ECONOMY-ARGENTINA: Fast as a Speeding Tugboat

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jun 28 2004 (IPS) - Argentina’s economy has taken off in the past 18 months, after an extended period of stagnation and total collapse in 2001. But now experts warn that growth will slow down and measures must be taken to avoid a bumpy landing.

The Argentine gross domestic product (GDP) shrank 19.6 percent between 1999 and late 2002, when economic activity began to recover. The next year ended with 8.7 percent growth, and projections for 2004 indicate a more moderate showing, with an expansion of five to seven percent.

The experts consulted by IPS agreed with officials from the Economy Ministry that this slower growth rate was generally expected. But even so, in the short to medium term, the Néstor Kirchner government will have to deal with some turbulence along the country’s economic path.

”The economic deceleration is not something tragic,” says economist Eduardo Curia, an adviser to the portfolio run by Minister Roberto Lavagna.

”After chronic depression, the impetus of recovery tends to involve growth rates that are not normal, and would hardly be considered sustainable” over time, he told IPS.

But the expert warned that now the economy will bet put to the test, in terms of its capacity to handle different challenges, both domestic and external.

”We’ll have to see how the economy withstands the ‘landing’,” said Curia, noting that much will depend on the government’s response to the new decline in international prices for important Argentine commodities, like soybeans, to a possible hike in interest rates in the United States, and to its impacts on the economy in neighbouring Brazil, Argentina’s main trade partner.

In that sense, the ministerial adviser said his country is on its best footing since the annulment in early 2002 of the so-called ”convertibility law” that had maintained the Argentine peso at one-to-one par with the dollar for 10 years. With the end of that regimen, the local currency was sharply devalued and paved the way for a period of economic expansion.

On the domestic front, Curia said he is keeping an eye on the evolution of Argentina’s energy crisis, fiscal policy and the negotiations with private creditors for restructuring the 100-billion-dollar debt that Argentina defaulted in December 2001.

”If growth is maintained at five to six percent GDP there shouldn’t be much trouble, but if the rate falls below that, things could get complicated, especially because of the impact that slow growth would have on job creation,” he said.

Officially, unemployment still reaches 14.5 percent of the economically active population, although it is an improvement from the record 21.5 percent in May 2002, 17.7 percent at the end of that year, and the 16.3 percent recorded at the close of 2003.

But in addition to the ranks of the unemployed are two million beneficiaries of unemployment subsidies who the government does not count in its jobless figures for this country of 37 million people.

Another economist IPS consulted, who preferred to remain anonymous, believes ”it is completely normal for the economy to put on the brakes after a major expansion, but we must be prepared to avoid a sharp impact from it.”

But this expert, who served as an officer of the International Monetary Fund and owned a bank in Argentina, warned that while the current international context is not necessarily negative, it is ”less favourable” than it had been.

As an example, the source noted that international prices for nearly all of Argentina’s exports are higher than they were a year ago, but less than they were a month ago.

”Our country owes 4.5 percentage points of the 8.7 percent it grew in 2003 to the rise in international prices, but it is unlikely that this situation will occur again,” said the economist, adding that in the best of cases the change in external conditions, including an increase in U.S. interest rates, ”will be neutral.”

Given this panorama, the expert recommends that the government ”accumulate reserves, maintain a prudent attitude in spending and finalise the external debt renegotiations.”

Taking all of this into consideration, the economist’s prediction is that economic growth this year will be 5.2 to 6.2 percent, and will not reach the original forecast of 6.2 to 8.0 percent.

The increased economic activity predicted by the economist is closer to the moderate projections made by the government: a 6.9-percent increase for 2004 and just 3.9 percent for 2005.

This is not bad news, but perhaps disappointing for some, as it is a worse performance from Argentina than last year’s.