BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS OUTLOOK

Argentina: Bad Numbers and Bribery, Too


As if the sagging Argentine economy did not have enough problems of its own, the country's Senate scandal is now affecting fiscal decisions.

President Fernando de la Rua has sent his 2001 budget to the lower chamber of Congress. How quickly it passes is seen as a test of Rua's political strength amid a bribery scandal that led to the resignation of his vice-president in early October.

Quick passage is also needed to meet the requirements of the International Monetary Fund's emergency credit line of $7.2 billion. In particular, the budget calls for spending cuts of about $700 million in order to shrink the 2001 budget deficit to $4.1 billion, another IMF target.

Argentina has been in a recession for almost two years, with few signs of recovery. Real gross domestic product fell 3% in 1999, and in the first half of 2000 it was up just 0.6% compared with the same period in 1999 (chart). Monthly data show that real GDP probably grew little, if any, in the third quarter. And at the start of the fourth, October vehicle production fell 10% compared with its year-earlier level.

One measure of investor wariness toward Argentina was the Nov. 7 auction of Treasury bills. The entire issue of $1.1 billion was sold, a small sign of investor confidence. But the yield was the highest so far this year, suggesting Argentine securities still carry a big risk premium.

Despite the recession, exports are doing well, rising 3% in the first half. The strength of foreign shipments negate any arguments that Argentina's woes stem from the country's decision to link its currency to the strong U.S. dollar. So far, that link has not made Argentine exports uncompetitive, and it has helped to lower prices. Consumer prices were down 0.5% in October from a year ago.

Deflation, though, has a drawback: It is curbing pay raises and limiting profit growth. And lower income means a drop in tax receipts. So, Rua has few options but to push through his spending cuts--and quickly--in order to secure needed credit for Argentina's slumping economy.

By JAMES C. COOPER & KATHLEEN MADIGAN

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Argentina: Bad Numbers and Bribery, Too

CHART: Argentina Remains Mired in a Slump



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