Overcoming challenges in Argentina country pro file Whats NewS u June/July 2000 5 Difficult decisions The case in Argentina differs slightly from its neighbours to the northeast and west - as Chris Abbenhuis, general manger in Buenos Aires says, 'We're on our way - but we're not there yet.' 1999 was a very challenging year for the Argentine economy - a change in government and a series of natural and economie crises led to a deep recession. But the new year has brought a new political regime and a new promise to Argentina - with a tough fiscal discipline, the signs certainly seem to be pointing in the right direction. Unique situation Key issue Export-driven Focused strategy When the new government came to power in December, they inherited a seriously weakened economy. In 1999, Argentina experienced negative growth of 3 to 4%, interest rates that climbed steeply in two-week periods, and a result- ing credit crunch that threatened the sur vival of many companies. But now, mea- sures have been taken to increase income tax, while subsidies and spending have been cut, along the lines of the IMF. 'The forecast for growth was ini- tially set at 4%, but now it's been taken back to 2%,' says Abben- hiiis. 'These aren't the rates you would expect to see in an emerg- ing market - it's a stand-still. So, we expect a continuation of the fiscal discipline and a mainte- nance of IMF rates - this will push the economy to grow.' While these measures are gener- ating external confidence in the political regime, they've also brought social unrest internally. Salaries have been cut and taxes increased - general strikes have been fre quent. This has caused consumption levels to drop, further complicating Argentina's fiscal situation as consumption taxes are an important source of government rev- enue. one of the primary dri- vers that brought Ar gentina out of the hy- perinflation of the 1980s. 'The nature of the economy is different than in Brazil or Chile,' says Heyl. 'While devaluation worked for sonte markets, it would not help the Argentine economy. In fact, it would be counter-productive. Exports generate approximately 8% of GDP - so a devaluation to drive the export sector wouldn't significantly improve the economie situation. And, as debt in Argentina, both private and state, is mostly dollar-based - a devaluation would increase the cost of servicing this debt.' GM Chris Abbenhuis It's very often that emerging markets facing recession use devaluation as the tooi to pump recovery. Argentina is, however, not a 'text- book' case. 'A key issue in the economy is the convert- ibility regime vis-a-vis the dollar,' explains Eric Heyl, deputy general manager and head of corporate clients. 'Will Argentina fol- low other emerging economies and devalue, or will the convertibility be sustained? We don't see a devaluation of the peso coming America. 'Through quicker reim- in the near future - both the population bursement of local taxes or in- and the government support convertibil- creases in levels of restitution, the ity. Nine years ago, the peso was linked export sector is being revitalized - to the US dollar on a 1:1 ratio. This was this will help drive recovery, Deputy GM Eric Heyl While export share of GDP isn't as large in Argentina as it is in Brazil and Chile, it's still expected to play an important role in recovery. 'A number of measures are being implemented to foster export,' explains Aie- jandro Reca, head of FAR Latin particularly in the near future, while the domestic market recovers.' In terms of Argenitina's food and agribusi- ness, growth is expected to be generated in the oil seed crushing industry (mainly soy- beans), the beef industry (Ar gentina's second largest export) and the blossom- ing wine industry. 'We're seeing for- y eign substantially in crease in these ar- FAR's Alejandro Reca eas,' says Reca. 'The US, Australia and Spain are investing in the wine sector, and while the market is still maturing, Argentina is becoming a very cont- petitive wine exporter. The input sector, dairy and food retail are other areas that are attracting attention from investors.' And, the Buenos Aires team has re- cently secured two transactions that promise to further strengthen the bank's market position in F&A - a co-ar- ranging role in the syndication for the financing of the largest urea plant in the world, and a mandate to arrange the project finance of a whey processing plant. Continued on page 7 »-

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