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.
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