|
The
Impact of the Attacks on the Argentine Economy
1. Investor flight to quality to
perpetuate financing difficulties.
Given Argentina’s dependence on external financing, the key to further
economic stability is the effect that the attack on the US will have on
international capital markets. The current downward trend in US interest
rates would lower payments for Argentine dollar denominated debt even if
spreads remain constant. However, since the attacks, spreads have widened
further as lower investor risk appetite is prompting a flight to quality.
In fact, Argentina’s cost of borrowing in international markets - as
measured by the spread on the country’s benchmark sovereign bond (FRB) -
jumped over 200 basis points to 2,200 basis points over the comparable US
Treasury bond following the 11 September events and remained at those
levels through the end of September, despite easing by the Federal
Reserve. Therefore, in the short run at least spreads are likely to
remain at prohibitively high levels to access international capital
markets.
2. Trade impact likely to remain
moderate.
The resulting downturn in international demand is likely to reduce trade
flows, which may put some downside pressure on Argentine exports. However,
on the trade front Argentina is not expected to suffer significantly,
since exports represent only 11.2% of GDP. In fact, if the US dollar
should weaken as a result of deteriorated US growth prospects, this may
provide some impetus to an improvement in export performance and could
prompt an earlier than expected conversion to the new Euro/US$ exchange
rate system.
3. Oil price decline likely to affect
fuel exports.
The decline in international oil prices will serve to put some downward
pressure on oil exports, which had grown last year at an impressive 78.9%
over 1999. Oil exports accounted for 1.0% of GDP in 2000 and 18.1% of
total exports. Nevertheless, the overall impact of lower oil exports is
likely to remain limited given that Argentina is a relatively closed
economy.
4. Direct effect on tourism limited.
Lower travel by US citizens is unlikely to affect Argentina significantly.
Last year, tourism receipts accounted for only 1.1% of GDP and US visitors
amounted to just 8.6% of the total. Nevertheless, indirectly the US
recession will raise further the potential for a regional slowdown, which
should take a greater toll on tourism, since inbound travel from other
Latin American countries accounts for 76.5% of the total arrivals from
abroad.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Argentina. For more details please click here.
|
