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IMF seeking
additional guarantees
The signing of the provincial accord and progress on this year’s budget
has been received favourably by the IMF. However, since the begin of the
IMF mission’s visit to Argentina on 5 March, officials have been keen to
point out that they intend not only to scrutinize the budget in great
detail – particularly macroeconomic assumptions - but also will seek
guarantees that new funds are not exhausted in futile attempts to stem the
downside pressures on the peso in the exchange rate markets. Furthermore,
the IMF mission is likely to demand that the Central Bank adopt direct
inflation targeting, to require that the country develop an agenda and
terms for a debt restructuring and to insist that the government elaborate
a more comprehensive programme to recapitalize the battered financial
system.
Currency weakening persists amidst lacking
confidence
The persistence of social unrest and the government’s slow progress on
adopting economic policy to begin negotiations with the IMF prompted the
peso to weaken by 6.7% in February, following the 49.0% depreciation
experienced in January. In fact, throughout most of February, the peso
remained well above the 2.00 pesos to the US$ threshold, closing the month
at 2.10. The currency weakened further in early March, closing at 2.22
pesos to the US$ on 8 March, a 5.2% depreciation over the end of February.
Participants expect the currency to weaken further this year, as the
current financial system restrictions are lifted gradually and a lack of
investor confidence prompts further US$ buying. The peso is expected to
weaken by the end of the year. An anticipated improvement in macroeconomic
conditions and greater economic policy advancement next year is likely to
provide a more solid footing for the currency. However, panellists expect
the currency to experience further depreciation in 2003.
Inflation on the rise amidst currency weakening
According to the National Statistical Institute (INDEC), consumer prices
rose 3.1% in February. As a result, annual inflation rose to 4.0%, up from
0.6% in January. The monthly February increase came in below the official
forecast of 4%. The wholesale price index rose at an even more pronounced
pace, which indicates that inflation is likely to accelerate at a more
rapid pace in the coming months. Monthly wholesale prices increased a
staggering 11.6% in February, which was up from the 6.8% monthly increase
registered in January. The February data raised the annual wholesale price
increase to 12.1%, up from just 1.1% in January. Furthermore, the February
figure indicates that the accelerated currency depreciation is passing
through to domestic prices with a considerable lag. The government remains
committed to its year-end inflation target of 15% but admits that January
and February prices indicate the possibility of a higher year-end
inflation rate. Nevertheless, the government believes that the currency
will stabilize this year, which should serve to provide a more favourable
setting for price stability. Consensus participants do not share the
government’s optimism, expecting the rise in consumer prices to accelerate
further before abating somewhat next year.
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