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Government
concludes debt restructuring
On 25
February, the Argentine government concluded its restructuring of US$
81.8 billion in outstanding sovereign debt, which has been in default
since December 2001. The government offered to swap US$ 43.2 billion in
new bonds for the existing obligations. Under the terms of the offer,
the government will pay back 30 cents on the US$ (including past due
interest). On 3 March, officials announced the results of the swap
transaction, which indicate that 76% of bondholders accepted the
government offer. The next step for the Kirchner administration is to
receive approval from the International Monetary Fund (IMF), which will
have to decide if the government acted in good faith with bondholders.
IMF rejection would mean that further lending from the fund would be
withheld for the time being. The government has not received additional
disbursements from the IMF since September last year, when the Fund
postponed outstanding payments on the existing 3-year, US$ 13.3 billion
stand-by agreement of September 2003 by one year. If the IMF approves
of the transaction, negotiations for a resumption of lending could
begin. A resumption of lending from the IMF would represent an
important credibility boost for Argentina in international markets.
Economy
rebounded strongly last year
Final
fourth quarter and full year national accounts data will not be released
until 17 March. However, recent data indicate that the economy
continued to proceed along a strong growth path in the final quarter of
last year.
In
December, the monthly indicator for economic activity (IMAE,
Estimador Mensual de Actividad Económica) rose 9.2% over the same
month in 2003 – below the 10.1% growth rate observed in the previous
month. According to the preliminary information based on the monthly
data, the economy expanded 8.9% in the final quarter over the same
quarter the previous year and growth for the full year reached 8.8%.
The final figure was well ahead of the Consensus Forecast estimate of
8.0% and the government’s forecast of 7.0%. A quarter-on-quarter
comparison confirmed the healthy growth. In the fourth quarter, the
economy
grew
2.72% in seasonally adjusted terms over the previous quarter, which was
down just a notch from the 2.83% figure observed in the third quarter.
Consumption growth robust as unemployment drops to ten-year low
Unemployment indicators support the view that economic activity
continued to develop favourably towards the end of last year.
In the
final quarter, unemployment declined to 12.1%, which was below the 13.2%
observed in the third quarter and the 14.5% reading registered in the
same quarter the prior year. In fact, the rate registered represents
the lowest rate in the past ten years. Declining
unemployment and lower interest rates are helping to rekindle private
consumption. According to the National Statistical Institute (INDEC),
supermarket sales rose 15.6% in December last year over the same month
the prior year, which almost tripled the 5.3% pace registered the
previous month. The pick-up was confirmed by seasonally adjusted
figures, which showed sales up 3.57% over the prior month, when activity
had declined 0.13%. As a result of the strong reading, the annual
growth rate in supermarket sales rose to 8.7% in December from 8.1% the
prior month. More recent data show that activity is likely to
accelerate further. The University Torcuato di Tella's (UTDT)
national consumer confidence index (ICC) reached 55.0 points in
February, which was up from 54.1 points in January and was the
highest level observed since March last year.
Healthy
domestic demand boosts investment but growth moderating
Investment also appears to have remained robust in the final quarter of
last year but the strong growth momentum observed in the first three
quarters last year seems to be moderating. Growth in the construction
industry is slowing, as the key construction activity indicator (ISAC,
Indicador Sintético de la Actividad de la Construcción) increased
6.9% in January over the same month last year. The January reading was
less than half the 14.8% pace observed in December of last year. The
slowdown is mainly due to less dynamic growth of oil-related
construction projects. As a result of the more moderate growth in
January, the annual average growth rate dropped from 19.9% in
December to 18.1%. Trade data confirm initial signs of moderating
investment growth, as capital goods imports dropped 14.6% in January
over the same month last year – the first decline since January 2003.
Export
growth remains healthy but stronger currency and moderation in global
growth loom
Exports
grew 18.5% in January over the same month the previous year. The
January reading was only a notch below the 20.8% expansion observed the
previous month. Manufactures of industrial origin were the key impulse
behind continued healthy export growth, in particular transport
materials and leather goods output. Nevertheless, the strong surge in
domestic demand also bolstered imports, which rose 17.9% over the same
month the prior year. As a result, the annual trade surplus narrowed
from US$ 7.2 billion in December to US$ 6.7 billion in January. The
moderation in global demand growth and the stronger currency could
undermine the sustainability of the healthy export expansion.
Furthermore, the exuberant import growth will give way to more moderate
growth rates amid higher prospects for a domestic demand slowdown.
Consequently, Consensus Forecast panellists expect both export and
import growth to moderate to virtually a third of last year’s level in
2005. As a result, the trade surplus will shrink to US$ 10.2 billion.
Activity
to slow but remain healthy
The
sustainability of the current economic rebound is still uncertain, as
export growth is slowing and investment is likely to moderate further.
Participants see economic growth slowing notably this year, as the
currency appreciation feeds through to slower export growth and an
absence of structural reform undermines a more sustainable recovery in
domestic demand. Consensus Forecast participants see
gross domestic product (GDP)
expanding by 5.5% this year, which is 0.4 percentage points above last
month’s estimate. Next year, growth will moderate further to 3.5%,
which is 0.2 percentage points below last month’s estimate.
Fiscal
balances strong despite narrowing primary surplus
In the
fourth quarter, the fiscal balance registered a deficit of US$ 755.9
million pesos (US$ 255 million or 0.2% of GDP). The fourth
quarter result was well below the 3.4 billion peso (US$ 1.1
billion or 0.7% of GDP) surplus registered the previous quarter and also
below the 9 million pesos (US$ 3 million or 0.002% of GDP)
surplus in the same quarter the previous year. The deterioration of
public finances was due to both lower revenues and higher expenditures.
Revenues dropped due to lower tax receipts (-2.9% over Q3) while
expenditures rose 13.1% over the previous quarter. As a result of the
fourth quarter reading, the fiscal surplus last year reached 11.6
billion pesos (US$ 3.9 billion), which was well ahead of the
annual primary surplus target of 10.0 billion pesos (3.0% of GDP)
agreed to with IMF under the terms of the stand-by agreement. The hold
on debt servicing resulting from the default on sovereign debt
obligations was a principal factor behind the current strength of the
fiscal accounts. In addition, strong economic activity also bolstered
income. The government is confident that last year’s strong primary
surplus of last year can be sustained in 2005. Consensus Forecast
participants expect fiscal accounts to remain healthy but anticipate a
significant narrowing in the non-financial public sector surplus to 1.5%
of GDP. Moreover, panellists expect the fiscal balance to narrow
further but remain in a surplus of 0.9% of GDP next year. |
