|
Debt
swap concluded
On 23
May, a US federal judge lifted a freeze on Argentina’s defaulted
sovereign debt that had put the settlement for the debt restructuring
completed in March this year on hold. Under the terms of the offer, the
government agreed to pay back 30 cents on the US$ on a total of US$ 62.3
billion of eligible outstanding bonds. The offer was accepted by 76.2%
of the eligible bond holders. Smaller investors, who were principally
represented by the Global Committee of Argentina Bondholders (GCAB), and
some larger institutional funds held out in the hope that the government
would improve the swap offer and argued that failure to achieve an
acceptance level over 80% should be considered a failure of the
government to have acted in good faith with bondholders. If the
International Monetary Fund (IMF) were to decide that the government had
not acted in good faith with bondholders, further IMF lending would have
been withheld for the time being. The IMF has not disbursed additional
funds since September last year, when the Fund postponed outstanding
payments on the existing 3-year, US$ 13.3 billion stand-by agreement of
September 2003 by one year. The IMF is currently conducting its annual
review and discussions between the IMF and Argentina are anticipated to
begin in July. Fund officials are likely to be firm in their demand
that the government should lift the freeze on public service tariffs
that has been in place since December 2001. The resumption of a lending
programme with the IMF would bolster the government’s credibility in
international markets.
Economic
activity slows in first quarter
Recent
data suggest that economic activity remained healthy in the first
quarter of the year but that the high growth pace of the past year is
beginning to decelerate. In March, the monthly indicator for economic
activity (IMAE, Estimador Mensual de Actividad Económica) rose
7.5% over the same month last year, which was down from the 8.5%
expansion observed in February. Based on the preliminary monthly data,
the economy expanded 8.3% in the first quarter over the same period last
year, which is below the 9.1% expansion registered in the final quarter
of 2004. The March slowdown was the fourth consecutive monthly
deceleration. However, a month-on-month comparison indicates that the
economy remained on a positive expansion path. In seasonally adjusted
terms, economic activity rose 0.32% in March over the prior month, when
the IMAE had increased 0.17%.
Unemployment increases moderately
According to the
National Statistical Institute (INDEC), supermarket sales rose 5.8% in
March over the same month last year, which was well ahead of the 1.2%
pace registered the previous month. The pick-up was confirmed by
seasonally adjusted figures, which indicated that sales rose 0.25% over
the prior month, when activity had declined 0.49%. Due to the healthy
March reading, the annual average growth rate in supermarket sales
remained unchanged at 7.6% compared to the prior month.
Despite
favourable economic developments, unemployment indicators were
disappointing in the first quarter, foreshadowing a moderation in
economic growth in the coming months.
In the
first quarter, unemployment rose to 13.0%, which was well above the
12.1% observed in the final quarter of last year but remained below the
14.4% reading registered in the same quarter last year.
More
recent data show that consumption is in for moderation. The University
Torcuato di Tella's (UTDT) national consumer confidence index (ICC)
reached 50.7 points in May, which was up modestly from 50.2
points in April but was well below the high levels observed at the
beginning of this year. Of the surveyed participants, 58.6% expected
that the economic situation would improve in the coming year, which was
down from 62.6% in April.
Industry
remains strong growth pillar
In
April, industrial production rose 10.2% compared to the same month last
year. The April reading was almost double the 5.5% expansion observed
in the prior month. A strong surge in motor vehicle, non-metallic
mineral, printing and publishing output was the key driver behind the
pick-up in industrial production. On the downside, the oil sector
experienced a decline in activity compared to the prior year. As a
result of the strong April figure,
the annual
average growth rate rose from 8.8% in March to 8.9%, putting a temporary
halt to the decelerating trend observed since December 2003.
Nevertheless, a month-on-month reading does not confirm the rosy picture
painted by the annual reading. In April, industrial production actually
dropped 0.37% compared to the prior month, which contrasted the 2.00%
expansion observed in March.
Outlook
upgraded amid persistence of healthy growth
Economic
growth is likely to have slowed but remained healthy in the first
quarter, as Consensus Forecast participants estimate gross domestic
product (GDP) to have grown by 8.2% (Q4 04: +9.1% year-on-year).
However, economic growth is likely to moderate further throughout the
year with the annual expansion expected to come in at 6.5%, which is
still well ahead of the government’s estimate of a 5.5% expansion and is
up 0.4 percentage points from last month’s Consensus Forecast figure.
Next year, GDP growth will moderate further according to Consensus
Forecast participants with the expansion anticipated to slow to 4.0%,
which is up 0.1 percentage points from last month’s Consensus Forecast
estimate.
Currency
strengthening persists despite intervention efforts
In May,
the currency appreciated 0.9% in nominal terms, which was up from the
0.3% strengthening observed the prior month, and brought the exchange
rate to 2.89 pesos to the US$. The May appreciation continued a
trend of successive monthly appreciations in the currency observed since
January – only briefly interrupted in February – and has the currency
3.0% stronger in nominal terms than at the end of last year. The
government is eager to avert the continued appreciation in the currency,
as the strengthening is likely to curtail the healthy export growth.
The Central Bank has been actively intervening in the exchange rate
market. In May, the Central Bank bought an average of US$ 76.4 million
daily, which was up from the US$ 22.5 million a day in April. In May,
the government decided to complement current Central Bank intervention
efforts with an initiative to stem short-term capital inflows.
Government officials adopted a new regulation, which requires that
short-term capital must be kept in the country for twelve months before
repatriation, instead of the earlier six months. Improved investor
confidence and the weakness of the US$ in international currency markets
have been key factors behind the continued strengthening in the
currency. As a result, international reserves reached US$ 22.1 billion
at the end of May, which was up US$ 1.3 billion from the previous month
and represented the highest level observed since October 2001. The
Central Bank believes that international reserves will continue to rise
and should reach US$ 24 billion by year-end, which is above the
Consensus Forecast figure of US$ 22.4 billion. Consensus Forecast
participants expect the current currency strengthening trend to abate
throughout the year with the exchange rate reaching 2.99 pesos to
the US$ – a 0.5% nominal appreciation.
Annual
inflation moderating
In May,
consumer prices rose 0.60%, which was up from the 0.49% increase
registered in the prior month and just a notch below the 0.64%
anticipated by Consensus Forecast participants. Surging housing and
clothing costs were the key factor behind the pick-up in inflation in
May, as prices in most other categories monitored by authorities
remained contained. Despite the higher May reading, the annual
inflation rate dropped from 8.8% in April to 8.6%. At its current
level, annual inflation remains ahead of the Central Bank’s target range
of 5% to 8% underlying this year’s monetary programme but is within the
government’s projections of 8% to 11%. Consensus Forecast participants
are much less optimistic about a further decline in inflation for this
year, expecting the annual rate to rise throughout the year to 9.9%,
which is up 0.2 percentage points from last month’s Consensus Forecast
figure. Next year, Consensus Forecast panellists expect inflation to
drop to 7.9%, which exceeds last month’s estimate by 0.3 percentage
points.
|