Argentina - Economic Briefing May 2002

Lavagna Replaces Remes as Economy Minister (continued)

Currency in freefall as uncertainty persists
In April the peso halted the freefall and depreciated only 0.8% in nominal terms, which represented a significant improvement from the 6.9% and 28.3% drop in February and March respectively. The April figure brought the depreciation so far this year to 66.2%. However, the exchange rate stability observed in April represented only a short-term respite - in light of the change in the economy minister portfolio. Since the end of April, the currency has resumed its weakening trend, depreciating 7.2% by 10 May to reach 3.19 pesos to the US$. Further currency weakening cannot be dismissed as Argentines continue to scurry to protect their savings in US$ since they mistrust the Duhalde administration’s capacity to bring the current adverse economic scenarios under control and to successfully control inflation. Despite the more accelerated deterioration in the exchange rate of the recent past, the Consensus expects the depreciation to ease. However, the Consensus evidences that a great deal of uncertainty remains, as panellists’ forecasts for the year-end exchange rate currently range widely

Peso deterioration raises inflationary pressures
According to the National Statistical Institute (INDEC), consumer prices rose 10.4% in April – the highest monthly increase experienced since 1991. The increase was well above market expectations of 7.4%. and brought the annual inflation rate from 8.4% in March to 18.9%. Clothing, health, household goods and food and beverage prices experienced strong upward jolts. In fact, overall goods prices experienced a 17.4% monthly increase, which was only modestly offset by a much more moderate 1.7% increase in service prices. Uncertainty over the trajectory of the currency, public service tariffs and public sector salaries continued to cloud prospects for any moderation in the current pace of consumer price increases. The government has still not given a clear indication of its policy towards raising public service tariffs given the new price environment nor have the wage demands of unions been defined clearly. Given the current lack of a political consensus and strong social volatility, the ability of the government to control wage pressures, maintain fiscal austerity and sustain restrictive monetary policy, particularly in the face of the current adverse economic conditions, is severely curtailed. A persistence of the inflationary bout is likely to lead to additional deterioration in social conditions and will prompt further US$ buying as consumers attempt to protect themselves against a further loss of purchasing power. Economy Minister Lavagna has promised that the government will fight the current inflationary bout with fiscal and monetary discipline and not price controls. Moreover, public sector wage hikes are currently not being considered, despite the deterioration in Argentines’ purchasing power. Consensus participants expect inflation to continue to rise throughout the year. The forecasts display a large difference in market expectations, as the inflation rate anticipated for this year varies significantly.

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