Argentina: Economic Impact of Farming Crisis

UNCLAS BUENOS AIRES 000828 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EAGR ETRD EINV PGOV AR SUBJECT: Argentina: Economic Impact of Farming Crisis Ref: Buenos Aires 803 and Previous This cable contains sensitive information - not for internet distribution. -------------- Summary -------------- ¶1. (SBU) Argentine consumer confidence has declined markedly due to economic disruptions linked to the 100-day long agricultural sector strike. A just released measure of popular sentiment on the general economic situation, employment, family income and purchasing power was down for the fifth straight month to its lowest index level since October 2004. While lags in GoA economic statistic reporting make it difficult to quantify the impact of the agricultural sector strike on the economy, respected local economists estimate that Argentina has already lost roughly 1% of GDP growth in 2008, equivalent to US$ 3+ billion in production. They note signs of economic deceleration that include declining rates of investment, broadly declining consumer purchasing power, and the lowest level of new employment generation in three years. Such deterioration in economic activity and concern over the inability to resolve the agricultural strike, exacerbated concerns over inflation, appears to be leading to a slight loss in confidence in the domestic currency and deposit withdrawals from banks, and falling prices for Argentine financial assets. More immediately, Embassy energy sector contacts confirm widespread shortages of refined petroleum products in the Greater Buenos Aires metropolitan area and northern and western Argentina. Such shortages have been exacerbated by hydrocarbon sector labor disputes that have disrupted production and refining operations, and made much more serious by transportation blockages recently led by independent truckers upset by the prolonged agricultural strike. All this said, even the most downbeat among local analysts continue to predict Argentina's 2008 GDP growth in the 5+% range, down substantially from the 8.9% GDP growth recorded in 2007 but still respectable. End Summary -------------- -------------- Ag Strike Impact: Deteriorating Consumer Confidence -------------- -------------- ¶2. (U) According to the Argentine Catholic University's (UCA) monthly economic expectations report, fully half of Argentines consider the nation's economic situation as "bad." A full 35% believe that the economy will worsen in coming six months vs. 22% who believe it will improve, the first time since 2004 that negative economic expectations have topped positive expectations. UCA's leading indicator, the General Index of Economic Expectations, which measures popular sentiment of the general economic situation, employment, family income and purchasing power, dropped 6.7% in May 2008 from prior month levels, its fifth straight month of decline and the lowest index level since October 2004. Mostly strikingly, 50% of those surveyed by UCA believe that this is a bad time to go forward with expensive goods purchases, a troubling sign of an economy whose growth over the past six years has been led by consistently strong consumer demand. -------------- --- Broader Impact of Strike on GDP Growth Uncertain -------------- --- ¶3. (SBU) That the agricultural strike is having a significant impact on Argentina's economy is accepted by all embassy contacts at local economic think tanks, with most pointing to lower overall levels of domestic investment (and lower consumer spending) as an immediate consequence. However, these analysts differ in their estimation of the strike's quantitative impact on broad GDP growth that, in turn, is influenced by a broad range of factors, including the impact of growing consumer uncertainty and inflation on real domestic consumption. ¶4. (SBU) Respected former Finance Secretary and now economic consultant Miguel Bein estimates that the now 100-day long agricultural sector crisis has already cost Argentina roughly 1% of GDP, some $3 billion of a projected $300 billion 2008 GDP. He continues to project 2008 GDP growth in the 7.5% range, on the assumption that agricultural exports currently withheld from the market will eventually make their way to overseas buyers later this calendar year. oted economic consultant Miguel Angel Broda likewise projects the strike's cost to date at 1% of GDP, lowering his previous projection of 6.8% GDP growth in 2008 to the 5.8% level. ¶5. (SBU) Local consulting firm Ecolatina takes a significantly harsher view of the economic impact of current uncertainties and projects 2008 GDP growth down sharply to 5.5%. They note current signs of economic deceleration, including the lowest level of new employment generation in three years, declining rates of growth of benchmark supermarket sales, and slowing increases in electricity consumption. Ecolatina also notes broadly declining purchasing power, with the value of total nominal wages up only 5.1% in the first quarter of 2008, less than half y-o-y rate of increase due to a combination of increased inflation and lower levels of employment creation. ¶6. (SBU) Longer term, local analysts are projecting 2009 GDP growth in the 3.5 - 5.5% range. Variations among analysts are largely a function of differing estimates on how quickly domestic consumption will slow due to inflation, the impact of likely energy shortages on industrial production, and the potential of a strengthening US dollar (given indications that the US Fed will raise interest rates to address domestic inflation