"No" to Dollarization -- the next step after the currency board has probably been terminated

Prior to the October 24, 1999 election, the Interpress Service 8/16/99, reported

"The government says 14.5 percent of the workforce is unemployed and another 13.2 percent is underemployed. Another 4 million people have given up on finding work and left the workforce. Poverty has nearly doubled in the past five years, according to the government, with 12 million of 36 million people living in poverty.

Privatization of state enterprises over the past 13 years has increased the costs of electricity, gas, water, telephone and public transportation for the poor. And ... the capitalized value of the firm, Azurix, that purchased the right to provide water, has plummeted -- that privitization program is not working."

Considerable attention was given to whether the federal government will meet the budget program contained in a $7.2bil standby credit agreement with the IMF in March 2000. The focus of concern was whether the $7.1bil federal deficit during Menem's last term of office, 1999, could be brought down to $4.5bil for Y2000 as requested by the Fund. The possibility that this might happened was given credibility when tax revenues for June 2000 came in much stonger than expected. Never mind that second quarter tax revenues were enhanced by a not-to-be-repeated tax amnesty (and never mind why they had to offer an amnesty to get taxes paid in the first place) -- the government proceeded to proudly place the image above on the web showing the substantial budget improvement compared to Menem's last year in office.

Four Year Projection:
In August 2000, the Finance Ministry put out an interesting projection of the future of the economy and indebtedness for de la Rua's four term in office. For a number of years public indebtedness has been growing relative to GDP, especially in 1999 when GDP dropped 3% for the year following the Jan '99 Brazilian devaluation. There are two public debt numbers, one for the federal government 31dec99 ($122bil gross and $110bil net of holdings of US Treasury strips used as collateral for Brady bonds) and another consolidated number for the national and provincial governments ($136bil for mar00). The official forecast is that the national and provincial budgets, by the end of de la Rua's four year term of office will be in balance! This would be a reversal of most of the decade's rapid growth in government indebtedness. According to the Economics Ministry the ratios of Debt/GDP will peak (in the next year or two depending on assumptions of economic growth) and start a downward trend. This picture of a declining Debt/GDP ratio is a central part of the new administration's economic game plan.

Leaving aside the immediate question of whether the federal budget deficit objective of $4.5bil for Y2000 goal is achieved, the larger issue is whether balanced budgets or even falling Debt/GDP ratios are credible given

the increasing stridency of organized labor unemployment at 15.4% in June 2000

May 31, 2000

June 9, 2000

that the forecasted high tax revenues for Y2000 are predicated on a rate of real economic growth over 3% in contrast to a rate of growth of -3% in 1999

that de la Rua has promised to attend to the urgent needs of education and health

that the privitization program is largely over -- the government has few assets left to sell -- 1999 privitization sales of $2bil are expected to drop to less than $1bil in 2000

a seriously overvalued currency makes it difficult for Argentina to compete internationally

the budget is based on provinces, which rely on tax amnesties to gather revenues and many of which are in arrears in wage payments to public sector employees, moving towards balanced budgets

the levels of corruption in laundering drug money, crime and extreme distrust of government are not as bad as Russia but (using 1999 ratings) worse than the other top Latin America debtors, Mexico and Brazil.

the Ministry of Economy puts out a web page (08aug00) displaying obvious fear rather than confidence of investor sentiments.

In a 1999 Business Week interview, the former head of Argentina's SEC, Martin Redrado, argued that external indebtedness will continue to grow unless there is a second wave of economic reforms comparable to the first wave in the early 'nineties. The first wave centered on massive privitizations and now, Y2000, the government, the country's chief debtor, has largely depleted their stock of assets to sell. The high level of second quarter Y2000 tax receipts was generated by a once-and-for-all tax amnesty and $1bil of the Y2000's revenue comes from another of a very limited series of Brady-bond-swaps.
As Redrado points out, recent capital inflows have shifted from the purchase of financial instruments to direct foreign investment (especially for the construction of tourist resorts in Patagonia, following the high-profile purchases of ranches by Ted Turner and Sylvester Stallone). This FDI (foreign direct investment) is doing little to support the government or Argentine corporate debt market. The EUI Jan 2000 (Economics Intelligence Institute) argued

Argentine companies are grappling with an estimated $6.39bn in debt coming due this year, including payments on principal and interest. Rolling over this debt will be complicated, considering that the government is seeking to raise $17.5bn in both the international and local financial markets in 2000. On top of that, most of the 23 Argentine provinces are running fiscal deficits and will need additional funds, placing more pressure on demand for the country's debt issues.
...
All of this public-sector fundraising narrows the space for companies in the international markets. At the local level, the only big investors are pension funds that have more than $16.5bn in assets under management. But local institutional investors have not been friendly to corporate bonds so far. Such instruments represent only 2% of their total portfolio, while government securities make up nearly 50%.