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The lack of political consensus on the
economic plan needed to secure the support of the IMF and access to
international assistance, threatens to deepen the recession, as economic
activity continues to stay on hold. In the meantime, the currency is
depreciating further and exerting additional pressure on inflation. |
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Currency depreciation accelerates as support
for Duhalde remains weak and political manoeuvring continues
After a temporary respite in April, when the peso depreciated just 0.8%,
the currency continued its weakening trend. In May, the peso lost 16.6%
in nominal terms relative to the US$, closing at 3.56 pesos to the US$
at the end of the month. Currency movements in May brought the peso
depreciation for this year to 71.8%. The continued deterioration of the
peso is mainly due to continued concerns about the Duhalde government’s
ability to manage the crisis, as depositors seek every opportunity to
minimize their exposure to Argentine political and economic risk by
buying US$s. As a result, total deposits dropped by another 1.9 billion
pesos in May (-2.8%), following the 3.4 billion pesos decline (-4.6%) in
April. Simultaneously, international reserves plummeted 21.2% in May, to
US$ 10.3 billion. If Argentina is able to obtain financial backing from
the International Monetary Fund (IMF) – the government now anticipates
to receive the IMF approval by the end of this month - the current
reserve drain may be halted, at least temporarily, and the resulting
confidence boost could bolster the currency. Nevertheless, the Consensus
has been revised notably from last month to reflect the precipitous
decline of the peso in May.
Inflation moderation masks underlying pressures
of currency deterioration
Consumer prices rose 4.0% in May, well below market expectations of 6.0%
and a clear moderation from the 9.9% increase registered in April. The
May consumer price increase raised the annual inflation rate to 23.0%
from 18.4% in April. The wholesale price index rose at a more pronounced
pace, which indicates that inflation is likely to accelerate in the
coming months. Monthly wholesale prices continued to increase at a more
accelerated pace, rising 12.3% in May, which was down from 19.9% monthly
increase registered in April. The May data raised the annual wholesale
price increase to 72.3% from just 53.5%% in April. If the government
decides to liberate public utility service prices, inflation will rise
further. The government has said that public service tariffs will not be
increased until after an agreement is reached with the IMF. According to
the ministry of economy, electricity and gas prices are likely to be
raised by 10%, while prices on long distance telephone may receive more
substantial increases. The government believes that the currency will
stabilize this year if IMF support is achieved, which should serve to
provide a more favourable setting for price stability. In addition, the
depressed domestic demand and the fact that no substantial wage
adjustments have been undertaken so far, should provide an anchor
against more substantial price pressures. However, participants remain
pessimistic, expecting the rise in consumer prices to accelerate further
before abating somewhat next year.
Economy at standstill as international
assistance remains absent
Economic activity has ground to a halt as the government attempts to
secure legislative approval for key reforms in order to conclude
negotiations with the IMF and secure international assistance. Domestic
demand remains depressed as credit is virtually closed, investment is
stalled amid the financial system controls and a deteriorating currency
severely undermines the ability for consumption to rebound. According to
the National Statistical Institute (INDEC), activity in the
manufacturing industry dropped 12.4% in April over the same month last
year, an improvement from the 20.2% drop observed in March. Key behind
the April decline was the automobile sector, where output dropped 39.3%
over April last year. Similarly, non-metal minerals, automobile part and
textile production plummeted to one third of the levels reached last
year. The only sectors that registered positive growth were the basic
metals and tobacco industries where output rose 2.1% and 7.7%
respectively.
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