Argentina - Economic Briefing April 2003

Economy on Rebound As Election Unlikely to Alter Trajectory

Despite the uncertainty regarding the outcome of the upcoming 27 April presidential elections and legislative elections later this year, the economy is headed for a strong rebound. The depreciation of the peso has served to bolster the external sector, which is driving the economic recovery, whereas domestic demand will recover more slowly amid tight credit and deteriorating real incomes.

Beginning to exit from the recession
Gross domestic product (GDP) declined 3.6% in the fourth quarter 2002 over the same quarter the previous year. The fourth quarter figure represented an improvement when compared to the 9.8% decline in the prior quarter. In fact, seasonally adjusted data show that economic activity rose 0.8% over the third quarter, when activity had increased 0.6%. Nevertheless, a strong contraction in the first two quarters dragged down the decline in economic activity for the full year to 10.9%, which was marginally better than the 11.3% Consensus figure and the preliminary figure of an 11.1% drop suggested by monthly data from the National Statistical Institute (INDEC).

According to the fourth quarter data, the majority of sectors remained in deep recession led by fishing (-41.0% year-on-year), construction (-16.4% yoy) and financial intermediation (-14.7%). On the upside, manufacturing experienced a strong growth spurt with a 4.4% year-on-year expansion, followed by hotels and restaurants (+2.7% yoy) and electricity, gas and water (+1.3% yoy).

Domestic demand remained depressed in the fourth quarter of the year, contracting 7.8% over the same quarter of the previous year, but improved markedly over the third quarter (Q3: - 16.5% yoy). Leading the decline was a 16.5% drop in investment (Q3: - 36.7% yoy), followed by a 6.5% contraction in consumption (Q3: - 12.6% yoy). Exports picked up further speed in the fourth quarter with the expansion accelerating from a 3.4% year-on-year pace in the third to a 6.4% rate in the fourth quarter, whereas imports dropped 29.8% year-on-year (Q3: - 49.5% yoy).

More recent data confirm that the economy is beginning to emerge from recession. In January, the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) rose 4.0% over the same month last year, which was up from the 0.6% increase registered in December. The January figure confirmed the slowly improving economic setting, as it represented the seventh consecutive monthly improvement. In seasonally adjusted terms, economic activity rose 1.0% in January over December, when the IMAE rose 0.5%.

However, January supermarket sales illustrate that the recovery remains erratic. Limited credit availability and high interest rates forestall a more pronounced rebound of private consumption. According to INDEC, supermarket sales were down 31.5% in January over the same month last year, which represented a worsening over December, when sales activity dropped 28.0%.

Industrial production, on the other hand, continues along a favourable trajectory. In February, output rose 17.4% over the same month last year, up from 16.4% registered in January. Textile products and automotive vehicle production were the key drivers behind the healthy February expansion, registering stellar growth rates of 178.8% and 96.0% respectively. More importantly, the recovery of the country’s industrial sector is broad-based. The only sectors not registering double digit growth rates over the same month last year were food/drinks and oil refining activities, where output rose 0.1% and 3.1% respectively.

Participants expect the current pickup in economic activity to gain strength throughout the year. In fact, the economy is anticipated to enter positive territory in the first quarter already and GDP is anticipated to rise in the first half of the year. Furthermore, the pace of economic activity will accelerate in the second half. As a result, forecasts for annual growth have been lifted 0.7 percentage points from last month. While the external sector is likely to be a strong determinant of growth this year, exports are seen rising strongly, a robust recovery in the domestic economy next year will help lift economic activity further, with GDP seen rising to a 4.4% pace.

Decree mandates accelerated phasing out of rescheduled deposit freeze
On 28 March, a decree by President Duhalde finally lifted the freeze on rescheduled deposits, the so-called corralón, which had been in place since the end of 2001. As of 1 April, depositors with funds of up to 42,000 pesos can withdraw the full amount for cash at banks. The Presidential decree also shortens the repayment deadline for deposits that exceed 42,000 pesos by three months. Therefore, deposits between 42,000 and 100,000 pesos have to be renewed for another 90 days but funds will now be available as early as 30 June 2003, instead of the prior 30 September. Similarly, deposits that exceed 100,000 pesos must be renewed for 120 days but could be repaid as early as 31 July 2003. Finally, the decree also addresses the pending issue of "re-dollarization", which resurfaced as the result of a 6 March Supreme Court ruling, which dictated that US$ denominated deposits be reconverted. However, the decree states that US$ deposit holders will receive a market rate equivalent (2.9792 pesos/US$) in local currency and compensation for the market rate differential in the form of a 10-year government bond. The deposit freeze phase out it not anticipated to result in a deposit run but instead depositors are expected to be induced to keep their funds in financial institutions, as banks continue to offer attractive interest rates and deposit options.