By Lester Pimentel and Drew Benson
July 7 (Bloomberg) -- Argentine President Cristina Fernandez de Kirchner's bid to use the peso as a weapon to quell striking farmers may be on the verge of failing.
The country sold about $2.6 billion of foreign currency reserves in the past two months, breaking a five-year policy of buying dollars and sparking a 3.4 percent peso rally, the biggest since 2003. While the gains cut into profits of farmers who had caused food shortages to protest higher export taxes, they also added to the woes of manufacturers from leather-goods maker ZH SA to yarn producer TN & Platex.
Credit Suisse Group AG, Merrill Lynch & Co. and Barclays Plc are telling investors to sell the peso in a bet Fernandez will stop driving up the currency as Argentina's five-year-old expansion falters. The peso will drop 4 percent in the next year to 3.2 to the dollar from 3.08, according to the median estimate of 13 analysts in a Bloomberg News survey.``A slowing economy will pressure the government into letting the peso weaken,'' said David Beker, a currency strategist at Merrill Lynch in New York. He forecasts the peso will slide to 3.25 by year-end.
Argentina will suffer the ``sharpest'' economic slowdown in Latin America, Merrill said in a June 27 report to clients. The firm cut its 2008 growth forecast for the country to 6.8 percent from 7.5 percent and its 2009 projection to 3.1 percent from 4.2 percent. The median estimate in a central bank survey of 57 economists published last month was for expansion of 7.5 percent this year and 5.5 percent in 2009.
`A Disaster'
Industrial output growth slowed to 5.9 percent on average in the four months through May from 10.5 percent the previous four months, according to the government.
Buenos Aires-based TN & Platex, the country's biggest yarn and thread maker, furloughed 400 workers, or 18 percent of its staff, last week after the peso rally diminished profit margins already hurt by rising costs, said company President Teddy Karagozian. BPGroup SA, a Buenos Aires-based auto-part exporter, said it lost $120,000 of international sales orders in recent weeks after the peso's gains pushed up costs in dollar terms.
``The exchange rate is a disaster,'' BPGroup President Alberto Borga said. ``We're all suffering because they want revenge on the farmers.''
The farmers have yet to back down. Miguel Calvo, vice president of the Argentine Soy Chain Association, said last week that the farmers may resume the strike if Congress passes a bill that converts Fernandez's tax increase into a permanent law.
Record Exports, Reserves
``The government has been unable to weaken and defeat the farmers,'' said Daniel Kerner, a Latin America analyst at the Eurasia Group, a New York-based firm that analyzes political risk for businesses. ``The cost for the government has been huge. They have alienated the industrial sector, which has been a strong supporter of the government.''
Fernandez's predecessor, her husband, Nestor Kirchner, had kept the peso weak to help fuel an export-led expansion.
The economy grew 8.8 percent on average over the past five years, rebounding from a $95 billion debt default in 2001 and its worst recession on record.
Exports, which account for about 14 percent of the country's gross domestic product, jumped to a record $63.4 billion in the 12 months through May. The peso held between 3.0345 and 3.1795 -- a range of less than 5 percent -- in the two-year period through March as the central bank purchased dollars. The bank's foreign reserves reached an all-time high of $50.5 billion on March 27.
Fernandez, 55, said in a speech last month that her husband's weak peso policy helped make the agricultural industry ``the most profitable'' in the country. Argentina is the world's second-largest corn exporter, third-biggest soybean exporter and fifth-largest supplier of wheat.
Cement Shortage
The central bank reversed tack in April after the farmers went on strike across the Pampas that surround Buenos Aires.
Upset that Fernandez raised a tax on soybean and sunflower seed exports in March, the farmers blocked roads and withheld products. The protests sparked shortages of everything from cooking oil to cement and contributed to an inflation rate that Merrill estimates is 25 percent.
Merrill, like other banks, does its own Argentine inflation calculation after the employees union at the National Statistics Institute said last year that a Kirchner appointee forced statisticians to break from standard data-gathering procedures. Fernandez says the institute's consumer price index, which registered annual inflation of 9.1 percent in May, is accurate.
`Greedy' and `Confused'
Fernandez has called the farmers ``greedy'' and ``confused'' for opposing a tax increase that she says will fund food subsidy programs. Her approval rating sank to 20 percent last month from 57 percent in January, a month after she took office, according to a June 19 poll of 1,000 people by Buenos Aires-based Poliarquia Consultores.
Demand for dollars soared as investors pulled money out of the country on concern the strike would trigger the second government default this decade. Yields on benchmark inflation- linked bonds due in 2033 jumped on May 14 to 11.7 percent, the highest since they were issued three years ago, according to Citigroup Inc. The bonds yielded 5.95 percent a year earlier.
The run on the peso eased within weeks, yet the central bank kept selling dollars, driving up the currency. It touched 3.0085 on June 24, the strongest since December 2005.
``It became noticeable by mid-May that the central bank was using intervention as a form of punishment for currency speculators and the farm sector,'' said Daniel Bou Kahir, a currency trader at Banco de la Pampa in Buenos Aires.
No Profit Growth
Raul Zylbersztein, who runs ZH, a Buenos Aires-based leather-goods maker founded in 1945, said the government is hurting ``its own troops.''
The manufacturers ``are the defenders of this model and the government knows it can't bomb us,'' Zylbersztein said. The company has had no profit growth in the past four years as its local costs climbed. ``You have to make more to get the same'' returns, he said.
Karagozian, the president of TN & Platex, said he had tried to avoid furloughing the 400 workers.
``We had been putting off the decision but we couldn't any longer,'' Karagozian said. The peso rally made ``the situation worse. The government will have to make changes soon.''
To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net; Drew Benson in Buenos Aires at abenson9@bloomberg.net
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