Argentina - Economic Briefing March 2004

Debt Negotiations Overshadow Progress on Economic Policy

The government continues to drag its feet on debt restructuring, unwilling to cede from its rigid negotiating position, despite notable strengthening in fiscal balances.  The long awaited public utility rate hike implemented this month is an important first step towards more transparent economic policy.  However, further progress on structural reform and the successful conclusion of the debt renegotiation would provide a more solid foundation for the rebounding economy.

Government acts on public utility tariffs and inflation likely to accelerate
On 13 February, the government announced that gas and electricity tariffs would be raised by 12% and 35% respectively.  The electricity price increase was made effective retroactively starting 1 February, while gas tariffs were hiked on 1 March.  The lion share of the increase is targeted at large industrial customers with high consumption levels rather than individuals.  Fuel prices have so far remained frozen for two years but are likely to follow suit by April or May.  As international oil prices have increased substantially since the beginning of the year, oil companies are eager to implement the long anticipated hike in prices.  The February increase in gas and electricity prices is anticipated to exert some pressure on wholesale prices.  In fact, according to the National Statistical Institute (INDEC), wholesale prices rose 1.27% in February, contrasting the 0.41% decline observed in January.  As a result, the annual variation in wholesale prices rose from 1.2% in January to 2.1%.  In contrast, consumer prices remained contained in February, rising 0.10%, which was down from the 0.42% increase registered in January.  Due to the moderate February consumer price increase, the annual inflation rate continued to drop from 2.7% in January to 2.3%.

Inflation likely to rise from current low
The question for consumer prices in the coming months will remain whether companies choose to absorb the rise in prices by accepting lower margins or pass through the increase to consumers.  Given that domestic demand is experiencing a strong rebound and that many retailers have been holding off for with passing through the pronounced wholesale price increases, consumer prices are likely to experience a pick up in the coming months.  In fact, Consensus Forecast participants expect consumer prices to accelerate throughout the year with inflation rising to 7.2% by the end of the year, which is almost double the rate observed last year.

Government receives continued IMF support
In February, the International Monetary Fund (IMF) performed its second review of the targets agreed to with Argentina under the terms of the US$ 13.3 billion stand-by loan arrangement of September 2003.  The IMF is scheduled to release a disbursement of US$ 3.1 billion on 9 March if Fund officials find that Argentina is complying with the targets.  On the fiscal front, the government is well on target to meet the requirements set out in the agreement.  In January, the government posted a fiscal surplus of 1.6 billion pesos (US$ 550 million), already exceeding the IMF target of 1.1 billion pesos set for the first quarter.  The Economy Ministry estimates that the primary surplus for the first quarter will reach 2.5 – 2.7 billion pesos in the first quarter, which represents 3.0% of GDP and is well above the 2.5% target agreed to with the IMF.  The long-awaited gas and electricity rate hikes will also be viewed favourably by Fund officials.  Furthermore, economic growth remained buoyant.  However, progress on structural reform and debt restructuring is absent.  Bondholders of Argentine sovereign debt, now principally represented by the Global Committee of Argentina Bondholders (GCAB), are requesting that the IMF withhold the March disbursement given that the improved fiscal balances provide a substantial cushion for government officials to improve the current restructuring offer to pay 25 cents on the dollar.  The IMF is likely to approve the disbursement but will demand progress on debt restructuring.  Further delays will postpone a needed rebound in foreign investment and could thus postpone a more sustainable economic rebound.

Economy rebounded strongly last year
Recent data indicate that the economy continued to proceed along a strong recovery path in the final quarter of last year.  In December, the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) rose 10.9% over the same month in 2002 – well above the 9.5% growth rate observed in the previous month.  The December figure brought growth in the final quarter to 10.3% over the same quarter the previous year and, as a result, growth for the full year reached 8.4%.  Even though last year’s annual growth rate was the highest observed in ten years, the strong performance also reflected a weak comparison base in 2002 and is far from sufficient to repair the damage done to the economy by four years of recession.  In order to reach pre-recession GDP levels, the economy would have to grow at roughly the same annual pace for the next two years.