion.

Economic outlook

Argentina's government continues to stimulate economic growth, despite deteriorating public finances and persistent price pressures. In December 2010 the government finalised the exchange of US$20bn in outstanding debt not included in the 2005 restructuring and is now in the process of resolving the issue of outstanding debt with the Paris Club group of creditors.

GDP growth (8.5 pct) recovered strongly in 2010 and is expected to continue albeit more moderately (5.3 pct) in 2011, with strong demand from Argentina's main markets, Brazil and China, supporting export-oriented activity. Inflationary pressures will continue to increase as a result of growing demand, a loose monetary policy, sustained supply constraints and real wage rises.

A key issue is the maintenance of a fiscal surplus - important for Argentina's future economic health - and how this is achieved. There is some domestic criticism of the reliance on export taxes on primary products (which now account for 18 per cent of revenue) and bank taxes to bolster that surplus. The Economist Intelligence Unit expects a moderate deterioration of the primary balance in 2011 due to new spending initiatives, leading to an overall budget deficit of 2.1 per cent of GDP.

The issue of energy security is a key long-term economic and policy challenge. Oil and gas production has stagnated in the face of artificially low domestic consumer prices. Similarly, electricity demand has increased due to strong economic growth, but generation capacity has been flat for several years, exacerbated by the practical freeze on tariffs since the 2001 devaluation. The government has announced several measures on both the demand and supply sides.

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BILATERAL RELATIONSHIP

Recent senior government and officials' visits have contributed to a continuing deepening of Australia's relationship with Argentina. The then Minister for Trade, the Hon Mr Simon Crean MP, visited Argentina from 15-18 April 2010 for meetings with senior government members. The visit was successful in promoting the bilateral trade and investment relationship, as well as our cooperation in multilateral forums such as the WTO and G20. Mr Crean also addressed a reception for key Australian and Argentine business representatives from the clean energy sector, and representatives of the Argentine government. In October 2010 a Congressional delegation from Argentina visited Australia and met with key government officials, academics and representatives from the business sector. In April 2008 Australia's then Parliamentary Secretary for Trade, Hon John Murphy MP, visited Buenos Aires for talks with government and private sector contacts. An Australian Parliamentary delegation visited Argentina in August 2008, and the President of the Senate, Senator the Hon John Hogg, visited Argentina in September 2009 to meet with Argentine counterparts. Senior Officials discussions, led by Deputy Secretary Heather Smith were held in October 2010 in Buenos Aires.

In April 2007, a delegation of Argentine ministers and officials visited Australia to attend the opening of the new research reactor at Lucas Heights in Sydney. The Argentine company INVAP, together with the Australian firms John Holland and Evans Deakin, won the tender to design, build and commission the replacement reactor. The project is a good example of the potential for increased business links between Australia and Argentina.

Bilateral links with Argentina were boosted in November 2008, when Qantas commenced a thrice-weekly non-stop flight from Sydney to Buenos Aires. Aerolineas Argentinas also operates four flights per week, through Auckland, between Sydney and Buenos Aires. Argentina and Australia have signed an investment protection agreement, which provides additional security to Australian investors by protecting against the possibility of expropriation of Australian investments and providing for an international dispute settlement mechanism. A double taxation agreement entered into force in 2000. An agreement on cooperation in the peaceful uses of nuclear energy entered into force in January 2005. In November 2003, Australia signed a bilateral Memorandum of Understanding (MOU) on scientific and technological cooperation with Argentina. Australia and Argentina also have bilateral MOUs on air services, education and training and cooperation in the development of rail infrastructure in Argentina.

Since the onset of the global economic crisis, Australia and Argentina have intensified their cooperation and exchange on issues related to the G20, of which both countries are members.

Approximately 11,000 Argentine born persons live in Australia, many of whom migrated to Australia in the 1970s, during a period of economic and political turmoil in Argentina. Australia's Argentine community also includes a network of second and third generation Argentine Australians.

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BILATERAL ECONOMIC AND TRADE RELATIONSHIP

Trade with Argentina is modest, with the balance in trade generally favouring Argentina since the onset of its economic crisis in 2001. Two way merchandise trade exceeded the half billion dollar mark for the first time in 2008, and reached AUD 627 million in 2010. Australian exports to Argentina are varied, and include coal, medicaments, fertilizers and civil engineering equipment. Australian imports from Argentina include animal feed, leather and soft vegetable fats and oils.

Australian investment in Argentina is estimated at around A$2.016 billion. Sectors of interest include mining, agribusiness, entertainment, port management, freight equipment and workers' compensation insurance.

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EXPORT OPPORTUNITIES

Export and, in particular, investment opportunities for Australia can be found in mining and most areas of primary production and agribusiness sectors as well as the revitalisation of Argentine industry and of the communications, transport and public utilities sectors. Other sectors with promise are environmental management, wine, construction and building materials and high-tech machinery. Australian expertise in distance education, vocational training, tele-medicine, English as a second language and postgraduate studies could also find markets in Argentina. With appropriate marketing, tourism could become another potential growth area.

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Last Updated: March 2011

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