Argentina Economic and Financial Review, November 20-25 2009

UNCLAS BUENOS AIRES 001304 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EINV ETRD ELAB EAIR AR SUBJECT: Argentina Economic and Financial Review, November 20-25 2009 REF: 09 BUENOS AIRES 1175 ¶1. (U) Provided below is Embassy Buenos Aires' Economic and Financial Review covering the period November 20-25, 2009. The unclassified email version of this report includes tables and charts tracking Argentine economic developments. Contact Econ OMS Megan Walton at WaltonM@state.gov to be included on the email distribution list. This document is sensitive but unclassified. It should not be disseminated outside of USG channels or in any public forum without the written concurrence of the originator. It should not be posted on the internet. -------------- -------------- -------------- Rating Agencies unlikely to upgrade Argentina from speculative grade after debt restructuring -------------- -------------- -------------- ¶2. (SBU) Fitch rating agency reported November 19 that Argentina could be moved out of the current Restricted Default (RD) credit rating in the near term if the likely offer to holdouts, who did not participate in the 2005 debt restructuring, is successfully carried out. However, Argentina's ratings are likely to remain well into speculative grade territory, not only due to enduring macro and financial pressures, but because public debt ratios are still higher that the debt ratios of single B-rated sovereigns. Fitch believes that limited financing flexibility and concerns about the transparency of official data are impairing the creditworthiness of Argentina. ¶3. (SBU) In tandem, Moody's senior analyst Gabriel Torres stated November 19 at a conference in Buenos Aires that contentious politics and a lack of political stability are the principal negative factors weighing on the outlook for Argentina's credit ratings. However, he noted that the overall outlook for the country is trending more toward positive than negative ground. Torres said that a successful agreement with the remaining holdouts of Argentine defaulted debt would factor positively in a future review of the country's ratings status. [Note: Moody's rates Argentine sovereign debt B3, one of the lowest among emerging-market countries.] ¶4. (SBU) Similarly, Joydeep Mukherji, a sovereign ratings analyst at Standard& Poor's rating agency, stated in an interview November 18 that Argentina's effort to restructure its defaulted bonds is not a driving factor in S&P's outlook on the credit rating. He recognized that dealing with holdouts would be positive but, when asked whether Argentina's rating would be raised, he added that are other things to look at. [Note: S&P's rates Argentine debt B-, which is six notches below investment grade.] ¶5. (SBU) Meanwhile, on November 24 local dailies reported that even though the GoA is working to launch the debt restructuring with holdouts this year (by December 15 before the holiday season begins),the approval of the SEC and other foreign regulators would likely be later and delay the launching until January 2010. -------------- -- A Stocking Full of Coal -------------- -- ¶6. (SBU) Just one month before Christmas, the Argentine Domestic Trade Secretariat suspended Brazilian safety certificates for toy imports. On November 23, the official gazette carried resolution 894, which suspended recognition of safety certificates issued by the Brazilian National Institute of Weights and Measures, Standards and Industrial Quality. This came on the heels of a tense exchange between the Argentine and Brazilian presidents over trade restrictions at last week's summit meeting in Brasilia. According to Argentine press reports, the measure merely aligns the Argentine policy with existing Brazilian practices which have not recognized Argentine or any other foreign safety certificates on toys since ¶2007. Brazil exports three times more toys to Argentina than the southern trading partner sends north. In 2008, Argentina reportedly sold $US 1 million worth of toys while Brazil sent over $US 3 million south. As of September this year, the gap was even greater: Brazil exported $US 1.9 million in toys to Argentina, with Argentina exporting $US 400,000 in toys to Brazil. -------------- -------------- -------------- October primary fiscal surplus better than expected due to a deceleration of primary spending: The beginning of a trend? -------------- -------------- -------------- ¶7. (SBU) The GoA announced November 19 that the October primary fiscal surplus declined 73% y-o-y to ARP 700 million from ARP 2.5 billion a year ago but was better than private analysts' estimate of ARP 500 million. The better-than-expected result was due to a strong deceleration of primary expenditure, whose growth rate decreased from 28% in the first nine months