Argentina - Economic Briefing February 2002

Government Floats Peso and Promises Fiscal Dicipline  ... (continued)

Initial consumer price data released by the National Statistical Institute (INDEC) indicate that inflation is beginning to rear its head, as businesses and consumers react to concerns about the inflationary passthrough of the currency deterioration on domestic prices.  In January, consumer prices rose 2.3% over December.  The largest increases in consumer prices were experienced in recreation costs, which rose 8.9%, followed by household items and transport/communications, which increased by 3.6% and 3.3% respectively.  Among the remaining sectors, the only prices that dropped were those on clothing, which were down 1.4% over December.  Wholesale price developments indicate that inflation is likely to accelerate at a more rapid pace in the coming months as the variation in the wholesale price index (which includes import prices) rose a whopping 6.6% over December.  Panellists expect the rise in consumer prices to accelerate further this year.  Moderation in the currency depreciation and monetary discipline are expected to help bring down inflation significantly in 2003.

Recession to deepen further this year as new economic regime stifles domestic activity

In the last quarter of the year, economic activity decelerated even further.  Industrial output dropped 12.9% in December over the same month in 2000, which raised the annual contraction to 6.2%.  Similarly, supermarket sales declined 14.4% in December, despite the holidays.  Thus, for the year as whole, supermarket sales contracted 5.7%.  As a result of continued deterioration in the economy, panellists expect the Gross Domestic Product (GDP) to have decreased 5.9% in the final quarter of 2001, raising the annual decline to 3.2% from 2.7% expected in last month’s publication.  The dire state of the financial system, the volatile political and social environment and restrictive monetary and fiscal policy as well as the strong currency depreciation is likely to postpone any recovery in the economy until next year.  In fact, participants expect that the current recession will deepen even further before easing.  Consequently, output is expected to drop sharply this year, down 2.4 percentage points from last month’s forecast.  In addition, the economy is seen as emerging from the four year recession in the first quarter of 2003 with very modest growth.  The Consensus on economic growth appears to be emerging gradually but some participants continue to await a more satisfactory conclusion to the current crisis before fixing an economic growth scenario.  In fact, the disparity between different forecasts remains very large.

Central Bank president resigns and is replaced by Washington insider

On 17 January, Central Bank President Roque Maccarone resigned.  Central Bank Vice President, Mario Israel Blejer, assumed the vacant post.  Blejer, a Chicago-trained economist, worked for thirty years at the International Monetary Fund (IMF) and served as a key consultant to former Economy Minister Domingo Cavallo.  He is likely to boost confidence in Argentine monetary policy and is expected to become a key figure in the government’s negotiations with the IMF.  Discussion with the IMF are scheduled to resume on 12 February but officials in the multilateral organization state the negotiations will only begin in earnest once the government has outlined a clear economic agenda.  The Fund froze a US$ 1.3 billion disbursement in December due to Argentine non-compliance with agreed fiscal targets under the US$ 22 billion stand-by credit agreement.  The government’s decision to fully float the currency is seen as an important step to restarting the loan agreement but IMF officials claim that additional definition in economic policy, particularly on the fiscal front, will be needed before serious negotiations are initiated.

For five-year forecasts, please click here.