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Financial system and foreign investment jeopardized
In the short-term the measures, particularly the
devaluation, are expected to incur strong losses for banks (currently
estimated at US$ 6 – US$ 9 billion), as loans are being converted to Pesos
but deposits will be maintained in US$. Most banks have also invested
heavily in government bonds and are likely to have sustained substantial
losses amidst the plummeting value of the sovereign debt obligations. The
J.P. Morgan sovereign bond composite EMBI+ spread over comparable US
treasuries on Argentine sovereign debt has widened further by 1,198 basis
points between the end of November and 11 January. At 4,542 basis points,
Argentine bonds are the highest yielding bonds in the world. Finally,
banks will suffer from the anticipated massive defaults, as holders of US$
denominated loans are unlikely to be able to sustain debt payments under
the new currency regime. Private sector estimates of the total cost of
the new measures to the financial system range from US$ 10 - 12 billion,
as depositors are likely to continue the run on the banks to protect and
find a safer haven for savings. The strains on the financial system will
dry up the credit available for businesses and precipitate further
deterioration in the economy.
The government’s default in itself may force Argentina
out of international capital markets for at least a decade as investor
confidence will be slow to recover, particularly if the government does
not negotiate the debt restructuring favourably.
The medium term effect of the new programme will be to
undermine foreign investment. Of the top ten banks in Argentina, six are
foreign owned. Key foreign banks to be affected by the Argentina crisis
include: BBVA Group, Santander Group, Bank Boston, Citibank, HSBC and
Banco Nazionale del Lavoro. In addition, YPF-Repsol will be affected by
the oil sector tax regime, while foreign owned public utility and
telephone companies like France’s Lyonnais des Eaux, Endesa of Spain and
Spain’s Telefonica will suffer the repercussions of public services tariff
redenomination. Foreign owned firms feel that they are being asked to
bear the main burden of the current crisis and any government hesitance to
show goodwill in granting concessions to foreign companies is likely to
jeopardize foreign investment in the longer term.
Argentina remains cash strapped and is seeking an
additional US$ 10 - US$ 15 billion in funds to bolster the financial
system. However, so far, the International Monetary Fund (IMF), which
froze a US$ 1.3 billion disbursement in December due to non-compliance
with agreed economic targets, has asserted that further financial support
will be offered only once the government presents a more cohesive
programme that includes a full float of the currency. Bilateral aid is
also likely to remain absent for the time being until foreign governments
receive additional guarantees that the government remains committed to
protecting foreign investment.
Free
floating Peso depreciates strongly on first day of trading
The government declared a four day bank holiday
following the announcement of the Peso devaluation and trading under the
new currency regime was not begun until 11 January. The currency dropped
an additional 17.6% to 22.2% in trading, closing the day between 1.70 and
1.80 Pesos to the US$. However, the current exchange rate level is
unlikely to persist in the near to mid-term. In fact, further currency
depreciation was stemmed by the continued freeze on bank deposits and a
Central Bank order barring banks from selling the Peso currency via
electronic transactions. While some Consensus Forecast participants are
still evaluating the situation, the limited number of forecasters is
currently anticipating that the Peso will lose some 60.6% of its value
against the US$ by the end of the year. Naturally, the uncertainty
implicit in this Consensus Forecast is very high given the current
circumstances with the forecasts ranging from a minimum 2.20 Pesos per US$
to a maximum of 3.10 Pesos to the US$.
Inflationary expectations rising
Immediately following the release of the government’s
new economic programme, business owners began marking up prices in
anticipation of the new currency regime. While fresh data are still
missing, anecdotal evidence suggested that the actual price increase in
consumer goods will by far exceed the level suggest by the devaluation and
the weight of imports in the economy. Concerns about the inflationary
pass-through of the weaker currency are reflected in this month’s
projections. Participants expect inflation to reach 48.6%, which is up
dramatically from the 1.5% deflation observed in 2001.
Recession deepens more than expected
In the midst of the current political turmoil, the
government released Gross Domestic Product (GDP) data for the third
quarter, which showed that the economy contracted 4.9% over the same
quarter last year. The third quarter figure was well below market
expectations and represents a strong deterioration compared to the second
quarter, when economic activity dropped 0.2%. On a seasonally adjusted
basis, GDP declined 3.7% over the second quarter.
Key behind the third quarter contraction was a 17.6%
drop in investment (Q2: - 6.2%) over the same quarter in 2000. Investment
has now contracted every quarter since third quarter of 1998 and is
unlikely to show a turnaround this year as participants expect further a
further contraction of 6.4%, following the anticipated 9.3% drop in 2001.
The consumption slump deepened with a contraction of
5.8% over the third quarter 2000, which was down from a 1.7% drop in the
second quarter. The 2.5% downturn for 2001 is expected to persist this
year with consumption dropping again by 3.0%.
When viewed by sector, all industries experienced
contractions in the third quarter aside from mining (+5.0% year-on-year)
and fishing (+90.0% yoy). The strongest drops were observed in
construction (-12.3% yoy), manufacturing (-7.1% yoy) and transport and
communications (-6.3% yoy).
Panellists slash forecasts drastically and expect a full-blown recession
Consensus participants expect the recession to have
persisted through the end of 2001, with economic activity contracting
again by 2.6% in the whole year, down from the 0.5% drop observed in
2000. The uncertainty regarding the political and economic developments
for this year has prompted many panellists to maintain their negative
assessments, with the economy again anticipated to remain in recession.
This month’s 5.1 percentage point downward revision compared to last month
is the strongest downgrade observed in any country of the Consensus
Forecast since the inauguration of our publication. Many Consensus
Forecast participants continue to await a more satisfactory conclusion to
the current crisis and, therefore, the disparity between different
forecasts remains very large with growth estimates ranging from a minimum
contraction of 0.5% to a maximum decline of 11.4%.
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