Far from Buenos Aires’s blooming jacaranda-lined boulevards and the intrigues of the presidential “Pink House” lies Argentina’s other 23 provinces that stretch from the Andean Altiplano to the steppes of Patagonia. One of these provinces is the sparsely populated, but oil-rich Patagonian province of Chubut. Often overlooked, the province has made headlines as it is experiencing an urban uprising (pueblada) with citizens reacting to a quickly worsening social, economic and political situation.
Urban uprisings are not uncommon in Argentina, occurring in periods of economic and political crisis, like the Cordobazo of 1969, the Santiagueñazo of 1993 and the urban riots of 2001. These urban uprisings usually occur after years of deteriorating living standards and in reaction to an unresponsive political class unable to deal with increasing social exclusion.
The current crisis in Chubut is directly linked to recent national events. Argentina’s teetering economy spiraled after the surprise results of the August primaries (PASO). The Peronist candidate Alberto Fernández’s nearly 16-point lead against market-friendly President Mauricio Macri was beyond what almost all observers expected. In the aftermath, markets went into meltdown. The Buenos Aires stock exchange crashed, seeing the largest decline in valuation in the world since 1990. The peso lost almost 30 percent of its value, forcing Macri to reluctantly impose capital controls. Argentina’s country risk soared to levels not seen since 2005, cutting the country off from credit and forcing the government to attempt to reprofile its mountainous debt.
Chubut’s own debt and spending crisis, although not as well known, is a microcosm of the ills that trouble Argentina and provide a warning of what could come.
Chubut is Argentina’s second largest oil and gas producer—recently superseded by Neuquén. Beyond its enormous oil and gas reserves, its windy plains also make Chubut ideal for wind farms. Chubut is also the largest producer of renewable energy in the country. With generous natural resources, the province has a per capita income above the average and a human development score second only to the City of Buenos Aires.
But as with other resource rich areas, Chubut’s natural resources may have lulled policy makers into a sense of inaction when it comes to handling its foreign debts. Between 2015 and 2018, as Argentina regained access to international credit, the province’s debt grew by 39% with 85% of the debt in foreign currency. Debt service increased from 2% of provincial revenues in 2015 to 17% in 2018—the highest rate for a province in the country. Upwards of 70 percent of the royalties Chubut collects from energy producers goes to service the debt, worsening the fiscal situation even further.
Chubut is, by far, the most profligate province in Argentina. In the second quarter of 2019, primary spending increased by a whopping 93% compared to 2018—the national average was 19 percent. The increases in spending are largely associated with increased public spending on public sector salaries—61% of the province’s expenditures goes to salaries, compared to the national average of 49 percent.
How did things go so wrong, so quickly? Even though the province’s finances were already flashing yellow, the situation has worsened due to the governor’s bid to win re-election by appealing to voters through populist measures. In a competitive election, Peronist Governor Mariano Arcioni promised generous wage increases to public employees with automatic inflation indexation clauses (cláusula gatillo). Unfortunately, public employment in the province is high, and Arcioni over-promised.
After the PASO elections, a perfect storm hit the province: relentless inflation triggering wage increases, a devaluation coupled with increased interest rates eroded Chubut’s capacity to repay its foreign debt. Facing a shrinking pie, the local government decided to renege on its promises to public sector workers by delaying full payment of wages.
This was the final straw for many chubutenses. Poverty in the province’s largest city, Comodoro Rivadavia, doubled to 30% in the first quarter of 2019 from 2018. Poverty in the capital city, Rawson, stands at 38%, well above the regional and national average.
Fed up, in early September public sector unions set up roadblocks and demonstrations in front of government buildings demanding back pay. The situation became more serious after the deaths of two teachers in a road accident on their way home from a union meeting. This further enraged striking workers, which led to the burning of the legislative building in the capital city, Rawson.
To make matters worse, Governor Arcioni has brazenly asked for a tripling of his salary and rejected calls for his resignation. In another controversial move, the governor took a private jet to participate in an event in support of Alberto Fernández in Mendoza.
With Argentina’s economic crisis unlikely to abate in the foreseeable future, the fear is that Chubut is only the first shoe to drop. The inflation and recession currently experienced in the country is eroding the positive fiscal balance that many provinces had under Macri, raising fears of a debt crisis in provinces that are heavily indebted in foreign currency.
Chubut is a canary in the proverbial coal mine for the perils of resource dependence, cheap credit, moral hazard and populist politics. While most are paying attention to the federal government’s struggles with debt, one would be remiss not to pay attention to Argentina’s provinces.
Nicolás Saldías, Senior Researcher at the Wilson Center’s Latin America Program and Argentina Project and is a Ph.D candidate at the University of Toronto