ECONOMY-ARGENTINA: Ready for the Take-off

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 12 2001 (IPS) - A drop in interest rates in the United States, a rallying of farm commodity prices, and a nearly 40 billion dollar IMF-led bail-out have created the conditions for Argentina’s economy to take off this year, after 31 months of recession, most analysts agree.

However, while the most optimistic economists project four to five percent growth for the year, others – like the Economic Commission for Latin America and the Caribbean (ECLAC) – forecast a mere 1.5 percent growth. And some analysts even doubt whether the recovery will take place at all.

The Ministry of the Economy projects four percent growth, while President Fernando de la Rúa puts the figure at five percent. However, back when the De la Rúa government took office in December 1999, it forecast 4.5 percent expansion for 2000, while growth barely cleared zero last year.

Economist Martín Redrado, with Fundación Capital, a local think- tank, said the 39.7 billion dollar credit package won by Argentina in December, plus the reduction of interest rates in the United States, were contributing to a downgrading of Argentina’s country- risk rating – measured by the surcharge paid by Argentine government securities over the interest paid by bonds issued by Washington.

But the country-risk rating has not yet reached the level demanded by investors, said Redrado, who added that positive external conditions were necessary but not sufficient for recovery. He recommended improvements in the structure of internal costs to make the economy more competitive through investment and tax cuts.

Economist Guillermo Calvo, a professor at the University of Maryland, in the United States, said that while the reforms adopted by Buenos Aires were the right ones, and the bail-out was important, Brazil could draw investment away from Argentina due to the exchange rate advantage of that country’s local currency, the real, over the Argentine peso.

In short, not even with the entire battery of adjustment measures and favourable external conditions is the take-off of the Argentine economy guaranteed, cautioned Calvo.

“Argentina did things right, but the markets failed to respond,” lamented Chilean economist Tomás Raichman, with the International Monetary Fund (IMF), in September, adding that he felt “frustrated.” U.S. Treasury Secretary Larry Summers echoed that view.

Despite the fiscal adjustment programme, tax hikes, wage cuts, and reforms of the labour code that made it easier to hire and fire employees, De la Rúa was unable last year to pull the economy out of the stagnation into which it had fallen in 1998. Indeed, the crisis deepened due to the slump in confidence.

A survey carried out by Romer y Asociados at the peak of the crisis found that only 14 percent of those surveyed were confident that the economy would recover – “the lowest level of confidence in the economy in 10 years,” according to the polling company’s director, Graciela Romer.

Against that backdrop, the interest rates that lenders set for the Argentine state soared above 12 percent a year, which forced the government to negotiate the 39.7 billion dollar “financial shield” with the IMF and other multilateral lending institutions to stave off a default in foreign debt payments.

This year, the government will have to shell out more than 15 billion dollars in debt servicing, while facing a nearly seven billion dollar budget deficit. With the bailout and the lowering of interest rates in the United States, the yearly rate on loans obtained this month fell to just over eight percent.

The Argentine stock market has reacted favourably. Since the start of the new year, it has gained points every day, rallying by 19 percent since Jan 2. The specialised daily newspaper Ambito Financiero predicted this week that it would not take long for the market to recover from last year’s losses.

An expected rebound of Argentina’s chief exports will also contribute to creating a more positive climate. Exports of soy, wheat, maize and sunflower oil have already begun to increase, and prices, which have been on the slump since the 1997 financial meltdown in southeast Asia, are also rallying, slowly but steadily.

Last year’s stars in the region were Mexico, with seven percent economic growth, Chile (5.5 percent), and Brazil (four percent).

Brazil and Mexico, Latin America’s biggest economies, were crippled by crisis in the second half of the 1990s, and thus provided Argentina with a model for how to pull out of a meltdown in a big way, according to a report by Argentina’s Centre of Studies for the New Majority.

The local think-tank also pointed out that the World Bank believed the conditions were in place for steady growth in the region in 2001 and 2002, especially if the external context – the upward trend in commodity prices, as well as the slowdown of the U.S. economy and subsequent lowering of interest rates, from 6.5 to 6.0 percent – remained positive.

Analysts say the fall in interest rates in the United States will not only mean a drop in the cost of the foreign debt owed by Latin American countries, but will also trigger a renewed influx of capital towards emerging economies, in search of higher returns.

In its annual report released last December, ECLAC said the recovery of the region’s combined Gross Domestic Product (GDP) was largely due to the simultaneous high level of growth in the two giants, Brazil and Mexico, something that had not occurred since 1994.

Brazil staged a strong recovery, from 0.9 percent growth in 1999 to four percent in 2000, while GDP growth in Mexico climbed from 3.7 percent to seven percent. Chile also posted strong performance, with 5.5 percent growth, although Argentina and Uruguay remained stagnant, according to ECLAC.

The regional United Nations agency forecast that Argentina would get on the road to recovery this year, but with just 1.5 percent expansion, a far cry from the level hoped for by the De la Rúa administration, which in October will face legislative elections, its first acid test at the polls.