ECONOMY-ARGENTINA: Prices to Determine Fate of Rescue Plan

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 8 2002 (IPS) - The economic rescue plan of Argentina’s new government went into effect Monday despite pressure from companies that will feel the impact of the nearly 30 percent devaluation. The new policies will now face a major test: the price test.

“The plan’s success depends on people (consumers) haggling over prices, in order to keep the mark-ups to a minimum,” said Economy Minister Jorge Remes Lenicov. The official acknowledged, however, that there would be inevitable effects on the prices of imported and exportable goods.

The government will wait for the new policies to pass the inflation test before presenting the budget for 2002, and before beginning formal negotiations with the International Monetary Fund (IMF) to obtain additional financial aid, perhaps in two to three weeks, said Remes Lenicov.

The minister pointed out that the new law passed by Congress Sunday, which put an end to the “convertibility” or currency board system that pegged the peso to the dollar for a decade, gave the government the power to set price caps on sensitive items like fuel and medicines.

He added that local authorities would use that power in case suppliers abused any monopoly position they enjoyed in the market.

The new measures were apparently accepted by the public. There were no people in the streets banging pots and pans, like in the protests that helped oust Fernando de la Rúa in the middle of his four-year term on Dec 20 and his first successor, Adolfo Rodriguez Saá, after just one week in office.

The people of this crisis-stricken Southern Cone country seem to have grudgingly recognised the government of Eduardo Duhalde’s firm refusal to yield to the business community’s lobbying.

Over the weekend, Duhalde and Remes Lenicov refused the visits and phone calls of bankers and the representatives of privatised firms and oil companies, especially executives from Spain, the leading foreign investor in Argentina. The business community’s pressure was aimed at staving off a devaluation, which will lead to a reduction in corporate revenues.

Spanish businesses invested around 40 billion dollars in Argentina in the 1990s, according to the press in Spain, while their shares and those of Spanish banks that are active in Argentina slid on the Madrid stock exchange.

If mark-ups occur, the poverty level will immediately rise, analysts point out. The Artemio López y Asociados firm estimates that a 20 percent rise in the cost of living would drive the number of Argentines in poverty up from 14.5 to 17.8 million, out of a total of 36 million.

To offset the increase in poverty and ward off new conflicts like the looting and rioting that led to Argentina being ruled by five different presidents in just two weeks, Duhalde promised that the public works programmes would be expanded, to provide jobs in a country where almost 20 percent of the economically active population is unemployed.

However, it is not yet clear where the financing to expand the employment programmes is to come from.

“The poor have already made a big effort. Now it’s the turn of the rich, who must show solidarity,” said Remes Lenicov Sunday night, in response to a question about the reaction of Spanish companies, which are criticising the modifications of their contracts with the Argentine government.

Duhalde’s economic emergency programme has left without effect a clause in the contracts which fixed utility rates in dollars.

The Spanish oil company Repsol YPF took in more than one billion dollars in earnings in the first half of 2001, while Spain’s Telefonica reported revenues of 1.04 billion dollars in Argentina in the same period, 16 percent up from the first six months of 2000, despite the severe recession in this country.

Resigning themselves to forego part of their profits, foreign corporations are showing signs that they are more willing to negotiate. Edenor, a power company from France that serves part of Argentina, declared that it was willing to accept the new rules.

Spanish Foreign Minister Josep Piqué, meanwhile, said he would continue holding conversations with Argentine officials to find a “realistic” way out of the crisis.

Nor will the state be able to compensate the losses suffered by banks and privatised companies this time around, because it is virtually broke, having suspended payments on the enormous foreign debt and seeing a 30 percent plunge in tax revenues in December.

Major price increases in the wake of the 29 percent devaluation of the peso do not seem likely because the country’s cash- strapped, unemployed consumers have chosen to buy only the essentials, or items whose prices remain within reasonable limits.

Over the weekend, when little ones throughout Argentina and the rest of Latin America awaited the presents that are brought every Jan 6 by the three Magi on Epiphany, sales for toys and children’s clothing were 35 to 50 percent down from last year, according to a survey by the chamber of small businesses.

Given that harsh reality, a sharp rise in prices looks improbable, say analysts.

