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Political
hurdle surmounted but uneasiness remains.
Despite the new authority garnered by the government, market uncertainty
has persisted as investors remain sceptical about the government’s and
private sector’s ability to service existing external debt, which
reached US$ 147.6 billion (51.8% of GDP) by the end of last year.
Furthermore, failure of the government to meet the quarterly fiscal
targets agreed to with the International Monetary Fund (IMF) could
jeopardize continued access to funds provided through the US$ 39.7 billion
aid package obtained in December last year. Funds are badly needed
to finance this year’s fiscal deficit and existing debt amortizations,
since the cost of borrowing in international markets is currently
prohibitively high – the spread on Argentina’s benchmark sovereign
bond (FRB) rose 253 basis points to 1020 basis points over the comparable
US Treasury bond from the end of February to the end of March but dropped
to 929 basis points by 6 April. In addition, in March international
reserves dropped by 12.0% over February to US$ 23.6 billion. The
persistence of further declines in reserve levels could increase
devaluation pressures and force the Central Bank to tighten monetary
policy, which would further choke off growth. Meek tax collection
and continued uncertainty regarding Cavallo’s intentions on exchange
rate policy have maintained markets uneasy.
Tax
collection data for March heralded a US$ 1 billion overshooting of the IMF
deficit target for the first quarter set at US$ 2.1 billion.
On the fiscal side, the government is confident that the new
economic agenda will serve to cut the deficit by US$ 3 billion this year
and enable authorities to comply with the year-end target of US$ 6.5
billion agreed to under the IMF stand-by agreement.
However, the government will have to act quickly to restore market
confidence by adopting the new economic measures and deliver results.
This month’s Consensus indicates that panellist believe that the
government will meet the year-end fiscal target, aided by the combination
of a pick up in growth in the second quarter and the economic measures of
the new Competitiveness Law.
Growth
slump in 2000 worse than expected.
Final growth data released by the Economic Ministry in March indicate that
the economy remained in recession last year with economic activity
contracting 0.5% over 1999 when output dropped 3.4%. The contraction
resulted principally from a 4.0% decline in industrial output, while
agricultural production declined 2.7% and services expanded a modest 0.7%.
The strong contractions experienced in the construction (-11.3%) and
manufacturing industries (-2.8%) accounted for the lion’s share of the
economic downturn.
Aggregate
demand and supply data show that growth was principally export driven
(+1.8% over 1999).
Investment declined 8.3% in 2000, while both private and public
consumption dropped 0.1% and 0.4% respectively.
The lack of new investment continued to keep key employment
generating sectors such as construction in recession.
Rising unemployment (14.7% in October 2000), tight credit
conditions and tax increases associated with the government’s fiscal
adjustment programme served to undermine total consumption, which dropped
0.1% over 1999.
Panellists
expect the economy to recover.
However, economic activity is expected to remain subdued in the
first two quarters of the year.
Growth is then anticipated to accelerate strongly in the third and
fourth quarter.
The up-tick at the end of this year will carry over into next year,
with panellists expecting the economy to recover at a healthy pace.
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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