February 28, 2014 / 10:03 AM / 6 years ago

Argentina's poor at risk as inflation weakens safety net

BUENOS AIRES (Reuters) - At a soup kitchen in a Buenos Aires slum, Alejandro Monzon hung his head as he stood in line and recounted how his fortunes have unraveled over the last year.

Food prices have soared, the 29-year-old maintenance worker complained, squeezing his meager monthly budget and leaving him reliant on charity to keep his wife and six children fed.

“I hoped it wouldn’t come to this,” he said. “But it’s just too hard to make ends meet now.”

He is not alone. A sharp currency devaluation in Argentina last month has worsened one of the world’s highest inflation rates, threatening to unravel a generous social safety net at the heart of President Cristina Fernandez’s economic policies.

One in four Argentine families now rely on state welfare programs ranging from payouts for the unemployed to scholarships for poor high school students, as social spending boomed along with the economy over much of the past decade.

Monzon was one of millions of Argentines who benefited. He moved into a bigger government-built apartment and found a job at a supermarket that helped him buy a car and even a flat-screen TV.

But climbing consumer prices in recent years have overtaken his monthly salary of 4,000 pesos ($507 at the official exchange rate, or about $350 at the black market rate) - a complaint echoing throughout Argentina.

Monzon watched the value of his paycheck tumble further last month when the Argentine peso devalued sharply, triggering a spike in prices of food and other goods.

Facing criticism that it underreported inflation for years, the government recently unveiled a consumer price index showing 3.7 percent inflation in January, the highest in over a decade.

Most economists say inflation is running at more than 25 percent a year, compared with government data that has put annual inflation at just over 10 percent.

As that gap has grown, so has the sense among many struggling Argentines that government-set stipends cannot cover what they used to.

A few months ago, Monzon reached his breaking point. As more of the family budget went to just putting food on the table, he sought help at the Los Piletones soup kitchen.

On a recent day, a line of adults and children, some with bowls in their hands, stretched outside the dining hall and onto the dust-filled streets in the Villa Piletones slum in Buenos Aires. Inside, workers dished out bowls of meat stew and people sat and ate at long wooden tables.

Beatriz Antunez, who helps run Los Piletones, said she saw the crowds lining up for a meal grow late last year.

“People are having to make choices about how they spend their money. And to cut down on their food expenses, they’re turning to us,” she said.


While Argentina’s influential unions have leverage to demand steep wage hikes keeping pace with inflation, those who rely on government social programs depend on policymakers to raise subsidies at the pace of consumer prices.

“The poorest are always the most sensitive to inflation,” said Eduardo Amadeo, a former secretary of social programs who runs an anti-poverty think tank. “But they can’t negotiate their subsidies. Their only tool is taking to the streets.”

Although there have been no large-scale demonstrations this year, some groups of poor Argentines staged a day of protests following the peso’s plunge in January, demanding a 40 percent increase in cash payouts for the unemployed.

Keeping a lid on social tensions will be a priority for Fernandez for the rest of her second four-year term. Under the constitution, she is unable to seek a third term and will leave office in December 2015.

On the streets of Buenos Aires, the signs of economic strains are unmistakable. Some of the famous boulevards that earned the city a reputation as the “Paris of South America” are lined at night with homeless people.

In the shadow of the century-old railway station Retiro at the heart of the city, a slum known as Villa 31 has grown about 50 percent in four years, housing an estimated 40,000 people in ramshackle brick homes three stories tall.

The vulnerability of so many Argentines remains a sore spot for a nation proud of its affluent history. In the early 20th century, Argentina ranked among the richest countries in the world, thanks to its booming beef and wheat exports.

However, a succession of financial crises in recent decades battered its well-educated middle class. As much as half of the country fell into poverty during the economic collapse that followed a record 2002 sovereign debt default.

Fernandez and her late husband and predecessor Nestor Kirchner turned back that tide thanks in part to new social programs and strong economic growth over a period of several years.

Kirchner took office in 2003 and four years later stepped aside for Fernandez to run. Popular for steering the country out of the economic crisis, Kirchner was widely expected to run again for president, but he died in 2010 near the end of his wife’s first term.

“There’s no question things are better than 10 years ago,” said Daniel Arroyo, a professor at the University of Buenos Aires and former vice minister of social development under Kirchner. “But many of the accomplishments have been through direct cash transfers rather than new jobs.”


Formal job growth has withered in recent years as economic growth slowed and private investment dried up, scared off in many cases by Fernandez’s heavy-handed approach to the private sector, economists say.

At the same time, the cost of the government’s social and subsidy programs have grown to 15 percent of gross domestic product from 10 percent a decade ago, according to economists at the Universidad Catolica de Argentina.

As the government has been lowballing inflation since 2007, however, official poverty statistics are suspect.

According to official data, adults can cover their basic needs and stay out of poverty with less than 600 pesos ($75) per month. Independent economists estimate that in fact those basic goods now cost twice as much.

The result is a startlingly low official poverty rate - below 5 percent last year - as millions saw their salaries inflated over an artificially low bar. Private economists say the real poverty rate could be five times higher.

With government finances under pressure, more deficit spending may worsen Argentina’s perilous inflation spiral. But allowing the value of subsidies to decline could also undermine the bedrock of Fernandez’s political support.

“The government is facing a serious social dilemma,” said Amadeo. “It’s hard to know what they’re going to do.”

The new official price index serves as a tacit admission that inflation is higher than previously reported and may open the door to raising subsidies faster, adding strain on the budget. Last year, the fiscal deficit before debt payments grew fivefold as public subsidies increased.

Fernandez has made repeated announcements this year of new or expanded social spending programs. Most recently, she tripled a stipend for families to buy school supplies, just as the academic year is starting.

Still, Monzon said he and his wife looked at the family budget and realized they would have to cut back on spending if they wanted to afford their children’s school materials.

“I’m still having a hard time making the numbers add up,” he said.

Editing by Kieran Murray

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