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A
decision to remove the currency board is currently unlikely given the
continued popular support of convertibility and high domestic exposure in
both the public and private sector to dollar denominated liabilities.
Moreover, a decision to let the Peso float, i.e. to devalue, would risk
not only a political backlash but would also initiate broad-scale debt
defaults. The resulting capital flight would raise the prospects for
further recession and the devaluation would raise the risks of higher
inflation. For now, the government remains committed to
convertibility and the new Economy Minister has already reaffirmed that he
intends to maintain the existing currency arrangement. This
month’s Consensus Forecast indicates that panellists continue to believe
that the Argentine Peso will remain at parity to the US$ for the
medium-term, which means that the government will have to vie instead for
further structural reform to boost Argentina’s international
competitiveness.
De
la Rúa reorganizes cabinet to build confidence.
On 4 March, President De la Rúa announced that Defence Minister Ricardo López
Murphey would replace José Luis Machinea as Minister of Economy.
The Secretary of the Presidency, José Horacio Jaunarena, was moved to
assume the Defence portfolio. The President also used the occasion
to announce that he intended to reshuffle other ministerial posts.
The post of the Secretary of the Presidency is expected to go to Darío
Alessandro, Frepaso deputy and former Vice President Carlos Alvarez
confidant. The government also may nominate, former Economy
Minister, Domingo Cavallo, to assume the Central Bank Presidency.
Current President Pedro Pou is being investigated by a bicameral committee
for money laundering and may be forced to resign his post before the
conclusion of his term in 2004. The incorporation of a key figure of
Frepaso into the cabinet is clearly a concession towards the left-wing
forces within the President’s own Radical Party and the Frepaso
acceptance of the Murphey appointment and possible Cavallo designation.
Both López Murphey and Cavallo are orthodox economists, the former
associated with a conservative economic research foundation and the latter
hailed by international investors for taming hyperinflation as Economy
Minister under President Menem. If approved, both appointments will
serve to substantially bolster market confidence, battered in recent weeks
as a result of rising uncertainty over the prospects of economic recovery
this year and the investigation of Central Bank President.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Argentina. For more details please click here.
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