issues) to diminish the competitiveness of Argentine industrial production given the Argentine Central Bank's de facto linkage of nominal peso exchange rates to U.S. dollar values. ¶7. (SBU) The Central Bank's (BCRA) response to volatility in the local financial sector -- attributed to the agricultural sector conflict and spiking inflation in February and March -- is also serving as a brake on growth. In order to reverse the run on the peso that started in March, the BCRA has forcefully intervened in currency markets by selling dollars, with sales of $1.7 billion in May alone (BCRA reserves have dropped from over $50.5 billion before the crisis to $48.3 billion on June 6). The intervention largely succeeded in stabilizing and even strengthening the peso, with the retail peso/dollar exchange rate ending May at about 3.1 ARP/USD, compared to the 3.2 ARP/USD level of April 30 and the high of 3.25 ARP/USD on May 9. The BCRA's intervention also resulted in a sharp increase in domestic interest rates, with the Badlar rate (the reference rate for one-month time deposits of over ARP 1 million) up from about 9% in early May to 17.9% on May 29 (the highest level since February 2003). Higher interest rates have led to sharply reduced bank lending, especially to industry, and the stronger nominal exchange rate is cutting into the competitiveness of Argentine industry. -------------- - Continuing Declines in Private Sector Deposits -------------- - ¶8. (SBU) Private sector deposits dropped ARP 5.8 billion (almost $1.8 billion) or 4% of total private sector deposits during May, resulting in the worst month for the financial sector since October ¶2001. Furthermore, an Embassy banking sector contact estimates that total capital outflow (capital flight) in May was $3.5 billion, compared to the $2.5 billion outflow in April. During the month, savings accounts had the worst performance, falling by 8% m-o-m (ARP 3 billion),followed by current accounts falling by 4% (ARP 1.7 billion). The first three weeks of May saw a rapid and constant drainage of private sector deposits. This partially reversed during the last week of May and first week of June helped by rising interest rates and BCRA measures to ease liquidity constraints. According to banking sector contacts, retail investors continue withdrawing their money from banks and/or converting peso deposits into dollar deposits. However, institutional investors are attracted by the high returns and are increasing deposits in pesos. ¶9. (SBU) At the same time, the great uncertainty created by the agricultural sector strike and inflation concerns have encouraged institutional investors to lower exposure to other Argentine financial assets. The Argentine stock market has fallen about 6.3% so far in June. Likewise, Argentine bond prices have plunged. Argentina's high sovereign risk premium over equivalent maturity U.S. Treasuries is near all-time highs (as measured by JP Morgan's EMBI Plus Index) and also by Argentina's Credit Default Swaps spread, which are also near their all time high. Reacting to events over this last weekend, GoA bond prices fell an additional 2-4% (depending on the instrument) from June 13 to close of business June ¶17. -------------- Energy Shortages Begin to Bite -------------- 10.(SBU) While electricity supplies remain normal (thanks in part due to improved water levels at hydroelectric generation plant sites) Embassy energy sector contacts report widespread shortages of refined petroleum products in the Greater Buenos Aires metropolitan area and the northern and western regions of Argentina. These shortages are exacerbated by significantly increased demand (due to GoA-influenced below market prices),hydrocarbon sector labor disputes that have disrupted production and refining operations, and of particular impact in the northern and western provinces transportation blockages caused of late by independent truckers upset that the agricultural strike has cut their incomes. Following a very cold week in Argentina, some rationing of natural gas to industrial clients in the Greater Buenos Aries area has been reported as well. -------------- Comment -------------- ¶11. (SBU) With GoA economic statistics reported with a lag, it remains dfficult to quantify the absolute impact on the economy of disruptions to national commerce, industrial production related to the now 100-day long agricultural strike. Revenue losses from foregone export tariffs appear largely temporal: It seems safe to assume that significant export tax revenues - at whatever export tariffs levels are eventually negotiated between the GoA and farmers - will eventually flow into GoA coffers. ¶12. (SBU) More troubling than temporal export tax revenue lags are declines in consumer confidence detailed here that will inevitably impact consumer spending, a principal driver of Argentina's rapid economic growth over the past six years. Deterioration in the political landscape and in economic activity, exacerbated by inflation concerns, appear to be leading to a loss in confidence in the domestic currency and deposit withdrawals from banks. Yet even the most downbeat among local analysts continue to predict Argentina's 2008 GDP growth in the 5+% range, down substantially from the 8.9% recorded in 2007 but still respectable. How nervous consumers adapt to slower growth and how they respond to growing uncertainties about the GoA's ability/willingness to take needed steps to deal with political turmoil and to control inflation will determine much about Argentina's near-term economic prospects. WAYNE