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.
