Argentina - Economic Briefing August 2004

IMF Discussions Complicated by Government’s Lack of Progress

The IMF has postponed the disbursement of funds, despite government compliance with economic growth and fiscal targets.  Fund officials demand that the government adopts more ambitious fiscal targets, advances on utility contract renegotiations and implements reforms to the current co-participation revenue arrangement between the federal government and the provinces.  Finally the Fund also instigated the government to conclude the lagging debt restructuring with international investors.  Further complication of the IMF negotiations could significantly undermine the sustainability of the current economic recovery.

IMF postpones disbursement under stand-by agreement
The International Monetary Fund (IMF) has postponed the disbursement of a US$ 728 million payment agreed to under the terms of the US$ 13.3 billion stand-by agreement approved in September last year, despite the fact that the government has met key economic targets related to fiscal and growth objectives.  Fund officials have decided to postpone the final approval, citing disagreement over fiscal targets, a lack of progress on utility contract renegotiations, the deferral of reforms to the current co-participation revenue arrangement between the federal government and the provinces and delays in the debt restructuring with international investors.  The government is arguing that the over-compliance in major economic targets should warrant a waiver on reforms.  However, officials are likely to attempt to progress more rapidly in the coming months since other loans from multilateral institutions are tied to IMF approval and further delays would require tapping reserves.

Economic growth robust but slowing amid stronger comparison base
Recent data suggest that economic activity remained healthy in the second quarter of the year but that the high growth rates observed in the past are beginning to drop.  In May, the monthly indicator for economic activity (IMAE, Estimador Mensual de Actividad Económica) increased 4.9% over the same month last year, which was down from the 5.7% expansion observed in March.  The May slowdown was the second consecutive monthly deceleration.  However, a month-on-month comparison indicates that the economy remained on a positive expansion path.  In seasonally adjusted terms, economic activity rose 0.88% in May over the prior month, when the IMAE had declined 1.90%.

Growth in supermarket sales slows
May supermarket sales suggest that lower interest rates and declining unemployment continue to drive robust private consumption activity.  According to the National Statistical Institute (INDEC), supermarket sales rose 11.3% in May over the same month last year, which was a deterioration over April, when sales activity rose 15.3%.  The strong sales pace observed in clothing, shoes and household textiles along with household electronics and articles drove up retail sales in May.  The current deceleration reflects the fact that the low comparison base of the prior year is gradually giving way.

Industrial production accelerates slightly
Industrial production also continues along a favourable growth path, despite the energy crisis.  In June, output rose 11.5% over the same month last year, slightly above the 11.3% pace observed in May.  Motor vehicles, printing and publishing along with non-metal mineral output experienced the strongest expansions.  The recovery in industry remains broad-based, as only base metal and oil processing output dropped and most sectors remained in healthy growth territory. 

Construction activity remains buoyant
Similarly, construction activity remains well in double-digit growth territory.  In June, the construction sector’s output rose 30.7% over the same month last year, up notably from the robust 22.9% expansion in the prior month.  Growth remained strongest in oil-related construction activity, where activity was up 55.7% over June last year, while housing construction exhibited the lowest growth rate with a 24.6% rise in output.

The current deceleration in overall economic activity reflects the stronger comparison base last year, when the economy was embarking on an expansion trajectory.  However, economic growth continued to proceed at a robust pace in the second quarter.  The government remains confident that the economy will grow 6.0% this year.  Consensus Forecast participants share the government’s optimism and anticipate that activity will rise at an even more pronounced 7.0% pace.  This month’s Consensus Forecast figure was revised downward 0.1 percentage points, which puts an end to the trend of consecutive monthly upward revisions since October last year.  Additionally, next year, growth is expected to slow notably to 3.9%.