Wanted: A Spark Of Confidence In Argentina

If consumers go into action, a full-scale recovery will kick in

For the first time in more than a year, Renault car salesman Hugo Belvisi is optimistic. Belvisi's downtown Buenos Aires dealership on Cordoba Street is selling twice as many Renaults as it did during the depth of Argentina's recession in 1995. "A few months ago, people would walk right past here with their heads down," he says.

Argentina's economy, like Belvisi's business, is starting to rebound from the shock wave created by Mexico's peso collapse. Banks, which lost 20% of their deposits in five months last year, are now bulging with funds. Inventories are at a two-year low. Moreover, last year's unsettling tension between President Carlos Menem and Economy Minister Domingo Cavallo has subsided. Economic indicators--including industrial output, steel production, and auto sales--have turned around after months of decline.

All that is needed to trigger a business recovery, after last year's 4.4% drop in gross domestic product, is a spark of confidence from consumers and small-business owners. That, say economists, is just around the corner. Most analysts expect GDP growth of 2% to 3% this year and 4% to 5.5% in 1997.

The recovery, however, will be different from the boom years of 1991-94. Although the Buenos Aires stock exchange has edged up 8% since Jan. 1, there's no flood of portfolio investments from abroad, which helped fuel 7.5% annual GDP growth in the 1991-94 boom. The exodus of those funds last year deepened the recession.

This time around, there's an inflow of mostly long-term direct investment (table). Companies have invested or committed at least $4 billion in Argentina since the start of the Mexican crisis. "We've seen more [direct investment] in the past 12 months than in the previous three years," says Alejandro Reynal, chairman of Buenos Aires-based Merchant Bankers Asociados, Salomon Brothers Inc.'s local affiliate. "And now it's much more strategic investment."

Auto makers, petrochemical manufacturers such as Dow Chemical, and retail chains such as France's Carrefour are betting on Argentina's prospects for long-term prosperity. The inflows are a delayed vote of confidence in Cavallo's five-year-old Convertibility Plan, which fixes the Argentine peso at 1-to-1 with the U.S. dollar. That confidence has been increased by Argentina's success in riding out last year's battering without changing its economic course. Many foreigners had been skeptical about Cavallo's plan, believing it was being propped up by hot money flows into the stock market and revenues from privatizations. "It has been proven that Argentina is prepared to stick to its guns," says Reynal. "That is what businessmen like, particularly foreign investors."

Another sign of foreign investors' growing trust in Argentina is the flurry of initial public offerings. Only four Latin American companies have made international equity offerings this year, and three are Argentine. On Apr. 29, steelmaker Siderar took in $78 million in a public stock sale in New York and Argentina. In March, Quinsa, the holding company for brewer Quilmes, sold $167 million worth of stock internationally. And supermarket chain Disco's IPO attracted $100 million on Apr. 8.

TRADE-OFF. Some analysts think the falling interest rates on Argentine bonds may make investors turn to stocks and give the Buenos Aires bolsa's index another 20% boost by the end of 1996. Winners are likely to include companies in industries that are already showing signs of recovery, such as construction and steel.

Unfortunately, the trade-off for Argentina's stable peso is sharper economic ups and downs. By fixing the currency against the dollar, Menem and Cavallo gave up the ability to cushion a recession with monetary policy moves, such as easing credit. "Convertibility is an excellent idea to achieve price stability, but the price you pay is volatility in growth," says Alfonso Prat-Gay, an analyst for J.P. Morgan & Co. in New York. "You move from a vicious cycle to a virtuous cycle overnight."

After the wringer they've gone through, Argentines, whose shopping sprees drove the economy in the early 1990s, are likely to spend their money cautiously for a while. But for now, car dealers like Belvisi are happy just to see them opening their wallets.

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