Argentina's New Economic Tack

FOR the first time ever, Argentines are walking into the many exchange houses in Buenos Aires' busy financial district, simply called The City, to buy United States' dollars without any government restrictions. Black market dealers are seeing their street business wither.

Unprecedented freedom descended on Argentina's volatile markets last week after President Carlos Saul Menem decided to give supply and demand an opportunity to resolve the acute economic crisis five months into his six-year term.

``We are all in the same plane, and there are no parachutes,'' Mr. Menem said last week after swearing in the third economy minister since he took office last July.

To illustrate how crucial his new attempt to curb galloping price inflation is, he added: ``After this, the abyss.''

The new minister, Antonio Erman Gonzalez, is an accountant and a close aide of the President.

Mr. Gonz'alez outlined his policies in simple language: All state controls on the markets and on prices would be lifted overnight. The announcement was a tacit admission that the government was unable to orchestrate the economy, as successive crises under Menem and his predecessor, Raul Alfonsin, have revealed.

Lack of confidence in a package of measures announced earlier this month threw the markets into chaos, prompting the government to make major Cabinet changes and close banks and exchange houses for three days to stop the hurried trading of local currency for US dollars.

Gonz'alez announced that taxes on exports - Argentina's main source of revenue - were being reduced for a period.

He also appointed Rodolfo Rossi, a staunch advocate of the free market from the moderate Union of the Democratic Center party, as the president of the central bank.

The markets reacted favorably when they reopened calmly last Wednesday after five days of tense expectation. The price of the US dollar - which has become the thermometer of the Argentine economy - went down 20 percent on Friday from the previous week's quotation, and a feared run on the austral failed to materialize.

But economists warn it will be some time before the markets give a final verdict.

In an attempt to keep investors in local currency, interest rates are worryingly high - around 90 percent a month for large deposits. In a country where the largest borrower is the state, high interest rates are bound to be inflationary. And the effective devaluation in the last two weeks has been about 100 percent, from 650 australs to the dollar to about 1,250.

Government ambiguity on whether and how Argentina's fiscal deficit (estimated to be 6 percent of GDP) will be cut fuels doubt that confidence in the government will last.

Menem's initial promise to privatize Argentina's inefficient state-owned companies faces growing opposition.

And large sectors of the ruling labor-based Peronist movement, including most trade union bosses, oppose Menem's pro-business alliances and policies.

``The new plan intends to calm down the markets through deregulation,'' says economist Daniel Artana. ``But nothing is being done to improve state accounts.''

``This is particularly serious if we take into account the public has clearly perceived the ruling party is not altogether behind structural reforms.''

The president is expecting Gonzalez to meet less resistance from the other members of the Cabinet than did outgoing minister Nestor Rapanelli, a businessman with no links to the party in power.

Menem had managed to bring inflation down from almost 200 percent a month last July to 9.4 percent in September.

But prices recently began to slip out of control and it is now clear the official target of 15 percent for the whole of 1990 will not be met.

Bankers expect inflation for December will be somewhere between 60 and 85 percent. Gonzalez, meanwhile, conceded it might be 50 percent.

The end of price controls, together with a recently passed law increasing the value-added tax on all products, might send prices through the roof.

Moreover, Argentina's prospects at upcoming negotiations with overseas creditors on its $59 billion foreign debt do not look encouraging.

The country has made no payments on the debt since April 1988 and is now an estimated $5 billion in arrears. An expected $5 billion positive trade balance due to a good grain harvest would just cover the 1990 interest payments ($4 to $4.5 billion a year).

Menem predicted Argentina would emerge from its economic crisis in two or three years time. But he warned that there still might be ``turbulence'' as the markets find their way.

With the prospects of a rough ride ahead for the economy, Argentines are hoping Menem - the proud holder of a pilot's brevet - will stay firmly in control.