Currency speculators who bet against the Argentine peso in recent months may
lose a bundle. Supported by dollar reserves totaling $25 billion and a
financially well-cushioned banking system, the peso's one-to-one
interchangeability with the U.S. dollar looks solid despite a devaluation by
Argentina's No. 1 trading partner, Brazil.
Still, Argentina's economy has lost the momentum that made it Latin
America's high-flyer in the early 1990s. And regardless of who wins next
October's national elections, it's unlikely that the new Argentine congress
will enact long-overdue tax, labor, and health-care reforms that are needed
to boost Argentina's lagging competitiveness, says Martin Redrado, president
of Fundacion Capital, a Buenos Aires economic and public-policy think tank.
Without such reforms, Redrado warns, even after recovering from its current
recession, Argentina's economy could plod along at an annual
growth rate of only 3% or so in coming years -- down from 6% to 7% in the
early 1990s -- and remain vulnerable to shocks from the rest of the world.
Redrado, 37, with masters degrees from the University of Buenos Aires and
Harvard in economics and public administration, respectively, headed
Argentina's Securities & Exchange Commission at age 29. Later, as Education
Under Secretary, he oversaw school-to-work training for 550,000 young
Argentines. Currently, he's also president of Trident Investment Group, a
private equity fund with Chicago backers that's investing in Argentine
health care. In New York recently for a forum on Argentina, Redrado
discussed his country's economy and politics in an interview with Business
Week Contributing Editor John Pearson. Here are edited excerpts of their
conversation:.
Q: Is Argentina's economy running out of steam?
A: It's a mixed picture. In the financial system we have done things right.
[Peso-dollar] convertibility, as I like to explain to my American friends,
is a dual monetary system, not a fixed exchange rate. The Central Bank has
$25 billion of liquid reserves, exactly the same as the $25 billion of
circulating money plus cash deposits. So if there is a run on the currency,
what will happen is that the economy will be dollarized, and convertibility
allows for that. There are additional networks of liquidity in the banking
system which are a buffer against external shocks.
Q: What's the other side of the picture?
A: Where we have run out of steam is in structural reforms. We haven't done
any in five years. Bureaucratic government at the national, provincial, and
municipal level has all the vices and inefficiencies it had 10 years ago.
This has meant increased spending and deficits. The public debt increased by
$10 billion last year, to $118 billion, and is going to increase by $10
billion again this year. If we don't do a second wave of reforms, Argentina
is going to be much more dependent on capital inflows and outflows and
vulnerable to external shocks.
Q: What are the main reforms needed?
A: Restructuring the public sector, cutting down layers of bureaucracy,
creating incentives for officials to have much tighter day-to-day budget
management. There are no built-in incentives, so performance is an
unheard-of concept.
Q: You have said you don't see much chance for reforms. If so, what will
that signify for GDP growth?
A: If no reforms are implemented, instead of 6% or 7% annual growth, more in
the 3% range from 2000 onwards.
Q: What's the difference between the top presidential candidates --
Fernando de la Rua for the center-left Alliance and Eduardo Duhalde for the
center-right Peronist Party?
A: Unfortunately, this is not yet an issue campaign. Duhalde is still not
the official candidate. The quality of the campaign may get better after his
party's July 4 primary. Polls say people want change, though nobody knows
very well in what direction -- for cleaner, more transparent government, or
more socially conscious government. So the candidates are trying to embody
change, though both are political insiders. I'm sure what they are saying
now is not what they are going to do in office.
Q: Former Economy Minister Domingo Cavallo, also a candidate, is expected to
throw his support to one of the top contenders. What are his prospects?
A: People in both camps tell me an agreement with Duhalde is near. Cavallo
wants to have a political base of his own, not to be just an appointee as he
was before. So he is probably bargaining to have at least of group of
congressmen who would be loyal to him, and some Cabinet posts.
Q: What is Cavallo after? A strong voice in economic policy?
A: He wants to be President of Argentina. He's not in a hurry, he's a young
guy, so he is probably trying to expand his political base.
Q: President Carlos Menem wants to remain the leader of the Peronist Party.
Will that create problems for Duhalde, if he wins the election?
A: For the first time, Peronism is confronting a leadership transition
without the death of the leader. That's going to be something to watch.
Argentina's system is very presidential, so Duhalde, if he wins, will have
all the tools to be the party leader. If he doesn't win, Menem will clearly
have the party leadership, and he will be working his political base toward
2003 [for another presidential bid], I have no doubt.
Q: How are businesses coping with the structural handicaps?
A: I'm not saying Argentina is going to derail. The story I see is winners
and losers. With high capital and labor costs it's very tough to compete. On
the tradeable side, especially, firms are going under.
Q: What sectors are the losers?
A: Textiles, the automotive sector, metallurgy, steel.
Q: Who are the winners?
A: There is a lot of investment in services, the nontradeable sector of the
economy where there's less international competition. Regardless of what the
government does, I see a strong dynamism in this sector. Retailing and
supermarkets are booming, along with the entertainment and leisure
industries. Tourism is receiving $5 billion in investments.
In telecommunications, we have the biggest cable network in Latin America,
with 5 million homes wired. There is a lot of M&A activity there, with
foreign companies coming in to provide services such as Internet and data
transmission through cable. Hicks, Muse, Tate & Furst, the American fund, is
very active in media and telecommunications.
Q: What's causing the tourist boom?
A: You'd be amazed. Buenos Aires is the city with the highest hotel
occupancy in Latin America. Many business travelers go on to Bariloche [in
the Andes]. Patagonia has become very trendy: Since Ted Turner and Sylvester
Stallone bought ranches there, many Americans have done so. Fifty resorts
are being built there. Even in a recession, you are seeing investments in
theme restaurants, theme parks, casinos.
Q: How much investment from abroad is expected this year?
A: About the same as last year, $13 billion. But there's a shift to direct
investment from portfolio. Before, I would say it was 70% portfolio vs. 30%
foreign direct investment. Now we are speaking about 60% vs. 40% portfolio
flows.
_______________________________________________________________
Get Free Email and Do More On The Web. Visit http://www.msn.com