Argentina Starts to Tango

ARGENTINES started the new year with a new currency amid renewed hopes that President Carlos Saul Menem's free-market economic policies will put this country's economy back on its feet.

This is the fourth change in the currency denomination since 1970. This time, peoples' hopes are in step with predictions by investors and economists.

"If we had to write the script on how to run Argentina's economy, we wouldn't be doing it any differently," says Edond Villani of the Boston mutual fund management group, Scudder, Stevens & Clark, during a recent visit to Buenos Aires. Mr. Villani is chairman of the Argentina Fund, which has raised $69 million to invest primarily in Argentine securities, thanks to what he describes as "the new stability and changes."

In spite of widespread recession abroad, economists here are forecasting for this year real economic growth of at least 5 percent, a manageable inflation rate, and increasing local and foreign investment. President Menem's drive to restructure and deregulate Argentina's distorted economy is being given much credit for this progress.

The new currency - the peso - will be pegged to the dollar 1 to 1, knocking off four zeros in the process. Inflation peaked at almost 200 percent a month in July 1989, when Menem took over from another civilian president. Fears of a return of inflation have enabled Menem to carry out harsh economic austerity policies with little opposition.

Under Menem, Argentina has been opening up to imports, curbing public spending, and privatizing money-losing state companies. Only within the past year, however, have the indicators begun to look up.

Economy Minister Domingo Cavallo, since taking office last February, has introduced significant economic, tax, and public-spending reforms designed to control inflation, encourage industrial exports, and reduce import duties.

Mr. Cavallo, a Harvard University graduate, has set the end of this year as the deadline for privatizing a long list of state companies. According to the 1992 budget, the government expects to receive $2.5 billion from privatization.

That budget forecasts an increase in overall revenues of 28 percent, 7 percent inflation for the whole year, and 6.5 percent real growth in national output. During the 1980s, the gross domestic product fell at an average annual rate of 0.8 percent.

Almost halfway through his six-year term and with Cavallo's help, Menem has achieved the lowest inflation rate in decades: 0.4 percent for the month of November. In spite of layoffs at state companies and public administration offices, unemployment in the past year dropped from 8.8 percent of the work force to 6.4 percent. Tax revenues increased 50 percent in the same period. Further tax reforms this year will make it even more difficult for tax evaders to practice what until now was a national sport.

Car output jumped from 95,000 units in 1990 to 155,000 in 1991. Manufacturers expect to produce 250,000 in 1992. The price of real estate doubled. The stock exchange boomed.

"We wouldn't be investing in Argentina as an emerging market if we didn't feel the potential growth would make up for the risks of venturing into a less-traditional market," Villani says.

Argentina also has hopes of solving its $60 billion foreign- debt problem. Government officials are seeking an International Monetary Fund medium-term financing arrangement. They also expect by the end of this year to reschedule debt owed to foreign commercial banks, and get some debt reduction under the so-called Brady Plan. Meanwhile, a drop in international interest rates has meant considerable savings. Argentina is paying $60 million a month to creditor banks in interest payments. One year ago, that amount covered 20 percent of the interest due. Today, it pays for three-fourths.

Economists, however, are warning of several trouble spots. Provincial administrations are not tightening their belts. Private companies face the challenge of becoming internationally competitive or disappearing. More than 10 percent of Argentina's 32 million people live under the poverty line.

Also casting shadows on Menem's economic achievements is a series of corruption scandals involving government officials close to the president.