BUENOS AIRES, Argentina – President Cristina Fernandez has tried to reinvent her image since her return from skull surgery. She's put aside the all-black wardrobe she wore for three years mourning her late husband Nestor Kirchner, and reshuffled her Cabinet. This week, her economy minister announced a new stimulus program.
Analysts, however, say what she really needs to do, and quickly, is take politically painful steps to contain inflation by dialing back government spending.
Restoring Argentina's sense of pride and sovereignty after its 2001 economic collapse has been the central goal of the Kirchners' "victorious decade" in the presidency. They renegotiated or paid off nearly all of Argentina's defaulted debt in ways that removed the supervision of international lending organizations, nationalized the pension system, retook control of the national airline and oil company, and dug deep into the treasury to redirect revenue to the poor.
But the years of 7 percent growth are over. Fernandez now "faces a rapidly deteriorating economy that demands profound and urgent measures, and there are no pleasant alternatives in sight," said Ignacio Fidanza, who directs lapoliticaonline.com, a website focused on Argentine politics.
Inflation has been at least 26 percent this year, more than twice the widely discredited official rate, private economists say. This forces rounds and rounds of wage and price negotiations that scare off investors and spark social unrest, like the provincial police strikes that set off looting across the country this month.
Governors promised pay raises that reached nearly 60 percent in some provinces to get officers back in the streets after the mob violence killed 13 people.
A 50 percent average raise for police would cost about $2.3 billion in 2014, but the officers represent just 15 percent of Argentina's 2 million provincial government employees, and with at least 28 percent inflation expected in the coming year, the rest won't be satisfied with less. If all 2 million get 30 percent raises on average, it would cost the equivalent of $10 billion in today's pesos, estimates Diego Giacomini, chief economist with the Economia y Regiones consultancy.
Printing more pesos isn't a sustainable alternative: JP Morgan estimates the peso will be worth 45 percent less by this time next year.
Economists figure Argentina's primary fiscal deficit, before making debt payments, grew to 2.6 percent of GDP this year. That's better than the U.S deficit of 4.1 percent of GDP, but Argentina can't attract international loans at market rates. Instead, it uses Central Bank reserves to buy fuel overseas, meet foreign debt payments and finance economic stimulus programs, reducing the reserves by nearly $13 billion this year, to $31 billion.
In all, the government had to spend $13 billion this year importing oil and natural gas, costing nearly $48 in hard currency for every $100 that agricultural exports brought into the economy, the Fundacion Mediterranea consultancy says.
"The ceiling that the debt once put on growth is now imposed by the energy deficit," said Ramiro Castineira, an analyst with the Econometrica firm in Buenos Aires.
The deficit has risen because long-term business investments have slowed even as the government stimulates the economy, subsidizes energy and transportation and expands welfare for the poor.
Significant new domestic energy supplies from Argentina's huge shale reserves remain years away, Economy Minister Axel Kicillof acknowledged this month as he promoted special deals and tax breaks to the world's biggest oil companies.
Meanwhile, Kicillof announced $1.5 billion in government-backed, peso-denominated business loans Monday, part of a $21 billion stimulus aimed at creating 830,000 new jobs in the coming year.
He also negotiated quarterly price controls on at least 175 of the thousands of products sold in supermarkets, but private economists say such measures have already failed to control inflation.
"The issue of inflation is fundamental, because it has wiped out the protection that social plans provided to the poor," said Jorge Oesterheld, spokesman for the Episcopal Conference of Argentine Catholic church leaders.
Associated Press writer Michael Warren contributed to this report.