Argentina has been, is being and will be a country of major investment opportunities for both national and foreign capital. A hundred years ago the big opportunity was the conquest of the farm frontier, thus adding more than 25
milion hectares to the farming and livestock activities.
Later on, it was the emergence of the light industries and still more recently that of capital-intensive heavy industries such as metal works and petrochemical.
So what are the chances for the 1990s? There are several but two sectors stand out for investors to benefit form them. One is altering the export-orient industrial structure by creating a common market with Brazil and a new
import tariffs structure. (A common tariff of 22 percent for all products has been set of late).
The other possibility stems from a strong political resolve to reduce the state through a denationalization process of goods and services companies to be transferred to private capital. The process is already under way and two
Buenos Aires TV channels, three broadcasting stations, the ENTel telephone company and the Aerolíneas Argentinas air company have been sold off so far. Another way of privatizing is offering grants of facilities as was the case
of the transfer of 10,000 kms of national highways or 8,100 kms of three lines of national railways. Payments will be part in cash and part in debt-equity swaps. By denationalizing ENTel, Aerolíneas Argentinas and Petroquímica Bahía Blanca´s part share packages, the Argentine foreign debt has bet cut down by roughly 7,500 million dollars.
Privatization and deregulation.
With a view of enhancing the economic efficiency, the administration has buttressed the privatization process with that of deregulation so as to prevent monopolies. Consequently, the oil sector has been deregulated as from January 1st, 1991 and is now free to set its prices and is fully competing in the opening of new service stations. The state-owned YPF oil facility will be turned into a stock company with private capital.
Meanwhile, a tender on four main (called primary) and 28 minor qeological potential (called secondary) oilfields has been issued. For the first time in the Arqentine oil history there is not only freedom of trade but also that the company exploring and actually findinq oil will become its only owner and will entitled to use it in its own refineries. or sell it to other companies, without having to
deliver it to YPF.
SEGBA, the company generating and transmitting power to the capital city and Greater Buenos Aires, will also be privatized in 1991. Also on sale list are two top petrochemical firms such as Mosconi (aromatic products and Bahía Blanca (oleophines); SOMISA, the country´s biggest steel works; the national water works company OSN, and the AFNE shipvards.
The establishment of a full market economy is the bottom line.
The popular market economic policy President Menem is absolutely convinced that there is no possible alternative to a popular market economic policy based on free prices, a free exchange rate and free wages, along with increased
imports and exports.
President Menem is obsessed with just one thing: that the Argentine companies be competitive within the country and abroad. To this end, he is implementing an economic policy based on the advantages of a free market. “Long before taking office”, he avows, “I was convinced that the centrally-controlled policy had been the root cause ot the Argentine economic collapse and I am fully aware of the advantages of free prices, a free exchange rate, a free hiring of labour force and a free discussion of wages”.
INTRODUCING YOU TO ARGENTINA
A triangle on the southern border of the Americas.
This is enough to place Argentina geographicaly.
Together with its closest neighbour, Chile, the southern half ot Argentina is far away from everywhere, farther south than New Zealand, Australia or South Africa, sorrounded by huge masses of water. Far away from the northern hemisphere: the distance between Buenos Aires, the Argentine capital, and Paris is over eleven thousand kilometers. The northern half is part of Latin
America, bordering on Uruguay, Brazil, Paraguay, Bolivia and Chile. This geographic location determines Argentina´s mild climate (annual mean temperature in Buenos Aires is17.5 degrees C°.
Which gets colder and colder as one goes south (annual mean temperature in Bariloche is 7.5 degrees C° and in Ushuaia 5.5 degrees C°.
Argentina is the eighth largest country in the world, with more than 2,7millons Km2. From north to south the Argentine triangle is 3.800 Km long,from east to west over 1,400 Km wide. Thirty million people live in this vast territory, distributed in a rather peculiar way. First of all, 1/3 of its population (approximately 10 million people) is concentrated in the capital city, Buenos Aires, and its suburbs.
