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Currency deterioration persists unabated
The peso continued its depreciation trend in June, loosing 6.3% of its
value to the US$, following a 16.9% deterioration in May. The currency
regained some lost ground in the first week of July with the peso
appreciating 6.8%. At 3.55 pesos to the US$ on 5 July, the currency is
now 71.9% weaker than before the devaluation in January. The lack of
definition on the economic policy front and failure to advance with
negotiations with the International Monetary Fund (IMF) are key reasons
for the continued US$-buying by Argentines, who are seeking to place
savings in a safer haven. As a result, international reserves continued
their downward path in June, dropping from US$ 10.3 billion in May to
US$ 9.8 billion at the end of June. If the reserve drain persists at its
current pace, the Central Bank will no longer be able to intervene in
the foreign exchange markets and the currency could enter into a
freefall, particularly if no resolution is found to the current economic
policy stalemate. Consensus participants expect the currency to continue
along its current depreciation trend.
According to INDEC, consumer prices rose 3.6% in June, down moderately
from the 4.0% spike observed in May. The June increase brought the
annual inflation rate to 28.4%. Meanwhile, as in previous months, the
wholesale price index experienced a more notable 8.2% increase, down
slightly from 12.3% monthly increase registered in May. The June figure
raised the annual wholesale price increase to 87.2% from 72.3%% in May.
The government’s agreement with business and union organisations on 2
July to raise the average wage by 12%, or by 100 pesos to 908 pesos per
month, may serve to increase price pressures further. The Consensus has
not yet factored the wage agreement into inflation forecasts this year
but, even so, participants have again revised their forecasts upward to
89.3% from 82.8% in last month’s publication.
Ally of Economy Minister appointed as new
Central Bank president
On 24 June, Central Bank vice president, Aldo Pignanelli, was appointed
as the new Central Bank president. Pignanelli replaces Mario Blejer, who
resigned over differences in Central Bank policy with Economy Minister
Roberto Lavagna. Blejer and Lavagna were unable to bridge their
differences over the most effective manner to phase out current deposit
restrictions, the desirability of providing discount loans to banks and
the need for the Central Bank to intervene in the foreign exchange
markets by selling reserves to bolster the peso. In his resignation
letter, Blejer also lamented the government’s lack of respect for the
independence of the Central Bank. The new president is considered a
closer ally of Lavagna and is likely to make the Central Bank more
malleable to political influence, which could serve to further undermine
the credibility of Central Bank monetary policy and the stability of the
peso. Blejer, a veteran of the IMF, is expected to become the chief
negotiator for the Argentine government with the multilateral
organisations once conversations begin in earnest.
Government calls early elections
On 1 July, the Duhalde administration announced that it would advance
the date for presidential elections six month to March 2003.
Congressional and provincial elections may be held simultaneously with
the presidential poll. Primaries for presidential candidates will be
held within four months after which campaigning will begin. The new
administration would take office on 25 May. The Duhalde government was
selected by the legislature to carry out the remaining presidential term
until December 2003 but the lack of popular legitimacy has hampered the
government’s ability to successfully impose the reforms necessary to
pull the economy clear from recession. Voters are likely to seek a
candidate that represents not only a clear break with the existing
economic policies but also with the traditional political elite. Given
the current social crisis, candidates that appeal to the immediate needs
of the broader population are in favour and several potential candidates
of the left are currently clear leaders in polls.
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