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Domestic uncertainties weigh heavier than US contagion. The government
has time to sit out the current adverse conditions in international
markets. However, lower Argentine spread levels are likely to emerge
only if current domestic political and economic uncertainties about the
country’s ability to meet its debt obligations subside. According to
the Federal Administration for Public Revenues (AFIP), tax collection
dropped 14.0% in September, principally owing to a 31.4% contraction in
sales tax revenues and a 5.7% decline in income taxes. Economic
activity continues to be subverted by the tight contraction in credit,
the persistence of high interest rates and continued cutbacks in
government spending. The September figure came in well below market
expectations of a 7% decline and below the government’s estimate of
positive growth. As a result, officials must again implement some US$
900 million in additional spending adjustments to comply with the zero
deficit fiscal law and the US$ 6.4 billion IMF deficit target for this
year. Since the government has said that an additional 13% cut in
public sector pensions and salaries will not be implemented, officials
will have to negotiate with the opposition controlled provinces to cut
back the US$ 1.4 billion minimum in monthly co-participation revenue
flows. In addition, the administration is preparing the 2002 Budget,
which signals an additional US$ 3.3 billion in cuts for next year.
Political will for further adjustment, however, is dwindling as the
elections near and leaders from the opposition and the President’s
coalition are increasingly urging the government to consider debt
restructuring. President De la Rúa is adamant that a debt restructuring
and the likelihood of a subsequent devaluation is out of the question
and that the government will continue to take the necessary steps to
comply with its current economic agenda.
No light at the end of the tunnel.
On 20 September, the Ministry of Economy released Gross Domestic Product
(GDP) figures for the second quarter, which show that economic activity
contracted 0.5% over the same quarter last year, up from a 2.1%
contraction in the first quarter of this year. The second quarter data
was on target with the government’s forecast and came in better than the
1.1% decline expected by panellists in last month’s Consensus Forecast.
In addition, on a seasonally adjusted basis, economic activity actually
grew 0.3% over the first quarter. The key driver behind lower than
expected contraction was a strong performance in primary sectors,
particularly fishing (+10.1% year-over-year) and agriculture (+5.8% yoy),
which helped lift economic activity. On the downside, however, key
sectors remained in recession, namely construction and manufacturing,
which contracted 3.7% and 1.7% respectively over the same period last
year.
Second quarter aggregate demand and supply data
indicate that domestic demand again dropped 1.7% over the second quarter
last year, which was up from the 2.7% contraction experienced in the
first quarter. Gross fixed investment declined 6.3% over the same
quarter last year, an improvement from the 9.3% decline observed in the
first quarter, but nevertheless a clear sign that any hopes for an
incipient economic recovery were precipitated. Consumption dropped 1.7%
year-over-year from 1.8% in the first quarter as unemployment reached
its highest level since 1996 (16.4%). Most economic sectors continue to
suffer from low domestic demand resulting from high interest rates and
tight credit conditions. Loans to the non-financial private sector were
down 9.0% in August over the same month last year and have now declined
every month since July 1999. Interest rates remain at prohibitively
high levels with the 30 day Peso loan rates at 38.6%, compared to 9.4%
for the same month last year. Further downside pressure on economic
activity is the result of high unemployment, which at 16.4% is at its
highest levels since 1996. Weak domestic demand was partially
compensated for by healthy exports growth, which reached 5.3% over the
second quarter last year and was up substantially from the 0.7%
expansion rate registered in the first quarter. The favourable export
performance came despite signs of a notable global softening and helped
avert a more substantial decline in economic activity. Imports dropped
4.7% year-over-year in the second quarter, following the modest 0.5%
expansion of the first quarter, as the deterioration in domestic demand
lowered consumer imports.
The preliminary data available for the third quarter
indicate that the economy shows no signs of recovery. Furthermore, the
attack in the US has erased any hopes that the economy would initiate a
recovery towards the end of the year. This month’s Consensus Forecast
foresees continued recession for the remainder of this year with the
economy contracting again in 2001, even below the government’s 1.4%
figure announced in August. Participants further anticipate that the
after-effects of the recent events in the US will serve to postpone
recovery further into next year with positive growth rates emerging at
the end of the second quarter. Healthier growth in the second half of
2002 should serve to bolster the economy.
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