Argentina's De La Rua Is Skipping The Honeymoon

The new leader will move fast to revive Argentina's economy

It was Fernando de la Rua's moment of triumph. He had just been elected President of Argentina in convincing fashion, crowning a four-decade-long political career and drawing down the curtain on the 10-year reign of Carlos Menem's Peronist Party. But in keeping with his character, de la Rua, 62, was subdued after the Oct. 24 vote. He barely cracked a smile, even as thousands cheered him outside a Buenos Aires hotel. "We will bring economic development with social justice," he pledged somberly.

De la Rua might call it "rational inexuberance." He knows he will have to skip the honeymoon and move directly to the task ministering to the ailing economy. Gross domestic product is set to shrink by more than 3% this year. Unemployment is close to 15%, and the budget deficit is expected to exceed the $5 billion target agreed to with the International Monetary Fund. Meanwhile, manufacturers, farmers, and exporters are up in arms over high taxes and rigid labor laws.

UNDER PRESSURE. De la Rua doesn't have much time to move into high gear. Argentine stocks and bonds rallied in the week before the election in anticipation of his victory. But the markets barely moved afterward. Even though the President-elect will not take office until Dec. 10, foreign and local investors are eagerly awaiting word of the new government's line-up. De la Rua is also under pressure to deliver a prescription for reining in the budget deficit without driving the country deeper into recession. If tough measures aren't spelled out in the next couple of weeks, Argentine securities will take a beating.

But the President-elect has to balance his economic priorities against the political realities. De la Rua must find enough posts to keep both members of his Alliance coalition happy: the century-old, centrist Radical Civic Union and the younger, left-leaning Frepaso. "From the economic point of view, he needs to make the Cabinet and policy known as soon as possible," says economist Abel Viglione of FIEL, a Buenos Aires think tank. "But politically, that's not so easy."

Argentina, more than most emerging markets, must also sell foreigners on its economic program. Because its currency board system keeps a hard peg to the U.S. greenback, it cannot easily lower interest rates or weaken the currency to revive exports and help local business. The country's only tool is fiscal discipline, and if foreign investors think de la Rua is sloppy with the budget, they will hammer Argentine stocks and bonds. Without foreign confidence, the government cannot raise money in the international capital markets. Next year, for example, Argentina's must drum up $16 billion to cover its deficit and service its debts.

To his credit, de la Rua appears comfortable with the idea of fiscal austerity. As mayor of Buenos Aires, he put the capital's finances back in the black. He and his Economy Minister--most likely former Central Bank President Jose Luis Machinea--are expected to slash discretionary spending and perhaps some government departments. De la Rua will probably have to raise some levies and eliminate exemptions on others in order to achieve the $4.5 billion deficit ceiling set for 2000.

CONSENSUS BUILDER. But long-awaited reforms, such as more flexible labor laws and an overhaul of the union-managed health-care system, will almost certainly remain on hold. The Peronists control the Senate at least through 2001 and have most of the provincial governorships. The unions are adamantly opposed to changes in the labor code, even though they could stimulate job creation and make Argentine industry more competitive. De la Rua, who prides himself on being a consensus builder, will not risk alienating his opponents too early in his four-year term.

That's bad news for business leaders. The economy needs a "confidence shock to send a clear message to both local and international business that Argentina can be trusted," says Guillermo Jofre, chief financial officer at telecom firm Impsat Corp.

The good news is that the President-elect has luck on his side. Brazil, Argentina's chief trading partner, is starting to climb out of its recession. Prices of Argentina's key exports, such as steel and vegetable oil, are rebounding. Argentina's economy may already have touched bottom, and recovery should begin next year. But de la Rua has never been the kind of politician to depend on luck. He can't afford to start now.

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