One year ago Argentina was embroiled in a showdown with international investors over its proposal to abrogate $22 billion in interest arrears and repay $88 billion in bonds at just 25 cents on the dollar. Unique among major defaulters in modern times, the country had resisted the advice of the International Monetary Fund and insisted that it could do a debt restructuring on its own with far less economic pain than a standard IMF workout.
Roberto Lavagna, 63, the steely Economy minister who pushed the independent strategy, has plenty of reason to crow today. More than three quarters of the country’s bondholders accepted the restructuring terms, allowing him to implement the program. Relieved of a large debt burden and profiting from strong global commodity prices, the Argentinean economy continues to boom, with growth forecast at 6.5 percent this year.
That surprisingly positive outcome has made Lavagna the most prominent and respected member of the government of President Néstor Kirchner, despite the fact that he was originally appointed Economy minister in 2002 by the president’s rival and predecessor, Eduardo Duhalde. Still, rumors swirl that Lavagna may be forced to step down if legislative elections next month strengthen Kirchner’s political faction. Institutional Investor Contributing Editor Jonathan Kandell recently met with Lavagna in his high-ceilinged office next to the Casa Rosada, the pink presidential palace in Buenos Aires, to discuss Argentina’s economic outlook.
Institutional Investor: How long can Argentina continue to grow without greater financial intermediation by the banks?
Lavagna: Sustained high economic growth requires a significant level of investment, and that can happen only with a banking system with a strong capacity for financial intermediation. But we are evolving in that direction. The rate of investment in the last quarter of 2004 was 21 percent of GDP. That’s the highest in more than 20 years. And it was achieved practically without the banking system -- that is, by self-financing, because there is a huge accumulation of savings outside the financial system. In my opinion, investment could reach at least 23 percent of GDP by next year. But that will definitely require an important role for the banks.
What new policy initiatives will there be in 2006 to improve investment and consolidate export growth?
There is a new law that allows accelerated amortization of capital assets. There will also be a reimbursement of the 21 percent value-added tax on capital assets. Then there is a plan to subsidize some $300 million in loans to small and medium enterprises in the interior of the country that will carry interest rates as low as 3.5 percent.
What inflation rate for this year and next will the government tolerate?
When we prepared our budget for this year, we estimated a 10.5 percent inflation rate, and we are using the same estimate for next year as well. For a developing country we think that is acceptable.
What peso-dollar exchange rate are you targeting?
About three pesos to the dollar. That’s the same rate we were targeting when we restructured our debt.
How does the situation in Bolivia affect the strategy for investment in energy infrastructure?
This year we haven’t had any energy problems in Argentina, but we have to increase energy supplies in the midterm. The delivery of natural gas from Bolivia remains uncertain because of political instability, so we are encouraging international oil companies, such as Total, Repsol YPF and Petrobrás, to step up exploration in southern Argentina. Also, along with Brazil and Paraguay, we are seriously looking into the construction of a natural-gas pipeline from Peru, which of course will cost more than a Bolivian pipeline because the distances are greater. But it will be a strong signal to Bolivia that if it doesn’t get its act together, we have an alternative.
On what issues do Argentina and the IMF remain furthest apart?
First, there is the fiscal relationship between the federal government and the provinces. The IMF wants us to change the law on the sharing of tax revenues between the federal government and the provincial governments. We agree. But we don’t have a sufficient majority in Congress to amend the law, unless the federal government agrees to share even greater revenues with the provinces. As we have tried to explain to the IMF, this would contradict the aim of tighter controls over spending [by the provinces]. And besides, there is no urgency, because we are running budget surpluses that are higher than at any time in the past 50 years. The primary surplus will be 3.8 percent of GDP this year. Another issue of contention with the IMF involves public utility rates. [The IMF wants utilities to be allowed to charge higher rates to encourage more investment in energy production.] We are still negotiating, but with no end yet in sight. It’s true that we have almost made a religion of taking tough stands in negotiations. But when we agree to do something, we do it.
Do you support the IMF’s suggestion that Argentina use its reserves to pay down its remaining IMF debt of more than $11 billion?
We have paid the IMF and the World Bank some $13 billion since April 2002. And how do you think we paid it? Obviously, by using the reserves that we had accumulated. So who is the IMF trying to kid? It is saying that thanks to its pressure, Argentina is paying down its debt, when in fact it knows this was purely an Argentinean decision.
What about the issue of small bondholders who declined to accept the government’s repayment terms of 25 cents on the dollar?
It’s completely over, and the markets are confirming it. When we launched our debt restructuring offer, I said, “Enough political pressure -- let the markets speak.” Well, the markets spoke, with 76 percent of creditors agreeing to our terms. And the markets continue to speak. We have already come out with a $500 million bond issue on the international markets, and we received offers for up to $1.5 billion. We decided on $440 million at a favorable interest rate.
