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Currency deteriorates amid higher foreign currency demand and Central
Bank selling
The peso lost 4.7% of its value in nominal terms against the US$ in
November, which followed upon a 2.5% appreciation the prior month. The
November weakening represented the strongest monthly depreciation
observed this year and brought the currency to 2.98 pesos to the US$ at
the end of the month. Stronger than expected dollar-buying by large
companies ahead of the holidays in the United States and Central Bank
intervention were key behind the November depreciation. Nevertheless,
the peso still remained 12.9% stronger than at the end of last year.
Furthermore, Consensus Forecast participants expect the currency to
appreciate again in the final month of the year with the peso closing at
2.92 to the US$ at the end of 2003. Next year, the currency should
remain stable, with Consensus panellists anticipating very moderate
depreciation of 2.6% to 3.00 pesos to the US$.
Consumer prices continue downward amid stronger currency and public
utility tariff freeze
In November, consumer prices rose 0.25%, which was more than half the
0.59% rate observed in the prior month. The strongest monthly increases
were observed in food and beverage prices and health costs, while
household goods and clothing prices dropped. As a result of the
moderation in price pressures in November, the annual inflation rate
dropped to 3.6% from 3.9% in the previous month. Wholesale prices, in
contrast, rose 1.05% in November, almost twice the 0.53% rise in October.
Nevertheless, the annual wholesale price variation remained in negative
territory at 0.2%. Despite the notable pickup in economic activity,
inflationary pressures have remained subdued, as the strengthening of
the currency and the public utility tariff freeze continue to avert any
upward surge. Participants appear to expect the holiday spending to
exert some upward pressure on prices towards the end of the year, as the
annual inflation rate is anticipated to rise to 4.1%. Next year,
heightened economic activity and increased prospects for a public
utility tariff hike will drive up consumer prices. Consensus Forecast
panellists expect annual inflation to rise to 7.6%, which is up a 0.1
percentage point from last month’s figure.
Debt
negotiations proceed slowly and cast shadow over recovery
The government has promised to present a formal debt exchange proposal
to investors by mid-January 2004. General guidelines of the government’s
negotiating terms had been released in September. Finance officials had
offered debt holders a pay back of 25% of the nominal principal amount
of eligible debt outstanding (US$ 94.3 billion), proposed that accrued
interest from January 2002 (US$ 11 billion) be written off and insisted
on an extension of existing maturities at lower rates. Bondholders
continue to reject the government’s offer, claiming the size of the cut
in principal is unacceptable and that the government should provide a
35% pay back and offer to negotiate on accrued interest. A US$ 725
million lawsuit by bondholders to seek compensation in Argentine assets
based in the United States was filed in New York and has been granted a
stay until February 2004. If the government should fail to provide more
negotiating flexibility, bondholders may decide to pursue litigation to
recover losses incurred by the default on Argentine debt. In the absence
of successful negotiations, investment in Argentina is likely to fall
short of levels needed to provide a more sustainable footing to the
economy that is still rebounding from a dire three year recession.
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