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Introducing a multiple exchange rate
regime.
On 15 June the government announced a package of trade and fiscal
measures that seek to increase competitiveness for tradable goods
producers and spur consumption. The government measures include:
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A new trade compensation regime.
The government will provide a subsidy to exporters by enabling
businesses to convert Pesos at the average of the US$/Peso and US$/Euro
exchange rate, which is equivalent to a 7.5% devaluation in nominal
terms. In its announcement, the government emphasized that the
introduction of a dual exchange rate regime does not represent a change
to the existing convertibility regime.
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Tax cuts and stimulae.
The measures are specifically targeted to raise consumer’s disposable
income by lowering income taxes and expanding the coverage of
mortgage-related tax deductions. In addition, the government will
enable exporters, agricultural and transportation firms to offset 100%
of payroll taxes against VAT and corporate social security related
outlays would be standardized at 16%.
The government claims that the overall fiscal impact of the new measures
will be positive, generating some US$ 619 million in additional revenues
for public coffers. Participants do not anticipate the new measures to
have downside effects on the public sector balances with the projected
fiscal deficit of 2.4% of GDP, up 0.1 percentage points from last month
but roughly on target with the government’s IMF commitments. Markets
reacted unfavourably to the government’s new economic policy measures,
anticipating that the introduction of the new exchange rate regime for
exporters was a precursor to devaluation. As a result, the Argentine
country risk premium, as measured by the spread over the comparable US
Treasury of the benchmark Brady FRB, rose from 887 basis points at the
beginning of June to 1,303 at the end of the month and deteriorated
further to 1,621 on 6 July. Nevertheless, the successful debt
management programme for this year is likely to enable Argentina’s
government’s to sit out the current spike before re-entering the
international capital markets again.
Senate approves Convertibility reform
to incorporate Euro in exchange rate mechanism.
On 21 June, the Senate approved the revision of the 1991 Convertibility
Law to allow for a shift from the current Peso peg with the US$ to a
basket of currencies that includes the US$ and the Euro. The new
exchange rate regime will enter into force when the US$ and Euro reach
parity at which point the Peso will be pegged to a basket consisting of
US$ (50%) and Euros (50%). As a result, the Peso would no longer be
fixed to the US$ but would fluctuate according to the exchange rate
between the US$ and the Euro.
Growth data confirms continued
recession as investment and consumption stagnate.
On 20 June, the economy ministry released first quarter Gross Domestic
Product (GDP) growth data, which indicate that the economy remained in a
deep recession. Economic activity dropped 2.1% in the first quarter
over the same quarter last year, the third consecutive quarterly
contraction, unchanged from the 2.1% contraction experienced in the
fourth quarter last year. Accounting for the lion share of the first
quarter contraction was a 9.2% decline in investment, which has not
grown since the third quarter of 1998 and has dropped an average of 9.2%
every quarter. Consumption dropped for the third consecutive quarter,
albeit at a more moderate 1.5% pace than the 2.4% decline observed in
the fourth quarter. Export growth also remained subdued, registering a
meagre 1.0% expansion over the first quarter last year. With the
exception of mining (+7.6% yoy) and electricity, gas and water (+3.6%
yoy), all sectors were either flat or contracted. Fishing, construction
and manufacturing experienced the strongest contractions of 38.3%, 10.0%
and 6.1% respectively.
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