ECONOMY-ARGENTINA: Slow Growth and Ballooning Public Debt

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 20 2000 (IPS) - The government of Argentina and the IMF agree that after the structural adjustments that have been implemented, the only thing left to do is wait for the economy to start growing and for the bulky foreign debt to stop mounting.

Gross Domestic Product (GDP) grew just 0.85 percent in the first half of the year, according to the Ministry of the Economy. And at that slow pace, the recovery expected after a year of contraction is projected to be as low as 1.5 or 2.0 percent for the year.

The International Monetary Fund (IMF) Western Hemisphere Department believes that after last week’s renegotiation and slight modification of Argentina’s targets, it is just a matter of waiting for confidence to rise and for the economy to revive.

A study by the local ‘Fundación Mercado’, meanwhile, indicated that the proportion of families with a capacity for savings dropped from 29 to 16 percent in the space of a year, pointing to shrinking incomes rather than a rise in consumption, according to the researchers.

Another survey, by the polling firm D’Alessio & Harris, found that 36 and 33 percent of those interviewed expected a “significant” or “moderate” drop in their own consumption patterns, respectively, while just 19 percent believed they would continue spending as they do today.

The static behaviour of the economy, reflected in the cautious, mistrustful attitude of consumers, businesses and bankers, runs counter to the economic expansion predicted this year for Latin America, the United States and the European Union.

According to the IMF, developing countries overall should expand 5.6 percent this year on average, while Latin America is expected to grow 4.2 percent, and in cases like Brazil, Chile or Mexico, 4.0 to 6.0 percent.

In that global context, the Argentine economy’s continuing slump is worrisome for the government, analysts and creditors. The low level of growth is not only perpetuating high unemployment (which stands at 15.4 percent), but also leads to diminishing revenues, while driving up the costs of servicing the foreign debt.

The secretary of the Argentine Chamber of the Construction Industry, Gregorio Chodos, complained this week that his sector, traditionally one of the economy’s most dynamic areas, was experiencing “the most dramatic moment” of its entire history, with the jobs of even highly-skilled workers vanishing.

Economist Eduardo Rodríguez, with the ‘Fundación Capital’, remarked to IPS that the growing burden of the debt on the Argentine budget had become the main barrier to achieving the fiscal balance targetted for 2003 by the government’s agreement with the IMF.

Argentina’s foreign debt has grown four times faster than the economy in the past four years. The public debt ballooned from 50 to 140 billion dollars over the past decade, despite the revenues taken in by state coffers through privatisations. The private debt, meanwhile, totals 60 billion dollars.

Rodríguez says the problem is that debt servicing payments have fallen due just when interest rates have been rising in the United States, which has meant an increase in the costs of servicing the debt.

This year, Argentina paid around 10 billion dollars in debt servicing. And more than 11 billion dollars will fall due next year, equivalent to 22 percent of the budget that the government recently sent to parliament.

The cost of servicing the public debt climbed 100 percent in just five years, due to an accumulation of redemption dates — which means the roughly 700 million dollars in spending cuts projected by the government for next year is not likely to have much of an impact.

Economist Claudio Lozano with the ‘Congreso de Trabajadores Argentinos’ central trade union is opposed to ongoing reforms designed to generate investor confidence, as carried out by Chile, Mexico and Uruguay. “The only thing this scheme achieves is more adjustments,” he argued.

Creditors and investors pay special attention to any government’s financial management, in order to deduce future capacity to meet payments.

A succession of satisfactory results along with the absence of a deficit favours the search for financing, when necessary, and helps keep interest payments down.

In Latin America, only Chile, Mexico and Uruguay have obtained “investment grade” status granted by the international credit- rating agencies that come up with country risk ratings. Argentina has not earned that status, and thus pays higher interest rates.

The government of Fernando de la Rúa has slashed spending since taking office in December. It cut the wages of civil servants by 12 percent, pushed through a law providing for greater ease in hiring and firing, and raised taxes.

But these “gestures” failed to secure the confidence of investors, who are not ready to consider Argentina a marketplace for direct investment.

“Until fiscal balance is achieved and country risk has been reduced, the debt will continue to grow, because the adjustment programme is making slow progress,” said Rodríguez, who recommended moving faster towards cutbacks in public expenditure and greater efforts aimed at bolstering growth.

The economist lauded the government’s decision to renegotiate with the IMF the target for the ceiling on the fiscal deficit, which was modified from 4.7 to 5.3 billion dollars, in order to pull out of the slump.

But he cautioned that the measure only provided “breathing space.”

“Foreign creditors do not see these kind of gradual adjustments, with no growth and insufficient cutbacks in expenditure, as viable,” said Rodríguez.

Economist Miguel Angel Broda, one of the consultants in highest demand by local and foreign companies, said the Argentine economy was being closely observed “because it is barely growing and heavily in debt, which means it pays an extremely high surcharge for country risk.”

Broda believed, nevertheless, that the government was correct in adopting fiscal adjustment policies, although he said the measures led to economic contraction and an aggravation of the recession.

“Recovery will arrive, but slowly,” predicted Broda, who projects GDP growth this year of less than 1.5 percent.