The Pain May Start To Ease A Bitby
Argentina's economy remains mired in recession, but the outlook is improving. One reason is because of waning fears that Economy Minister Domingo Cavallo, the author of the country's successful reform program, will resign amid clashes with politicians over his assertions in mid-August of corrupt practices in the policymaking process.
In late September, Cavallo traveled to the U.S. and Europe to assure investors that he is committed to working with President Carlos Menem and that the government remains dedicated to policies that encourage a sound currency and low inflation. As a result, Argentine stocks began to rally in late September, after falling some 17% since mid-August.
The political friction arises mainly from the recession's added sting amid Cavallo's painful reforms. Argentina's real gross domestic product fell 3.7% in the second quarter, the first decline after four years of growth averaging 7.6% per year. The recession stemmed from capital flight in fear that Argentina would devalue its currency after the Mexican peso crisis. By all signs, the contraction continued in the third quarter. Industrial output through August remains in a steep drop (chart).
The official forecast, recently lowered, calls for 1% economic growth in 1995 and a rebound to 5% in 1996, with inflation holding at about 3% next year. Private analysts are less upbeat about growth. They expect 1995 GDP to be flat to down a bit, with 1996 growth closer to 3%.
A key clash centered on splitting Cavallo's ministry, thus diluting his influence, in a bid to reverse falling production and rising joblessness, now at a record 18.6%. Menem's draft 1996 budget appears to reject such a plan. In fact, the proposed balanced budget is a vote of confidence for Cavallo. It is austere and reflects policies consistent with International Monetary Fund guidelines.
With deposits slowly returning to the banking system and foreign capital flowing in again, the foundations for recovery are gradually falling into place.
BY JAMES C. COOPER & KATHLEEN MADIGAN