International Insight.

Hot Spots: Argentina

What a difference a month can make! At the beginning of February, it looked as though Economy Minister Jose Luis Machinea had succeeded, at long last, in reestablishing a measure of confidence in Argentina's ability to pull out of its two and a half-year slump. A "financial shield" provided by the IMF to the tune of 39.7 billion USD had largely stilled fears of a foreign debt default. An aggressive easing by the US Federal Reserve had raised the prospect of lower Argentine interest rates. Prices for some Argentine export commodities were showing a firming trend. There was anecdotal evidence of a pick-up in business activity. Private sector deposits in the local banking system had hit a record, and the US dollar's newly developed softness versus the euro gave encouragement to Argentine exporters who had suffered because of the peso's overvaluation alongside the highflying greenback.

Now, in the early part of March, the optimism engendered by the dollar's exchange market dip and the Fed's easing is largely gone. There is still no tangible proof that the economy is ready to emerge from the recession/stagnation in which it has been mired for so long. Construction activity dropped in January, as did supermarket sales, turnover at shopping centers and industrial production. Several leading international investment houses have sent out recommendations that their clients go "underweight" on sovereign Argentine bonds. Such paper traded at yields roughly 6.5 percentage points above comparable US instruments right after the IMF package was announced; since then, the yield spreads have widened to more than eight percentage points.

Tax revenues in the first two months of this year fell short of expectations, which has raised doubts as to whether the government will be able to meet the first-quarter fiscal targets agreed upon with the IMF. A money laundering scandal has undermined the credibility of Central Bank president Pedro Pou, which is disturbing because the CB is viewed by many as the main guardian of the Convertibility Law that pegs the peso solidly to the US dollar. Argentina's consumer confidence index, though still above the nadir of 11.3 percent hit just before the IMF's announcement of its bailout, tumbled by more than seven percentage points in February to 20.5 percent. Since consumer spending accounts for a good 80 percent of gross domestic product, these factors would have to show a reversal for the first signs of a real economic rebound to become apparent.

Late in February, thousands of unemployed Argentines marched into Buenos Aires to demand jobs and food from the government. Labor unions have been threatening strikes to protest the government's policies. In Congress, opposition lawmakers are vowing to fight a series of decrees enacted by the President during December--largely in keeping with promises to the IMF. There is dissension even within the ruling alliance over aspects of economic policy, and many are questioning President De la Rua's ability to make the decrees stick. On top of it all, Argentina has been sideswiped by repercussions from Turkey's woes, as international ...