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Postponement of tariff hikes provides backdrop for favourable inflation
trend
In August, consumer prices rose 0.02%, which was down from the 0.45%
increase observed in July and resumed the declining inflation trend
observed since March. Strong declines in clothing and recreation prices
were the key behind the moderate monthly increase. As a result of the
August consumer price figure, the annual inflation rate dropped from
7.3% in July to 4.9% - the lowest level observed since February 2002.
The trend of successive monthly wholesale price declines, which had been
observed since February of this year, reversed in August, with prices
rising 1.46% over the previous month – the highest monthly rate
registered since September last year. Nevertheless, on an annual basis
wholesale prices entered negative territory for the first time since the
devaluation in 2002. This indicates that underlying inflationary
pressures may have subsided for the time being, as pent up price
pressures from the wholesale sector subside. The continued postponement
of public utility tariffs and the stronger exchange rate promise to keep
inflationary pressures at bay for the time being. Participants have been
gradually lowering their annual inflation estimates to reflect the
downward trend in inflation observed throughout this year. This month,
panellists expect inflation to reach 6.7% by year-end, which is down 0.9
percentage points from last month and 5.7 percentage points below the
forecast from three months ago. Unlike this year’s figure, the Consensus
inflation estimate for next year has remained stable with participants
seeing the annual rate at 8.8% - a 0.1 percentage point drop from last
month.
Deadline for new IMF agreement approaching
On 9 September, the government is required to make a US$ 2.9 billion
payment under the terms of the transitional US$ 3.0 billion stand-by
credit arrangement with the International Monetary Fund (IMF) signed in
January this year. The government has already made significant progress
towards meeting some key IMF conditions. In August, Congress approved a
reform bill of the Central Bank charter to strengthen the monetary
authority’s autonomy and a measure to compensate banks for the losses
incurred in the wake of the 2002 devaluation. However, a successful
conclusion of negotiations with the IMF will rest upon an agreement over
primary fiscal surplus targets and the renegotiation of public service
contracts needed to pave the way for public utility tariff hikes. The
government is reluctant to adopt economic policy that is considered
detrimental to social welfare and which jeopardises the nascent economic
recovery. In practical terms this means that officials will resist
raising the primary fiscal surplus beyond 3% of GDP for the next three
years and will insist on raising public service tariffs very gradually,
following renegotiations of contracts with the private utilities. The
government hopes to reach a three year agreement with the IMF that would
enable refinancing US$ 10.5 billion in payments due to the multilateral
organization. Unless the government and the multilateral organization
reach a new agreement to refinance the country’s maturing debt,
Argentina will be forced to either default on its obligations with the
IMF or make a payment amounting to 21.4% in the current international
reserves. Default would postpone beginning negotiations with
international debt holders and the absence of an agreement with the IMF
would have investors increasingly weary about the sustainability of the
government’s economic policy.
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