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Even before Sept. 11, Argentina's economy showed signs of great weakness. Gross Domestic Product fell 2.1 percent and industrial product 6.1 percent in this year's first quarter, after both has declined in 1999 and again in 2000. Total consumption fell 8 percent between 1998 and this year's first quarter, following a downfall in the previous quarters. It is estimated that for the whole 2001 negative growth will be 2 percent, marking three years of uninterrupted recession. Unemployment is approaching the historical peak of 18 percent.
A large number of businesses, both small and large and local and foreign, are facing problems in the payment chain which, inevitably, will be reflected in an increase in defaults in bank portfolios.
The market contraction has even generated a substantial deflation. In the last three years the prices of the basic consumer basket fell 2.3 per cent and wholesale prices 2.5 percent. Lower prices contribute to improvement in the exchange rate and salaries. But it also makes business income smaller than anticipated and lower profits threaten survival of many companies.
Furthermore, declining business activity has triggered a cut in fiscal revenues, that in September will have fallen for a fourth month in a row and are estimated to be 4 percent lower than September 2000, when the economy was already in recession.
All this makes very troubling the prospect of balancing the fiscal accounts to eliminate a budget deficit, which Argentina has agreed to meet in order to receive help for the International Monetary Fund. On one hand, if revenue doesn't improve the government would resort to new spending cuts. On the other, it is very likely that further cuts would lead businesses to contract and would deepen the recession, lowering even more fiscal revenues.
This picture was made worse by the terrorist attacks. The contraction in global demand, already felt before those events, will deepen. Immediately after the attacks, developed countries took various measures to quickly increase liquidity in their markets and thus avoid financial panic or an abrupt contraction in demand. But there is every indication that this will not be enough to stop the decline in global demand.
Faced with this uncertainty, financial capital will seek refuge in the safest placements, cutting down the available funds for emerging economies.
To deal with this situation, U.S. Treasury secretary Paul O'Neill is proposing that Argentina swap current foreign debt bonds at high interest for others at lower rates. This initiative could be compatible with the Argentine government's idea of promoting the voluntary repurchase of debt by the creditors, issuing new bonds at a lower rate that would have some king of additional guarantee that would lower the operation's risk. An eventual lowering in interest payments would lower public spending.
However, expectations about a possible recomposition of the foreign debt do not bring relief to the serious and urgent problems in Argentina's real economy. These flow, largely, from the deterioration of the internal demand on which the overwhelming majority of the sales of goods and services depend for survival-and, as a consequence, income and employment for a majority of the population would be affected.
The serious consequences of the contracting demand are reflected in investments in the production sector. Gross domestic investment fell 10 percent last year and as much in this year's first quarter. The fall in durable equipment investment was even larger. A recent study shows that it has been falling since early 1999 and, in the case of foreign companies, it has plummeted by 45 percent in the first half of this year.
Gross investment in fixed assets, that had peaked at 20 percent of GDP in 1998-a modest figure in international terms-has fallen to 15 percent of GDP, which doesn't even allow for renewing equipment already installed.
In this troubling picture, only some areas of the agricultural sector and the food industry offer a more promising future. But even this is affected by the impact the terrorist attacks had upon the economy of neighboring countries, particularly Brazil, Argentina's largest customer; the fall of the real has substantially reduced the income from that market.
Claudio Campuzano (claudio-campuzano@hotmail.com) is U.S, correspondent for the Latin American newsweekly Tiempos del Mundo and editorial page editor of the New York daily Noticias del Mundo. He writes weekly for World Tribune.com