Opportunities in Argentina still murky

WASHINGTON, Dec. 18 (UPI) -- When Argentina declared bankruptcy two years ago, there was considerable fear that the country's economic woes would have an adverse domino effect, plunging neighboring countries and even financial markets worldwide into a deep mire of bankruptcies and turmoil as had been the case in East Asia in the late 1990s.

Granted, Brazil too subsequently had to resort to loans from international financial agencies, but overall, Argentina's default had little impact on the regional, let alone global, economy. Nevertheless, investors still appear to remain uneasy about putting their money aggressively back into the country, despite the considerable international support Argentina has received to get back on its feet since it defaulted on $95 billion in December 2001.

Since then, the country has not only tried to get its finances back into shape, but it has negotiated loans with the International Monetary Fund and other international financial agencies. In fact, President Nestor Kirchner negotiated a deal with the IMF, World Bank, and the Inter-American Development Bank in September that could allow the country to reschedule more than $21 billion over the next three years. The country's economy had shrank 12 percent last year, and even though the country hopes GDP will reach around 3 percent this year, it's still a long way to go before Argentina gets back to where it was.

Yet, getting back to where it had initially been will be the easier part of the two-step process for economic reconstruction, said Joydeep Mukherji, director of sovereign and international public finance at credit rating agency Standard & Poor's.

"Recovering lost ground ... to reuse idle capacity and labor" will be easy enough, once investor and business confidence pick up, Mukherji said at a briefing on Argentina's prospects hosted by the Inter-American Dialogue. But what will be more difficult will be to generate growth beyond the initial starting point, especially as the banking system remains constraint so that new capital is difficult to access, he argued.

Of course, even the ability to recover lost ground depends on how far back the investor wants to go. At the turn of the 20th century, Argentina was one of the wealthiest nations in the world, surpassing the economies of many European countries. But even in the 1990s, Argentina was one of the richest, if not the richest, country in the region, thanks in large part to an overvalued currency that was pegged to the U.S. dollar. But floating the peso in January 2001 led to a surge in foreign liabilities as well as a massive exodus of Argentine assets overseas, eventually leading to the nation defaulting on its foreign loans.

Certainly, accessing the money that fled from Argentina at the onset of the financial crisis is one way to pump in new more for the ailing economy. But to ensure a steady flow of capital, it is essential for the country to establish a strong banking system which is currently lacks.

Meanwhile, the Standard & Poor's economist also pointed out that unlike Asia, ranging from India to Japan, where a large bulk of capital for private businesses actually comes from within their own borders, Latin America remains heavily dependent on foreign money.

"There is no Asian style of funding...there is an addiction to get equity from overseas," Mukherji said, adding that whilst such a model was unsustainable, it was difficult for Latin American countries to break out of that mold.

At the same time, Argentina's politics continues to weigh down on its economic prospects, said Martin Anidjar, an emerging markets strategist at JP Morgan. He argued that while President Kirchner's rhetoric about reform sounded solid, it was still difficult to gauge whether the country would actually implement the economic reforms that it has promised.

While many economists expect Argentina to be able to meet its growth projection for 2004, many are concerned that the pace of investment will be limited due to political uncertainties.