|
Economy
Minister introduces revisions to Convertibility regime. On
14 April, Economy Minister Domingo Cavallo announced the government’s
plan to revise the 1991 Convertibility Law to allow for a shift from the
current Peso peg with the US$ to a basket of currencies including the
Euro. According to the stipulations of the bill, the new exchange
rate regime would officially enter into force once the US$ and Euro reach
parity at which point the Peso will be pegged to a basket consisting of
US$ (50%) and Euros (50%). As a result, the Peso would no longer be
fixed to the US$ but would fluctuate according to the exchange rate
between the US$ and the Euro. Assuming that the new exchange rate
regime would have been adopted on 30 April, the Peso would have been
devalued 5.97% relative to the US$. The Economy Minister argues that
the earlier adoption would have helped address the current competitiveness
problems that Argentina is having. In fact, if the same regime would
have been put in place on the day of the Brazilian devaluation in January
1999, the Peso would be 14.4% weaker to the US$ than today. In
addition, the government argues that greater monetary flexibility would
enable real interest rates to come down and drive an economic recovery.
However, the new peg system also bears the risk that the Peso appreciates
against the US$ and thus further heightens the risks related to
overvaluation, if the Euro should experience a sustained appreciation
against the US$.
Most
market forecasts do not anticipate the Euro to reach parity with the US$
for another year and, thus, any movement of the Peso relative to the US$
is likely to remain absent for now.
Furthermore, forecasts indicate that the Euro is likely to
strengthen relative to the US$ by the end of 2002, which is likely to
undermine the government’s desire to gain competitiveness via a weaker
currency but could help alleviate US$-related debt servicing concerns in
the longer term.
The
government’s move to ease the existing exchange rate rigidities may be
an attempt to do away with fixed exchange rate policy further down the
road but Cavallo has stated that he remains committed to current policy
for at least another five years.
Given the risks that devaluation poses to growth, the domestic
financial system and regional stability, the government cannot afford to
tamper any further with convertibility.
This month’s Consensus Forecast indicates that the Peso is likely
to remain at its current level for the medium term.
The revision of the Convertibility Law was approved by the Chamber
of Deputies on 3 May and is now scheduled for review in the Senate.
Even though some of the Menem-backers of the Peronist party have
expressed their disapproval, preferring instead full dollarisation, the
draft bill is likely to be approved to avert further deterioration in
market conditions resulting from political instability.
Fiscal
terms of IMF Agreement renegotiated.
On 3 May the government signed a revised agreement with the International
Monetary Fund (IMF), which gives Argentina continued access to funds from
a US$ 13.7 billion loan provided by the multilateral organisation as part
of the US$ 39.7 billion international rescue package received in December
last year. Lagging tax collection attributable to the continued
slump in economic growth and higher debt servicing costs resulting from
the spike in the Argentine country risk premium forced the government to
revise its fiscal deficit targets for this year. According to the
most recent government data, tax collection was down 9.1% in April over
the same month last year. Meanwhile, the cost of borrowing in
international markets has come down but remains high – the spread on
Argentina’s benchmark sovereign bond (FRB) closed at 1,234 basis points
over the comparable US Treasury bond on 11 May, up from 667 basis points
at the end of December.
Even
though the government still intends to meet the overall fiscal deficit of
US$ 6.5 billion for this year, quarterly targets were revised. The
government expects the recently implemented tax measures, which include
the elimination of existing exemptions to the value added tax and the
adoption of a new 0.4% financial transactions tax, and some US$ 900
million in spending adjustments to enable compliance with the year-end
target.
|
