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Argentina: Have We Reached The Bottom Yet?

By Jonathan Lemco


For the past two years, Argentina’s economy has been mired in a deep recession/depression. One of Latin America’s few economic success stories of the 20th century, the nation had experienced a tremendous economic meltdown that resulted in over half the population, including large numbers of the formerly middle class, relegated to the ranks of the poor. The reasons for this disaster are related to political mismanagement, bureaucratic inertia and corruption, inefficient industry, and bad luck. But amidst all of the gloom, there are some signs that the worst may finally be over.

Historically, the greatest economic fear of Argentines is that inflation will return. Many analysts predicted that inflation would surge following the 2002 financial collapse. But as of June 2003, inflation seems to be well behaved. In fact, consumer prices have actually fallen of late, as the Argentine public is willing to hold the local currency. Inflation is unlikely to exceed 10-12% in 2003, and may actually end in single digits, especially if utility prices are not increased.

Also industrial production is way up in the past three months and supply-side indicators and consumer and business confidence are improving. There is decent GDP growth as well, after 17 straight quarters of contraction. In the current quarter, Gross Domestic Product growth is 5.4% yoy, up 2.4% from the previous quarter. The currency devaluation has revived local industry and growing consumer confidence has bolstered spending. The IMF expects the economy, which shrank 11% last year, to grow 4% in 2003.

The fiscal situation is not as dire as it was three months ago either. In fact, fiscal policies at both the Federal and the Provincial levels reflect similar trends toward primary surpluses. Many analysts think the Kirchner administration has a good chance of achieving a primary fiscal balance that would surpass the IMF target of 2.1% of GDP for 2003. That is a very positive sign.

The external sector has improved as well. A huge trade surplus has resulted from a virtual collapse in imports during 2002. Export growth has been negligible and has been driven by higher commodity export prices. But exporters are slowly gaining access to bank credit. Equally important, Argentina’s relations with its multilateral creditors are improving, although serious problems remain -notably the effort to restructure external debt. The government wants to move rapidly in this area, but we expect actual progress to be slow. Of the estimated US$160 billion in public sector debt, US$63.66 billion may be subject to restructuring.

Argentina has a newly elected President, Nelson Kirchner, whose policies are likely to be moderate and fiscally prudent. Many political observers believe that he will emulate the market-friendly policies (thus far) of President Lula in Brazil and President Lagos in Chile. The current economic team in place is experienced. That said, President Kirchner’s priorities must begin with accelerating negotiations with the International Monetary Fund on a new medium-term arrangement. Argentina has to pay the IMF US$3 billion on September 9. We expect IMF negotiations to be very challenging, given where they fall during the electoral cycle. Other significant issues include banking sector restructuring and utility price adjustments.

We expect much attention will be devoted to the creation of an enlarged public works program as well, for the government argues this will play a key role in producing an economic recovery that reduces unemployment and poverty, led by a strong and efficient public sector. We think that government policy is leaning towards emphasizing government spending on infrastructure, and on consumption, as opposed to private investment. In the short run, this might be wise policy, particularly since the government needs to build support for its programs as the cycle of provincial and congressional elections conclude in the fourth quarter. But we would be very concerned if “priming the pump” continues into 2004, for then it would do real damage to the business environment.

Other concerns include the health of the banking system. It is very liquid, but many questions remain about its solvency. In addition, access to credit and especially to the global capital markets will remain problematic for some time to come. Argentina will have to do much to restore investor confidence. However, a satisfactory agreement with the IMF on restructuring its debt will be a major step in the right direction. On balance, we remain extremely cautious but we are impressed with the progress that Argentina’s government has made thus far.



Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Sergei Blagov, Jonathan Lemco, Joseph Blalock, Jonathan Hopfner, Caroline Cooper and Robert Windorf



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