Argentina - Economic Briefing June 2004

Government Improves Restructuring Offer Amid Healthy Economy

Bolstered by a strong economic expansion, the Kirchner government has offered international creditors with a new debt restructuring plan.  The government has increased the share of outstanding sovereign debt that officials are willing to repay and included past-due interest in the restructuring offer.  Meanwhile, the economy is humming ahead but activity is likely to slow, as the stronger comparison base of last year begins to kick in.

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.