[SANITIZED]LATIN AMERICA REGIONAL AND POLITICAL ANALYSIS 14 JULY 1977 - 1977/07/14

• Document Type: SPECIALCOLLECTION
• Collection: Argentina Declassification Project - The "Dirty War" (1976-83)
• Document Number (FOIA) /ESDN (CREST): 03000023
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 41
• Document Creation Date: April 3, 2019
• Document Release Date: April 12, 2019
• Publication Date: July 14, 1977

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3.5(c)
Latin America
REGIONAL AND
POLITICAL ANALYSIS
3.5(c)
132
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14 July 1977
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LATIN
LATIN AMERICA
14 July 1977
CONTENTS
3.5(c)
Argentina: Improved Foreign
Financial Situation
13
This publication is prepared for regional specialists in the Washington community by
the Latin America Division, Office of Regional and Political Analysis, with oc-
casional contributions from other offices within the Directorate of Intelligence and
from other agencies within the Intelligence Community. Comments and queries are
welcome. They should be directed to the authors of the individual articles.
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5.F..Q.PrET
Argentina: Improved Foreign Financial Situation
The military junta that took over last year has
brought Argentina back from the brink of international
bankruptcy to a state of comfortable solvency. Interna-
tional obligations are being met, and reserves have
reached an all-time high. The government must now induce
industry to exploit the favorable foreign balance by im-
porting more of the materials needed for raising domestic
/, production. Economic prospects for the remainder of 1977
are good even though the government still faces serious
domestic problems--inflation, a large budget deficit, and
lagging industrial production. Its handling of these
problems over the next year or so will help determine
whether it remains in power bong enough to consolidate
its gains.
Inherited Problems
When the military ousted the Peronist government in
March 1976, the economy was approaching disaster. The
trade balance had registered $0.5 billion deficit in 1975--
compared with a $1.3 billion surplus two years earlier,
when a good grain harvest boosted exports, and an $800
million surplus in 1974. The 1975 drop resulted from a
poor grain harvest, the loss of EC markets for meat, and
an unrealistic exchange rate that made Argentine manu-
factures uncompetitive while encouraging importers to
buy heavily abroad in anticipation of a major devaluation.
Although the higher cost of oil imports also contributed
to the trade deficit, oil costs are less significant for
Argentina than for most oil-importing countries because
domestic oil production covers 85 to 90 percent of re-
quirements. In addition, poor debt planning had allowed
a concentration of foreign debt payments to build up in
1976. Reserves were near the vanishing point.
Domestic production was stagnant. Government poli-
cies had discouraged agricultural output, while manufac-
turers found themselves in a profit squeeze between rising
/ rycosts and regulated prices. Inflation was spiraling up-
'/,7 ward so rapidly that, if left unchecked, the 1976 rate
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would have approached 1,000 percent. With a bloated
bureaucracy and an inadequate revenue structure, the
government deficit was rising rapidly, and the regime
was increasingly covering expenditures by issuing more
currency. eor their part, workers were demanding and
getting sizable wage increases in an effort to offset
rising prices. Argentina's foreign credit rating was
poor, and the Peronist government had not yet lined up
funds to cover its foreign financial gap.* This gap had
widened from a $0.5 billion in 1974 to $2 billion in 1975.
Argentina: Foreign Financial Gap
19772
1973
1974
1975
Million US $
19761
Exports, f.o.b.
3,266
3,931
2,961
3,895
4,500
Imports, f.o.b.
1,983
3,160
3,431
2,652
3,500
Net services and transfers
-563
-644
-815
-632
-790
Current account balance
720
127
-1,285
611
210
Debt amortization
-573
-600
-800
-1,000
-1,000
Financial gap
147
-473
-2,085
-389
-790
Medium- and long-term
capital inflows
594
723
NA
1,300
NA
Net short-term capital
inflows
180
-301
NA
290
NA
Change in reserves
921
-51
-791
1,201
-300
External debt, yearend
4,672
4,873
4,695
5,189
4,679
Percent
Debt service ratio
20
17
30
29
25
'Preliminary.
2Projeeteci.
*Financial gap is defined as the current account deficit
plus amortization of medium- and long-term debts shifts
in short-term capital are not included.
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1976--The Bail Out
The new junta immediately focused on the need to
stimulate exports, with emphasis on agricultural products.
It reversed the previous policy of keeping agricultural
prices low to benefit urban workers. Sharply increased
prices for farm products, improved availability of cred-
its, and abolition of the marketing monopoly of the
state grain board led to a 10 percent increase in grain
areas planted. Favorable weather during the growing
and harvesting seasons then contributed to a bumper crop.
Although world wheat prices dropped, aggressive market-
ing by private Argentine grain sales agencies--pushed
by a shortage of facilities to store the record crop--
accounted for a large share of the $900 million increase
in total exports in 1976. This trend continued into
1977, when the remainder of the harvest was marketed.