The new policies also established that mortgages and credit card debts of up to 100,000 dollars will be converted into pesos at the old exchange rate of one peso-one dollar. Rental contracts up to 180 days and public services rates will also be translated into pesos at par with the dollar.

But the government measures aimed at tackling one of the worst crises in the history of Latin America’s third largest economy drew fire from privatised companies and from oil exporters, who will have to pay a new tax.

The new tax on oil exports will go towards backing the issue of a public bond to compensate banks for losses arising from devaluation in the conversion of dollar debts to pesos.

The new rules will all act as curbs on inflation. But soaring unemployment, an extremely tight money supply – due to the limits on cash withdrawals from the banks – and the government’s determination not to facilitate mark-ups by printing new money should also keep prices from spiralling out of control.

In 1989, when prices shot up nearly 5,000 percent in one year, the unemployment rate stood at just six percent. But today, Argentina is in its 42nd month of a deep recession, unemployment has skyrocketed, and cash is a scarce commodity.

More than 60 billion dollars in savings deposits have been trapped in the banks since late November, when the de la Rúa administration announced restrictions on withdrawals to curb a run on banks.

The new government is now considering easing those limits, and is working out a long-term schedule for the release of deposits.

On a tour of small businesses, IPS heard the same complaint over and over again. Some suppliers have left their prices untouched, while those who marked them up found no buyers. Thus, not only have small businesses avoided putting up prices, but they are pressing middlemen to lower theirs.

“I’ve left my price for a kilo of bread untouched,” said the owner of a bakery on the outskirts of Buenos Aires. “But two weeks ago, a 50-kilo bag of flour cost us 14.80 dollars, and now (the miller) is trying to sell us the most common type of flour at 18.20. We simply didn’t buy, because luckily we still had enough.”

Other bakeries opted for marking up their prices as a precautionary measure, or because they had no more flour and had to buy at the new prices. The problem with products like flour is that devaluation benefits exporters but raises fears that local output will be diverted overseas.

In the case of imported products, the cost of devaluation was basically shifted to consumers. Price hikes have already been seen in cosmetics, stationer’s goods, and cleaning products, many of which are imported from neighbouring Brazil. The prices of manufactured products containing imported components have also risen, although to a lesser extent.

“I’m not buying products whose prices have gone up, and that’s how we got (the companies) Sancor and Parmalat to lower the prices of dairy products, which they had marked up,” commented the owner of one small shop.

He admitted, however, that he was selling disposable diapers and cleaning products whose prices had risen, “but by no more than 10 percent. Nevertheless, people won’t buy them,” he predicted.

Public transport companies are facing a critical situation. Diesel oil rose eight percent over the weekend, and the price of the paper used to print tickets, which is imported, also increased.

Businesses have debts of over 100,000 dollars, which means they will not benefit by the new measures. “This spells out bankruptcy for us,” protested the owner of one transport company on Monday, fully aware that the market is not in any position to absorb a rise in fares.

The chairman of the Chamber of Merchant Business Activities, Osvaldo Cornide, said that an initial rise in prices could be seen among small and medium businesses. However, “it will be immediately mitigated, because the buying power of consumers is not able to absorb new hikes.”

The cigarettes, soft drinks and beer sold at kiosks did not go up. However, the prices of some kinds of candy imported from Brazil rose around 20 percent, as did the prices of pharmaceutical products that small businesses decided not to replace until the state sets price caps.

“Bayer wanted to sell us aspirin at a price 80 percent higher,” commented one kiosk-owner, indignant with the pharmaceutical giant, which has threatened pharmacies with major price hikes and triggered scarcity of some products.

One dollar will officially buy 1.40 pesos for all foreign trade transactions, according to the exchange rate set by the Central Bank for the first few months. But there will also be a parallel, free-floating rate to be set by the market, which Remes Lenicov says is not likely to vary much from the official rate.

But despite the fact that exchange houses will remain closed until Wednesday, the dollar was already buying 1.60 pesos and selling at 1.40 pesos on Monday.

ECONOMY-ARGENTINA: Prices to Determine Fate of Rescue Plan

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 8 2002 (IPS) - The economic rescue plan of Argentina’s new government went into effect Monday despite pressure from companies that will feel the impact of the nearly 30 percent devaluation. The new policies will now face a major test: the price test.
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