In what appears to be a reversal of what political commentators expected, President Néstor Kirchner is handling the tricky issues of the debt and international financial relations, while Roberto Lavagna is fussing over the details of domestic economic policy.
Worryingly for Lavagna, the import substitution boom that followed the devaluation at the end of 2001 and beginning of 2002 has now run its course. The companies that led it are now running up against capacity constraints. Their owners are unwilling to invest more because of the slowdown in Brazil. The appreciation of the peso this year has also made exporting trickier.
This phenomenon is particularly clear from what is happening in the textile industry. The industry has been growing at unsustainable rates, after contracting horribly during the recession. Now, however, it needs fresh investment to move on. This investment is not coming in. A survey of business intentions by the official statistic agency found 32% of those polled saying that they were investing less now than they were in 2002, and 19% indicating that they were investing at the same rate as last year. Most worryingly of all, however, is the fact that 22% admitted that they were investing practically no money whatsoever into their businesses.
This caution has slammed the brakes on the recovery. The government is reduced to trying to talk up the economy, without much success.
What the finance ministry cannot talk away is the fact that industrial production has fallen month-on-month throughout the second quarter.
Lavagna. It is significant that it is Roberto Lavagna, the economy minister, who is pooh-poohing the growing supply-side evidence that the economy is slowing down. President Kirchner's political capital is still too slight to risk in such a venture. When the president speaks he has to deliver, if the economy is not to slide back into chaos.
Lavagna can afford to be more tendentious. He claims that demand is picking up and that this is what will drive the economy forward in the second half of the year. Even so, he is still forecasting, effectively, that the economy will slow in the second half.
In late July, Lavagna raised his growth forecast for this year from a range of between 4.5% and 5.0% to between 5.0% and 5.5%. Lavagna was trying to quell (justified) worries that the steam was whistling out of the recovery. The official statistical agency, Indec, reported that the economy had grown 7.1% year-on-year in May but only 0.4% against April.
This dull figure prompted the minister of the interior, Aníbal Fernández, to echo what independent economists have been saying, and concede that the economy was slowing down. Lavagna immediately slapped his colleague down, saying that he stood by his forecasts, which he saw as a minimum rather than a maximum.
Demand. Lavagna argues that the rise in wages and the public sector's ability to pump prime would help the economy to move up a gear.
Most local economists do not buy this argument. They argue that the economy needs investment, and this is not coming through.
The finance ministry tried to flesh out Lavagna's argument by claiming that improved consumer confidence figures in June and July will translate into a boost.
As well as leading to a surge in spending, the hope is that robust consumer confidence will fan the strong performances from agriculture, services and construction. The problem with this line is that installed capacity is probably too small to be able to support much more demand. Traditionally, a recovery has sucked in imports.
The difference with this recovery is that Argentines have had neither the cash nor the credit to afford imports. The statistician's view of what is happening in the economy is illuminating. Fernando Cerro, a director at Indec, said that, if activity remains at its current level, he expects the economy to grow by 4.9% for the full year. This realism is not what Lavagna wants to hear.
A final point. Even if growth comes in at the upper end of Lavagna's revised forecast for this year, it is against a base of the 11% contraction seen last year. GDP would still be 14.3% below the level seen in 1998.
Budgeting. Lavagna may be saying that growth will be 5% this year, but he is budgeting on 4.5% growth for 2004, according to well-placed leaks to the Argentine press. The budget, which will be announced in September, will have an inflation target of 10%, an exchange rate of 2.72 pesos to the US dollar, and a primary fiscal surplus equivalent to 2.5% of GDP. This latter figure is especially significant, given that the IMF at present wants a surplus of 3.0% and is expected to push for a surplus of 3.5% to 4.0% during its visit to Argentina at the end of July.
The surplus also raises the question of whether the IMF will countenance the continuation of export taxes. These earned US$4.7bn for the government during the first half of 2003, and, together with a tax on bank current accounts, was worth 21% of total government revenues for this period. The government clearly wants to hang on to the export tax revenue. It is floating the idea of a phased withdrawal over 2004.
Tourism: There was a 39.9% year-on-year rise in the number of foreign visitors passing through Argentina's main airport, Ezeiza, over the first six months of 2002.
The US (with 84,409 visitors) and Brazil (82,215) provided the most tourists in the January-June period. Their numbers were up by 46.2% and 59.7%, respectively.
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