Meat exports nearly doubled in 1976 compared with
the depressed 1975 level, aided by more realistic ex-
change rates. With continual "microdevaluations" of the
peso to offset inflation and the gradual elimination of
the dual exchange rate, the government also succeeded
in stimulating exports of nontraditional products by the
end of the year. Imports dropped 23 percent in 1976 as
inventories were drawn down and as demand was dampened
by recession.
In addition to initiating the export promotion pro-
gram, Economics Minister Martinez de Hoz launched a world-
wide effort to obtain foreign loans. In personal approaches
to banks and international financial institutions in the
US, Canada, Western Europe, and Japan he succeeded in
lining up nearly $1 billion in four- to five-year loans.
Together with $300 million from the International Monetary
Fund, these loans enabled Argentina to meet debt
obligations and to improve the debt maturity profile.
By the end of 1976, debt payment coverage was as-
sured. Moreover the trade balance had swung from a $500
million deficit in 1975 to a $1.2 billion surplus. The
current account balance totaled $600 million, compared
with a $1.3 billion deficit the year before. International
reserves had trebled. Gains on the domestic front promised
further improvement in the general economic climate and
the restoration of foreign confidence in Argentina's fi-
nancial soundness:
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--GDP, although down 2.9 percent for 1976 as
a whole, was rising in the last qLarter.
--The inflation rate was down from more than
400 percent (annual basis) in the first
half 1976 to about 100 percent in the second
half.
--The national budget deficit, which equaled
13.5 percent of GDP in the first half of
1976, was down to about half that level in
the second half; for the year as a whole,
41 percent of expenditures were covered by
revenues, compared with only 23 percent in
1975.
1977--Maintaining the Pace
The foreign financial situation has remained highly
favorable so far. Exceptionally large grain shipments
boosted exports to $1.8 billion in the first four months,
double the level of imports. More than 85 percent of
imports consisted of industrial inputs and capital goods,
signaling an upturn in industrial output. To encourage
this trend, the government has removed practically all
restrictions on imports. If production picks up, imports
should be considerably larger in the remainder of the
year; exports will decline until the next harvest begins
in November. The government's economic team p=jects
the year's exports at $4.3 billion to $4.5 billion, the
trade surplus at close to $1 billion, and the current
account surplus at $200 million.
The junta is continuing its program of incentives
for agriculture and expects another large grain harvest
in 1977-78. It is also counting on realistic exchange
policies to boost exports of manufactured goods.
Debt payments due in 1977 are close to the 1976
level of $1 billion and will require additional borrowing
to cover. Although an improved credit rating will make
loans easier to obtain, new borrowing is expected to to-
tal less than one third the 1976 level because of record
foreign reserves. Argentina almost certainly will choose
to reduce its external debt rather than accumulate addi-
tional reserves.
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Farther Down the Road
Longer range prospects for the Argentine economy
are clouded by political uncertainties. If the present
economic team remains in power and adheres to current
policies, the economic recovery is likely to accelerate
and the foreign financial situation should continue im-
proving. In light of past Argentine experience, however,
it cannot be assumed that this will happen.
The well-organized and traditionally influential
labor sector has been a major factor forcing previous
military governments to abandon promising economic re-
form programs. Much of the burden of the present eco-
nomic readjustment has fallen on the working class,
whose purchasing power--as the regime concedes--may have
dropped by one third in the past year. Labor organizations
have lost most of their political influence and lack a
central rallying point since Juan Peron's death. If
public opinion turns against the junta, however, labor
elements could probably exert enough pressure to force
the government to ease restrictions on wages and union
activities. Continuation of the present economic pro-
gram would then be impossible. If changes were made
that favored urban labor at the expense of agriculture,
the problems that characterized much of the last three
decades would reappear.
Another possible development would be the ascendancy
of a more hard-line group within the military that would
replace the present gradualist, free enterprise approach
with stricter controls. Although this policy might bring
down inflation more rapidly, it could stifle the reviving
manufacturing sector and cause extensive unemployment.
Any change from the present government would probably
have a generally destabilizing effect.
Foreign investors are wary because of past experi-
ence with Buenos Aires' vacillating economic policies
and are waiting for more solid evidence of political
stability before investing heavily. They are favorably
impressed, however, with the junta's liberalization of
foreign investment laws and with its efforts to settle
outstanding disputes with several foreign firms. In-
creasing numbers of businessmen are visiting Argentina
to study investment opportunities. Some foreign firms--
especially oil companies--are increasing their exposure.
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The financial gap should decline moderately over
the next few years, as annual debt payments diminish
with better debt scheduling. The current account surplus
may not increase substantially, since rising imports
will probably limit trade surpluses. Agricultural ex-
ports--in which Argentina has a comparative advantage--
should remain large; exports of manufacturers, especially
autos and other transport equipment, probably will in-
crease. Covering even a sizable financial gap should
present no problem.
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