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Government
approves debt restructuring offer
On 1 June, the government provided holders of defaulted Argentine
sovereign debt with an improved restructuring offer for US$ 99.4 billion
in defaulted public debt. In September last year, the country
offered a US$ 22.5 billion package which repaid 25% - albeit without any
accrued interest. The new package includes the past due interest
that has been long demanded by creditors and thus amounts to a much
higher US$ 38.5 billion repayment. In addition, the government is
providing a gross domestic product (GDP)-linked extra payment option,
whereby interest payments to bondholders are raised if nominal GDP
exceeds the government forecast. Finally, the government has
pledged to raise the primary fiscal surplus from 2.4% of GDP for this
year to 2.7% of GDP in 2005.
However, Argentina is
still offering to repay only a quarter of total debt. The chief
bondholder representative group, the Global Committee of Argentina
Bondholders (GCAB), has rejected the new offer, claiming the
restructuring plan still falls well short of the terms offered under
previous sovereign debt restructurings. The Argentine debt
principal reduction is well above the 35% Russian offer in 1998 and also
exceeds the 40% cut adopted by Ecuador in 2000. Despite objections,
the government hopes to execute the restructuring and new bond issuance
at the end of next month. However, discontent investors are likely
to seek to stall the process unless the government comes forward with a
more attractive proposal. Further delay in the negotiations is
likely to undermine the sustainability of the current recovery, as the
investment rebound is likely to subside quickly.
Energy
shortages cut back industrial production
According to the National Statistical Institute (INDEC), industrial
production rose 9.3% in April over the same month last year. The
April figure was well below the 15.7% expansion observed in March and
represented the first single digit expansion since November 2002.
Declines in tobacco product (-26.8% year-on-year), basic metals (-4.7%
yoy) and oil output (-3.7% yoy) accounted for the slowdown in overall
industrial production. All other sectors, however, remained in
positive growth territory with motor vehicle (+33.7% yoy) and printing/publishing
(+24.7% yoy) production providing the strongest upward momentum.
In part, the deceleration in April industrial production reflects a
higher comparison base. However, seasonally adjusted data suggest
that the energy shortages also might play a role in the slowdown.
According to seasonally adjusted data, industrial production dropped
3.9% over the prior month – the strongest decline since January 2002.
The government attributed
the April deceleration to the current shortage in gas and electricity
supplies, which has forced authorities to impose restrictions on
domestic energy consumption and to limit natural gas exports to other
countries in the region (Uruguay and Chile) in order to avert a more
pronounced slowdown of the booming economy. The current energy
shortage has emerged as a result of the government-imposed public tariff
freeze, which remained in place for almost two years and prompted
utility companies to cut back investment notably. The combination
of stalled investment and rapid acceleration in economic activity has
provoked nationwide energy shortages. Officials have so far
attempted to avert full scale energy rationing but have imposed
consumption restrictions on wholesale consumers in industry and are now
offering lower prices for households and businesses that reduce
consumption voluntarily. The so-called Plan for Rational Energy
Usage (PURE, Plan de Uso Racional de la Energía), which entered into
force on 1 June, hopes to cut back energy consumption by 5% compared to
the same period last year for both residential and commercial users who
consume more than 600 kWh bimonthly. The penalties for
non-compliance include stiff tariff increases, which range from 22% to
50%.
Economy
proceeds on strong expansion path in first quarter
Despite the looming energy shortages, the economy continued along a
strong growth trajectory in the first quarter of the year.
According to INDEC, the monthly indicator for economic activity (IMAE,
Estimador Mensual de Actividad Económica) rose 11.9% in March over the
same month last year. The March figure was well above the 10.1%
expansion observed the prior month and confirmed the acceleration in
economic activity observed since January. Furthermore, seasonally
adjusted data confirm the pickup, as activity added 1.0% over the prior
month, reversing the 0.3% drop observed in February. As a result
of the strong March reading, gross domestic product (GDP) is likely to
have grown 10.4% in the first quarter compared to the same quarter last
year. The preliminary first quarter figure is well ahead of the
Consensus Forecast estimate of 8.8% last month. However, given
that the low comparison base of the previous year is gradually subsiding
– economic growth accelerated from 5.4% in the first quarter to 8.7%
in the second last year -- the strong growth rates are likely to give
way to a more moderate expansion in economic activity. In fact,
the GDP expansion in the first quarter actually slowed from the 11.3%
pace observed in the final quarter last year. |
