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Investors Hope New Leadership in Argentina Will Spark Recovery
The Washington Diplomat / January 2000

By Larry Luxner

Argentina's newly inaugurated president, Fernando de la Rua, has inspired hopes among U.S. and other foreign investors that the change in leadership will signal a turnaround for one of South America's most important economies.

With a per-capita income of $8,500, Argentines are by far the richest of any people in Latin America, though Argentina's total GDP of $298.1 billion ranks third in size after Brazil and Mexico. According to Latin Trade magazine, Argentina's GDP is expected to shrink by 3.3% this year before growing 2.3% in 2000.

It's also the only Latin country likely to show deflation in 1999 (-1.4%), though prices will likely rise by a minuscule 0.4% in 2000. Total exports in 2000 should hit $26 billion, while imports will reach $29.3 billion.

"Even though the economy has fallen 3% or more [in 1999], commodity prices are recovering in the international economy, and there is a good possibility Argentina will rebound," says Felipe Frydman, economic attache at the Argentine Embassy. "De la Rua has promised to maintain the convertibility law, keeping the peso on par with the dollar."

The new president easily defeated candidate Eduardo Duhalde, who represented the long-ruling Peronist party and an ally of former President Carlos Menem.

Frydman, who's staying on for now despite the departure of his former boss, ambassador Diego Ramiro Guelar, says De la Rua "is looking to limit the fiscal deficit to $4.5 billion, because they consider this is essential in order to get overseas financing and to show the international markets that Argentina is willing to reduce the fiscal deficit. So far, there hasn't been any problem with foreign direct investment. There was no changes in the international market regarding the Argentine bonds, for example. On the contrary, the new cabinet has been well-received, inasmuch as most of these economists have the support of the economic establishment."

That claim appears to be backed up by investors themselves.

"We're optimistic on the new government coming in," says Delbert R. Wilkins, president of ACBL Hidrovias S.A., a barge operator in the port city of Rosario. "The word on the street is that de la Rua's cabinet selection is quite professional, all people with good reputations." In addition to Jose Luis Machinea, the new minister of economy, de la Rua's cabinet includes three other economists -- Defense Minister Ricardo Lopez Murphy, Foreign Minister Adalberto Rodriguez Giavarini and Education Minister Juan Llach.

"We look for continued stability, and continued optimism towards investment and business," says Wilkins. "We like to think there won't be any radical changes."

Despite a crippling recession and the IMF's prediction of only 1% GDP growth in 2000, Argentina is poised for economic recovery due to reforms adopted since 1989, says a study issued by PricewaterhouseCoopers.

Argentina Now, published by the big accounting firm's Latin American Business Center, praised the outgoing government of President Carlos Menem for its pro-business policies, including "adherence to a currency board system; opening of product and capital markets to international competition; privatization of inefficient state companies; implementation of a privately managed, funded social security system, and deregulation of activities that had been under state control."

Adds Ricardo Silvani, partner with PricewaterhouseCoopers in Buenos Aires: "So far, the Argentine and international business communities are very optimistic. De la Rua has given clear indications that he wants to have an administration with sound economic policies, strong institutions and fight against corruption. All these three attributes should be good news for American busienss, because fiscal discipline will bring growth to the economy, new opportunities for investment, and a level playing field, which is what American corporations are always looking for."

Argentina has been hit hard by the recession in neighboring Brazil, which buys 30% of the country's exports, and that's created tension within the Mercosur trade bloc.

"Politically, many Argentine government officials privately subscribe to the hypothesis that Mercosur is diverting rather than creating international trade flows," says a recent report by Santander Investment. "

The strong relationship between Argentina and the United States seems to be another source of controversy for Mercosur's two leaders.

"Argentines feel the Brazilian government dislikes their close relationship with the U.S., in part because the Argentine government repeatedly uses it to help counter Brazil's much larger bargaining power. Argentines are also worried over Brazil's reluctance to establish bilateral institutional mechanisms to solve future disputes, especially following sudden, significant changes in any nation's macroeconomic conditions."

Despite having brought Argentina's inflation rate down from 1,350% in 1990 to virtually zero this year, Menem's legacy also includes record-high unemployment, an internal public debt of $120 billion, an external debt of $110 billion and a trade deficit of over $5 billion a year. Besides boosting the debt to such an extreme that interest payments alone amount to $10 billion a year -- equal to half the country's export earnings -- Menem sold all state-run enterprises, from old TV stations to oil giant YPF.

Today, says the National Census and Statistics Institute, 40% of the domestic supply of goods is concentrated in the hands of 500 companies, of which 70% are foreign-owned. Of the 351 foreign-owned companies, 43% have head offices in the United States.

One thing holding Argentina back is trade protectionism around the world -- especially agricultural subsidies. U.S. Treasury Secretary Larry Summers said Dec. 1 that the topic came up during conversations held with the economic teams of both Menem and de la Rua, telling reporters that "global trade barriers, mostly in the agricultural sector, cost Argentina 2% of its gross domestic product."

Yet Argentina itself practices protectionism. According to the Santander report, "from Brazil's perspective, Argentina's recent protectionist approach -- mainly its imposition of tariffs against a rising flood of Brazilian shoe, paper, steel and textile imports -- is unacceptable."

Another problem is unemployment and poverty. Officially, Argentina's jobless rate stands at 14.5%, though other sources say the real number is much higher. According to the World Bank, during Menem's second term in office, the richest 10% of Argentina's 34 million people received 35% of the country's income, while the poorest 40% scraped by on 14% of the wealth.

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