Argentina - Economic Briefing March 2004

Debt Negotiations Overshadow Progress on Economic Policy (continued)

Consumption growth accelerates amid decline in unemployment and stronger exchange rate
The healthy currency appreciation, improved credit conditions and declining unemployment are helping to rekindle private consumption.  According to the National Statistical Institute (INDEC), real supermarket sales rose 6.7% in December last year over the same month the prior year, which was up from the 6.0% growth rate observed the previous month.  The pick-up was confirmed by seasonally adjusted figures, which showed sales up 0.8% over the prior month, when activity had declined 1.2%.  More recent data show that activity is likely to have accelerated further.  The University Torcuato di Tella's (UTDT) national consumer confidence index (ICC) reached 59.9 in February, which was up from 57.2 in January and was the highest level observed since the inauguration of the indicator.

Investment benefits from domestic demand pickup
Investment also appears to have remained robust in the final quarter of the year and the growth momentum seems to be carrying over into this year.  Businesses are now taking advantage of the rise in domestic demand and improved credit conditions to step up investment activity.  According to INDEC, construction activity remained buoyant, as the key construction activity indicator (ISAC, Indicador Sintético de la Actividad de la Construcción) increased 28.3% in January over the same month last year, which was down from the 31.8% pace observed in December of last year.  Growth remained healthy across all sectors, in particular road and infrastructure works.  Trade data confirm the robust investment growth, as capital goods imports rose a staggering 433.3% in January over the same month last year – almost double the December pace.  As a result, 12-month accumulated capital goods imports increased 132.7% over the same period the previous year.

Improved global setting drives up exports but stronger currency looms
According to trade data, exports last year expanded 15.9%, following on a 4.7% contraction observed the prior year.  High oil and soy prices boosted exports notably.  However, the strong surge in domestic demand also bolstered imports, which rose 53.7%.  As a result, the trade surplus narrowed from US$ 16.4 billion in 2002 to US$ 15.6 billion last year.  Even though export growth will benefit further from the pick up in global demand, the stronger currency is likely to undermine the sustainability of last year’s robust expansion.  In fact, in January, exports rose only 4.6% over the same month last year, which was down from the 22.9% pace observed in December and represented the lowest rate registered since December 2002.  Imports, on the other hand, continued to accelerate, with growth reaching 100.1% over the same month last year, which was up from 92.3% in the previous month.  The exuberant growth rates of imports will give way to more moderate growth rates once the comparison base – in the wake of the crisis imports dropped a staggering 55.8% in 2002 – returns to more normal levels.

Activity to slow but remain healthy
The sustainability of the current economic rebound is still uncertain, as export growth is slowing and investment is likely to remain strong only if the Kirchner administration progresses in its negotiations with the IMF and international creditors.  Participants see growth slowing notably this year, as the currency appreciation feeds through to slower export growth and an absence of structural reform undermines a more sustainable recovery in domestic demand.  Consensus Forecast participants see gross domestic product (GDP) expanding by 5.8% this year, which is 0.3 percentage points above last month’s estimate and even above the government’s 5.5% estimate.   Next year, growth will moderate further to 3.7%, which is 0.1 percentage points below last month’s estimate.