of the year to 17% in October. This decline in primary expenditure is due to a reduction in subsidies to both provinces and the private sector. However, it is still unclear whether this reduction in expenditures is temporary or the beginning of a trend. In October, revenues reached ARP 21.1 billion (driven mainly by VAT, fuel taxes and social security contributions) and primary expenditure totaled ARP 20.4 billion (mainly social security payments and capital transfers to provinces to improve infrastructure, transportation and housing). Taking interest payments into account, the overall fiscal balance for October is a deficit of ARP 1.8 billion. Year-to-date the primary surplus is at ARP 9.4 billion. Private analysts estimate that the primary fiscal surplus will reach only 0.7%-0.8% of GDP in 2009, compared to 1.4% included in the 2009 Budget and 3.1% achieved in 2008. ¶8. (SBU) In a press conference, the Minister of Economy Amado Boudou and Secretary of the Treasury Juan Carlos Pezoa highlighted that the October results mark the end of a downward trend of the primary fiscal surplus after reaching the lowest level of the year in September at ARP 223 million. In previous months, GoA officials attributed the weak fiscal results to the international financial crisis and the implementation of a counter-cyclical fiscal policy to alleviate the effects of the global crisis. -------------- -------------- GDP recovery on the way: September monthly economic activity index up 0.6% y-o-y, second increase in a row -------------- -------------- ¶9. (SBU) INDEC announced November 20 that EMAE (the Monthly Economic activity index - an indicator of real GDP growth) increased 0.6% y-o-y in September, after increasing only 0.1% y-o-y in August and following a -1.5% y-o-y fall both in June and July. This increase was also stronger than the 0.2% increase private forecasters expected INDEC to announce. In the first nine months of the year, EMAE increased a cumulative 0.3% y-o-y, which contradicts many leading micro indicators and sector-level data that suggest a severe y-o-y contraction of activity to date. Most independent private sector estimates and surveys show that the economy has clearly been contracting since the fourth quarter of 2008 and estimate that GDP will contract by 2-3% in 2009. However, after depressed domestic demand conditions in the first half of the year, there are signs that the economy has stabilized and is moderately recovering, leading most analysts to revise upwards their estimates for 2010. GDP private estimates range from a mild 2-3% recovery to an optimistic 5-6% growth, especially under a scenario of very supportive external factors. -------------- -------------- Industrial production index up 1.5% y-o-y in October -------------- -------------- ¶10. (SBU) INDEC announced November 20 that industrial production increased 1.5% y-o-y in October, better than the market's forecast of a 0.5% increase. According to INDEC, during the first ten months of the year, industrial production declined 1.0% y-o-y. In October, the fastest growing industries were textiles (+9% y-o-y), paper and cardboard (+9% y-o-y),and chemicals (+8% y-o-y),while the oil refining and basic metals industries sub-indices decreased 18% and 8% y-o-y, respectively. Most analysts expect that the industrial sector will continue to show signs of recovery in the near future as the inventory cycle stabilizes and foreign demand strengthens. Growth is resuming in some of the country's main trading partners, especially Brazil, which is the destination of about 20% of Argentine exports. ¶11. (SBU) The industry-wide capacity utilization index reached 76% in October compared to 77% in October last year, recovering from its low of 67% in January, 2009. The sectors showing highest capacity utilization are textiles, printing and cardboard, and basic metal industries. The sectors with the lowest capacity utilization are auto production, and metal-mechanic and plastics industries. -------------- -------------- Official unemployment rate increases to 9.1% in the third quarter of 2009, about 2 percentage points lower than private estimates -------------- -------------- ¶12. (SBU) INDEC (National statistical agency) announced November 23 that Argentina's unemployment rate increased to 9.1% in the third quarter of 2009 (about 1.5 million people are unemployed), compared to 8.8% in the second quarter of 2009 and 7.8% in the third quarter of 2008. In sharp contrast to INDEC's statistics, non-government figures suggest that the actual unemployment rate is at least 2 percentage points above the official figures. This deterioration in the labor market is consistent with a decline of real activity between the fourth quarter of 2008 and the second quarter of 2009 (while the INDEC figures show just a mild deceleration of the economy). MARTINEZ