Argentina - Economic Briefing August 2004

IMF Discussions Complicated by Government’s Lack of Progress (continued)

Consumer price increases remain controlled
In July, consumer prices rose 0.46%, which was down from the 0.56% increase observed the prior month.  As a result of the July price increase, the annual inflation rate remained unchanged over the prior month at 4.9%.  While food and clothing prices actually experienced declines, the drop was insufficient to offset the strong price rise in recreation costs (+5.42%).  The continued postponement of utility rate liberalization and a more stable exchange rate are helping to contain consumer price increases for the time being, despite the robust economic expansion.  However, Consensus Forecast participants expect price increases to accelerate further in the second half of the year with annual inflation seen as rising to 7.3%, which is up 0.1 percentage point from last month’s figure but continues to be at the lower end of the target range of 7% to 11% underlying the Central Bank’s monetary policy programme for this year.  Furthermore, inflation is anticipated to rise further next year to 7.5%, despite the slowdown in economic activity, as the anticipated acceleration of currency depreciation is likely to exert additional pressure on prices.

Central Bank intervention helps sustain currency depreciation
In July, the currency depreciated just 0.4% over the prior month to close at 2.98 pesos to the US$.  The July depreciation contrasted strongly with the more pronounced 3.4% weakening observed in June.  The current exchange rate fundamentals point towards further strengthening, as US$ earnings by exporters who are benefiting from the pick up in global demand are rising and international commodity prices remain strong.  Furthermore, US$ demand is subdued, as the government’s foreign currency needs are being curbed by delays in debt restructuring.  Nevertheless, ongoing Central Bank intervention with purchases of up to US$ 40 million on average daily in the past several months has helped stem currency appreciation observed earlier in the year.  Consensus Forecast participants expect the currency to experience a nominal appreciation of 1.0% this year to close at 2.96 pesos to the US$ by year-end.  The currency is anticipated to depreciate next year by 3.6% to reach 3.07 pesos to the US$ by year-end.

Trade balance deteriorates as export growth moderates
Export growth moderated notably in June from 20.3% growth in May to just 1.0% over the same period last year.  The June reading represented the third consecutive month of deceleration.  Furthermore, seasonally adjusted figures show that exports dropped 13.0% over the previous month - the second monthly decline this year and the highest contraction observed since August last year.  While most sub-sectors experienced growth in June, primary product exports declined 30.5% over the same month last year, as soy exports to China stalled due to temporary trade disruptions and copper exports to Korea dropped.

Import growth accelerates
Meanwhile, import growth continued its accelerating trend amid the strong pick up in domestic demand.  In June, imports rose 77.5% over the same month last year, which was up from the already booming 64.0% increase observed the prior month.  Rising fuel (+213.2% year-on-year), passenger vehicle (+197.4% yoy) and capital goods imports (+141.2% yoy) drove up purchases.  In seasonally adjusted terms, imports rose 2.9% over May, when growth had reached 1.8%. 

Trade surplus drops rapidly
As a result of the moderation in exports and the strong import expansion, the annual trade surplus dropped to US$ 13.3 billion from US$ 14.2 billion in the prior month.  Participants, however, see the current narrowing in the trade balance to revert and expect the annual surplus to rise to US$ 14.0 billion by the end of this year.  Next year, however, the trade surplus is seen as dropping from its current highs to US$ 12.6 billion, which is down moderately from the US$ 12.7 billion anticipated by Consensus participants last month.