To the south, there is a region known as Patagonia, which is l/3 of the total area of the country and is only inhabited by about 3 % of the total population.
In the ceritral part of the country, there is the vast plain known as “the pampas”, where agriculture and cattle breeding are cleveloped on a grand scale these being indeed the primary sources of the country´s wealth.
The Argentine population is basically homogeneous, mainly of European origin, without any racial cultural and religious conflicts.
The Republic of Argentina consist of 22 provinces, the federal district of Buenos Aires and one national territory. The president of the nation is both head of state and of the armed forces.
Leaislative power is vested in the national Congress, made up by the Chamber of Deputies and the Senate.
Carlos Saúl Menem was elected president in May, 1989, succeeding Raúl Alfonsín five months before expiry of his constitutionáliy decreed six-years term.
On taking office in July, 1989, Menem was confronted by an ecónomy in a dismal state with hyper-inflation and stagnant economic activity causing massive unrest among the population. Thanks to a euphoric election campaign and some successful post-election manoeuvring, Menem was able to secure support among important entrepreneurs, liberals and the military.Despite its strong standing in the Congress, his own Justicialista Party did not give him unconditional support, and the Peronist unions stood against him.
In the presence of MERCADO reporters who interviewed him in his Government House office, Menem stood by the notion that the economic freedom enabled the pricing system to reflect the relative shortages, thus tending to an efficient assignment of resources. That the President admits to the fact that the free market forces are the price-setters, ruling out controls completely, is something new in Argentina. It is also something new in political terms that a President openly speaks about businessmen making money and investing it afterwards.
Menem´s proposal was to implement a “popular market economy,” which means addinga new Employment Act to he freedom of trade, to be discussed shortly by the Congress. It will help to provide a more efficient hirinq of the labour force and to fight covert unemployment. “The excesses inherent to bad employment laws are precludinq major hirings”, he says, “and a huge black labour market has developed which we are going to fight by making the hiring procedures more flexible.” In exchanqe for business freedom he is asking the business community leaders for more solidarity and “if the gasoline goes up 20 percent because its price was lagging behind, they do not increase their prices by 20 percent but only as much as reflected bv readjustment.”
This resetting of the rules of the qame for the domestic market will be best achieved with a bigger competition through a reasonable opening of the economy, a rebate on import tariffs and a cut on export duties, so as to enable the firms to compete not only with imported goods but also to come out and complete abroad with their own oroducts. The export trend will be favoured by a more orderly economy and a declining inflation rate, by a free exchange rate and by doing away with bureaucratic obstacles for imports and exports. “Argentina,” Menem emphasizes, “must insert itself into international trade flows, and to do this, it must compete and compete.”
The President is aware that the state must give up the centrally-controlled economic policies and direct its efforts to the roles it thinks are fundamental and unrelinquishable such as ¡ustice, education, health, social welfare, domestic and external security.He believes that in macroeconomy steps should be taken to have a stronger fiscal and monetary discipline by removing both deficits and
subsidies. Deregulation and denationalizations are opening new spheres of action for businessmen and the economy in general.
The guidelines
Menem is harping time and again on his ideas. “It was the state that not so long ago has been giving out the guidelines to businessmen by setting domestic prices, wages and the exchange rate. These conditions spawned a business class makinq a lot of money as a result of oficials decisions rather than of their own work. Moreover, the state has been oversized and weak, so the big business was to become a contractor of public works or a supplier to state-owned companies. This elephantiasic state lavished privileges on a few of them and brought Argentina almost to a standstill and complete frustration, so much so that my constitutional predecessor had to quit office months before his term
expired. We have been requested to reform the state in order to change serious structural flaws, and I would be very pleased to see many businessmen also to reform their companies and make them more competitive.”
Menem cannot as yet be boasting about the economic success, and he readily admits it. “You cannot leave a decades-old frustrated Arqentina behind you overnight, as If by magic. We are not sailing in calm waters but in a storm, so I am holding the rudder fast, for we have ¡ust gone through two hyperinflations. But I am absolutely convinced that we are on the right track and that there is no
backtracking.” As chief of state he sees some glimmers of light at the end of the tunnel.
