Argentina - Economic Briefing May 2004

Growth Remains Buoyant but Energy Deficit to Inhibit Potential for Another Banner Year (continued)

Primary surplus bolstered amid growth-induced improvements in tax take
On 20 April, the government reported that the primary fiscal surplus reached 3.98 billion pesos (US$ 1.37 billion) in the first quarter, which was more than triple the 1.1 billion pesos (US$ 378 million) surplus agreed to with the International Monetary Fund (IMF) under the terms of the US$ 13.3 billion stand-by agreement approved in September last year.  The strong first quarter figure resulted from the record March surplus of 1.42 billion pesos (US$ 490 million).  The government believes that compliance with the full year fiscal target may be achieved by June of this year.  Furthermore, authorities hope to use the excess revenues to raise pensions and public sector wages, which have been frozen since the 2002 devaluation.

Currency appreciation continues amid strong export growth
Despite the Central Bank’s direct intervention in the currency markets to stem the currency strengthening, the peso appreciated 0.1% in April, which was down from the 2.2% appreciation observed the prior month.  As a result, the currency closed at 2.86 pesos to the US$ by the end of the month.  The April appreciation had the currency trading 2.4% stronger than at the end of last year.  The current exchange rate strengthening reflects increased US$ earnings by exporters, who are benefiting from the pick up in global demand and rising international commodity prices.  Furthermore, demand for US$ remains subdued as the government’s need for foreign currency is stemmed by continued delays in debt restructuring.  However, participants do not anticipate the current trend to persist as the currency is anticipated to depreciate 2.9% from its current levels to reach 2.95 pesos to the US$ by year-end.  Furthermore, next year the exchange rate is anticipated to rise further, as the currency is expected to depreciate 4.1% to close 3.07 pesos to the US$.

Inflation receives upward push amid booming economic activity
In April, consumer prices rose 0.85%, which notably exceeded the March figure of 0.60% and was well above market expectations of a 0.55% variation.  A strong upward surge in textile (+2.5%) and recreation prices (+1.3%) accounted for the pronounced April increase.  Higher than anticipated monthly increases earlier in the year were attributed to public utility tariff hikes but the April price surge reflected growing consumer demand, which is finally enabling retailers to mark up prices.  The April rise in consumer prices raised the annual inflation rate from 2.3% in March to 3.1%.  At its current level annual inflation is well below the target range of 7% to 11% underlying the Central Bank’s monetary policy programme for this year.  However, accelerated economic activity and gradual currency depreciation are likely to exert some upward pressure on prices throughout the year, as the Consensus Forecast sees annual inflation rising to 6.5%, which is down 0.1 percentage point from last month.  Next year, inflation is anticipated to rise further to reach 6.9% amid continued healthy economic activity.