|
Even though current domestic and international interest
rate spreads as well as the downward trend in international reserves and
domestic deposits indicate that investors doubt the creditworthiness of
the Argentine government, analysts still remain hesitant to examine in
detail the possibility of a default. Forecasts indicate that domestic
interest rates are likely to come down from their current highs to 10.2%
and that reserves will rise again towards the end of the year. Increased
IMF funding would serve as a significant boost to investor confidence and
would solve the government’s current financing dilemma. A persistence of
the current situation without external assistance, however, would further
undermine the government’s fiscal position, threaten debt repayment and
the exchange rate regime.
Private sector also suffering
consequences.
Concerns about the quickening pace of deposit withdrawals from the
domestic financial system have prompted banks to build up cash positions.
As a result, private sector credit declined 3.4% in July over June. Some
of the largest Argentine firms have begun debt renegotiations with
creditors and the first defaults are emerging. The government claims that
once the current jitters subside, the new fiscal measures should help
provide better access for the private sector to domestic capital markets,
as the government’s need to abide by strict fiscal discipline will lower
its borrowing requirements in domestic markets. In the short-term,
however, tight credit conditions are likely to further undermine
investment, which has not grown since the third quarter of 1998 and is
expected to decline again by 1.4% this year.
Recession to persist this year.
The decline in investment is likely to be accompanied by a further drop
in consumption, which will suffer from the public sector wage cuts. As a
result of the downward pressure on domestic economic activity exerted by
declining investment and consumption, GDP growth is anticipated to remain
flat this year.
Sustainability of current austerity
programme rests on social stability.
Argentines have been living in the throes of a recession since 1999. The
recession has taken its toll on unemployment, which according to the most
recent National Statistical Institute (INDEC) release rose 1 percentage
point in May 2001 over the same month last year. This brings unemployment
to 16.4%, the highest level since October 1996. The latest fiscal
adjustments were politically viable principally because of the dire state
of economic affairs. Even though political opposition both within the
Peronist party and President De la Rúa’s own Alliance party came to the
foreground in congressional debates, a political stalemate was avoided by
the fact that no politician was willing to suffer the consequences of the
potential deleterious effect that political opposition could have had in
provoking an outright economic and financial breakdown. Nevertheless,
union and social movement’s opposition against the adjustments is mounting
and any attempts to implement further adjustments may heighten the
potential for social unrest and political instability.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Argentina. For more details please click here.
|
