Argentina's Gears Are Starting to Turn Again

A devalued peso gives the economy a lift

It has been ages since San José, a small town on the eastern edge of the Pampas, Argentina's grassy plains, has had a New Year's worth celebrating. In 1997, San José's lifeline, the Vizental meatpacking plant, shut down, laying off 800 workers. The area's already high unemployment rate climbed to 60%. Now San José's luck may be about to turn. Last year, J.P. Morgan Partners, the private-equity arm of giant U.S. bank J.P. Morgan Chase & Co., stepped in to rescue the Vizental plant from bankruptcy. It has since pumped $8 million into the operation, and some workers are already busy readying the plant for a February reopening. Alfredo Irigoin, a Buenos Aires-based J.P. Morgan partner, says the firm is eager to begin exporting cuts of premium Argentine beef, taking advantage of a sharply devalued peso. "This would have been impossible a year ago," he says.

The rusty gears of Argentina's economy are beginning to turn again. Recently released numbers show that industrial production rose a seasonally adjusted 2% in November--the first year-over-year increase in 27 months. There are other signs of life, from Buenos Aires, where a small construction boom is under way as suburbanites remodel homes, to Zárate, outside the capital, where Toyota Motor Corp. has announced plans to spend $200 million to triple the capacity of its auto plant.

The local press has dubbed this incipient renaissance "el veranito"--Indian Summer--a welcome thaw after nearly five years of recession. "Whether we're on the cusp of a full-blown recovery or the start of a long bottoming-out phase, it's too early to say, but there's no doubt the economic indicators are solid," says Guillermo Mondino, an economist with LatinSource, a consultancy with offices across the region. Investment banks are forecasting growth of between 3% and 6%, after last year's 11% contraction.

Call it the devaluation dividend. Local industries that lost ground to foreign imports during the decade the peso was pegged to the dollar are seeing renewed demand for their products. That includes textile companies, auto-parts makers, and paper producers. Analysts estimate that in 2002, local companies substituted cheap Argentine goods for $7 billion in imports. "Wherever possible we've gone from buying 100% of our fabrics abroad to ordering 100% locally," says Mariano Rodríguez Giesso, president of Giesso, a leading men's clothier. Other sectors are benefiting, too. The cheap peso has turned Argentina into a hot tourist destination: Officials are anticipating a 25% increase in foreign visitors this year.

But investors with dollars to spend are picking through the rubble with care. True, the peso has stabilized, after shedding 70% of its value, and inflation is abating. Yet the country's outlook remains hazy. Presidential elections scheduled for April could usher in populist leadership. Uncertainty over the direction of economic policy is one of the reasons the International Monetary Fund has delayed inking a new agreement with Argentina's interim government, although a deal now seems imminent. "There are a lot of incredible bargains out there, but until the air clears, we won't be signing any deals," says Diego Speranza, who manages a $57 million Argentine real estate investment fund set up by New York's Cushman & Wakefield Inc.

Nevertheless, the old rap against Argentina--that it's a great place to visit, but too costly to do business in--is no longer true. Wages are stagnant, owing to nearly 18% unemployment. The workforce is educated, and the transport and telecom infrastructure is one of the region's most advanced. This combination of positives explains why Royal Dutch/Shell Group chose Buenos Aires as the administrative base for a new regional oil-products division. Teleperformance, a French company that operates call centers, reports a steady influx in new business from offshore clients such as Microsoft Corp. since the devaluation. "Other countries would die for the amount of over-qualified talent that, sadly, we take for granted," says Teleperformance Chief Executive Norberto Varas. The weary and wary of Argentina can only hope that this Indian summer turns into an economic heat wave.

By Joshua Goodman in Buenos Aires

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