Priorities: payments to international financial institutions, the Paris Club and the BONEX (External Bonds) holders.
Argentina recognizes unreservedly and inexcusably its duty to honour its foreign debt, while it is, at the same time, willing to negotiate a payments plan it can really comply with, with its creditor banks. It will certainly avail itself of the advantaqes of the mechanisms deriving from the Brady Plan or the Initiative for the Americas, recently outlined by President Bush. But before settling down for
rounds of negotiations it must redress the macroeconomic imbalances which are cause for serious difficulties and are reflected by a high and persistent inflation rate.
This is, in short, the government´s stance, as inferred from statements made by the Minister and Deputy Secretary of Economy, Antonio Erman González and Carlos Carballo, respectively, and the Central Bank Chairman, Javier González Fraga .
“Argentina”, Carballo states, “has made up its mindto take on its problems and not go on shying away form them any more or delaying its solutions as it has been doing for decades. At present state structures are being modified by redimensioning the public sector, state-run companies are being denationalized, and the heart of the matter-the public sector´s financial crisis-is beinq addressed head on by means of a tax retorm. This is crucial to solving the problems in the short term and to start negotiations with banks within a couple of months”.
González Fraga, the Central Bank Chairman says “Argentina recognizes each and every ot its commitments and the need to honour them if it is to join the international financial community and obtain the financing necessary to get an investment-based growth off the ground”. Of course, there still are enormous problems left, as is always the case when a debtor cannot repay its debts.
President Menem himself is fully aware that the worst thina is not to pay “and his minister ot economy thinks that in order to get investments tlowing into the country an agreement with creditor banks is in order.
“We”, González Fraga says, “are sure that to leave the period of time of capital flights, disinvestment and stagnation behind us, we have to head towards a free market economy. Moreover, we have to act decisively on foreign debt payments. But we are very constrained domestically in that by freeinq the exchange rate, each doltar paid to our creditors must be bought on local markets with australs
coming from fiscal surplus”.
Whereas Minister González thinks the decision to free prices, wages and the exchanae rate made in December, 1989 was a great initiative, Caballo adds the elimination of the quasifiscal deficit-the terror of the public accounting-to that list. He also points out that the clarity of the information and the way it is being released is someting to be taken into account.
The Paris Club
“We have reached an agreement with the International Monetary Fund and the World Bank-qranted loans have been unblocked. Accounts have been reconciled and commitments with the Paris Club institutions have all been rescheduled. This means short-term financing will be renewed. Arqentina will then be able to benefit from credit insurance the industrial nations are extending to their
exporters. Debts with alI international institutions have been put in order, and we keep opening our economy, in which the integration with Brazil is playing a major role. All this is closely related to the foreign debt”.
González Fraga reminds that from June throuah December, 1990 Argentina has been repaying monthly 40 million dollars on its debt, and as from January, 1991, 60 million dollars, as a token of its good will. He admits to the fact that the creditor banks were not satisfied as was expected, however. He stands by that amount as beinq Treasury´s fiscal surplus-derivea limit.
González Fraga believes there is one aspect in this situation which could not have been neglected:
Argentina started reducing its foreign debt through debt-equity swaps in denationalizing state-owned companies.
The Argentine strategy undoubtedly is to be even with the international financial sources (International Monetary Fund, the World Bank, the Inter-American Development Bank, the Paris Club and the Argentine government external bonds (BONEX) holders. González Fraga´s explanation of this conduct: “Due to the magnitude of our commitments we had to establish priorities for our repayments. All those items will enable a positive financial inflow in the short run and keeping up the credibility of government payments. Not that the commercial banks are notthat important, but it is a different obligation to be fulfilled in a different way. We shall negotiate with the banks in due course and offer the largest possible menu of options for them to choose out, For the time being, we are doing our level best”.
Minister González and Carballo are agreed in admitting that Argentina´s record as a debtor is not good. However, they emphasize the present administration is sendinq out clear signals it is looking for the right solutions to its problems.
