Argentina: No End in Sight to the Turmoil

Argentina's economy shows signs of stabilizing after five years of recession. Yet, weighed down by financial crisis, government turmoil, and social unrest, 2003 will be another rough year.

Real gross domestic product in the second quarter rose 0.9% from the first quarter. Although real GDP was down 13.6% from the year before, the quarter-to-quarter gain was the first in two years. And the country's two measures of industrial output suggest the rate of economic erosion continued to slow during the third quarter.

But the economy remains fragile as it suffers the effects of last December's $95 billion debt default, this year's 70% plunge in the peso, and the imposed limit on bank withdrawals that has strangled consumer spending, choked off credit, and sent consumer confidence tumbling to a record low. Through September, inflation has eased, although it could still hit 60% annually by yearend. Interest rates are also down, but are 36% per year.

The government's recent overly optimistic budget proposal for 2003 highlights next year's potential pitfalls. It assumes 3% economic growth, with falling inflation and a stable peso, a scenario most economists think is a pipe dream. Argentina lost funding from the International Monetary Fund after failing to meet the IMF's budget goals, and it is now trying to win back IMF aid.

To its credit, Argentina has tightened capital controls to keep hard currency at home, and it is working toward a plan to relax restrictions on deposit withdrawals. Also, Argentina's Central Bank has kept monetary policy tight. Plus, with tax collections up sharply this year, helped by inflation and new taxes, the government is running a primary surplus, excluding interest payments.

But the budget leaves the tough decisions on restructuring the debt default to the next President. Elections have been moved up to March, 2003. With half the population in poverty and with one in five unemployed, the office will most likely go to a populist regime more intent on increasing spending than reining it in.

By James C. Cooper & Kathleen Madigan

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