G.BREUER
Since 1869
www.gbreuer.com.ar
GB Newsletter
January 2005
Dear
Clients & Friends:
Welcome to
the January edition of our Newsletter, a monthly e-bulletin prepared by
G.BREUER to bring you a periodic update of some current events in
Argentina.
Please
do not hesitate to contact us if you need any further information.
Sincerely,
G. BREUER
Tel:
+54 11 4313-8100
Fax:
+54 11 4313-8180
Please note that the information given in this bulletin is for general purposes only. It does not aim to provide comprehensive legal advice on any issue.
If you do not want to receive this bulletin, or if you think someone else in your organization should be receiving it, please reply to this link indicating your full name, the name of the organization you work for, and the name of the person/s that would like to be added to our mailing list.
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Dr. Jorge Otamendi, Senior Partner of G.BREUER, has recently participated in the Merger Control Chapter for Argentina of the Competition Law Handbook 2004/05 edited by Global Counsel Handbooks that you can open by clicking here.
For any further information you may need on this respect, please do not hesitate to contact Dr. Otamendi joo@gbreuer.com.ar
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You will also find attached to this edition the last issue of our Boletín Informativo (BI) and of our Boletín Informativo Tributario (BIT), both of them publications we prepare with the latest legal and tax news for our Clients & Friends in Argentina and would also like to share with you.
INTERNATIONAL TRADE
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China
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In the wake of the agreements recognizing China as a market economy, Argentina has decided to sign two decrees to limit imports of Chinese goods to Argentina via tariff barriers. One decree says that imports of textiles can not exceed 7.5% of the market and the other says that imports in general will be limited if they cause a disruption in the local market for the local manufacturers of the same product. These safeguards can not be used for more than one year if the situation no longer exists. At the absolute maximum none of the measures can last beyond 2008. Despite these safeguards many Argentine companies are still concerned about the impact of Chinese and Brazilian imports (see below) and what the government will do to protect them.
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Mercosur
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Amidst tensions and disappointments with its progress, ten years after the South American trading bloc was formed, Mercosur members gathered for a meeting to discuss various plans for the future. At the meeting they confirmed the addition of Colombia, Ecuador and Venezuela as associate members. They also laid down the strategy for the formation of a regional parliament to be in place by the year 2006. Other topics included common external tariffs and the creation of a $72 million annual fund to reduce imbalances in less productive sectors of the region and to finance the institutions of the bloc. Mercosur confirmed an agreement with India at the meeting as well.
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This Mercosur meeting was held in a context of tensions between the two major partners, Argentina and Brazil, over asymmetries in trade between the two. In order to protect its local market Argentina has placed restrictions on imports from Brazil primarily on home appliances, shoes and cars. During the first quarter of 2004 imports from Brazil increased by 75% and this year Argentina’s deficit with Brazil is a record $4billion. Some Brazilian businesses are calling for retaliation against the agricultural imports from Argentina. In the meantime, Argentina had proposed safeguard measures to be included in the Mercosur agreement that would provide for automatic protection of sensitive industries. Argentina insists on that the solution is to apply the Asuncion Treaty which calls for free trade and coordinated economic policies. However, Brazil rejected the safeguard measures saying they were against the spirit of Mercosur. The President of Brazil, nonetheless, believes that it is important for the region for Argentina to be industrialized. The solution is still being worked out and in the meantime Argentina’s import licenses and private business arrangements continue to limit the entrance of certain goods. Both countries believe that it is still important to continue forward with Mercosur.
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The Central Bank is considering making an exception to the current rule which requires all exporters to bring back into the country 100% of the money earned in each transaction. The exception would be for those companies that have obtained financing abroad for an investment project that would increase its exporting capacity. In such case, these companies could keep money abroad as a guarantee of repayment of the financing.
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Next year the government is planning on reducing for certain industries the exorbitantly high withholdings of export income. However, the business sector is pressuring the government to decrease these withholdings for all industries that export claiming it will make industry more competitive. The speculation is that only value added products will receive this benefit.
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A meeting was recently held between Argentina and the EU in order to explore possible ways for the expansion of their bilateral relationship. Currently the EU is Argentina’s primary market for its exports.
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In 2004 an increase in luxury goods has generated an increase in imports. This year 30% of imports were related to electronic products and are 71% higher than last year.
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Argentina has been saying that they want to cancel their US$15 billion debt with the IMF through various installment payments (rather than one lump sum as was initially thought). The idea is to get out from underneath of the IMF’s control of the economy and periodic reviews. The IMF said up to now they have not received any official requests to pay off the debt but they are willing to talk about it. In any case, the IMF is certain that Argentina will need to discuss a new program once is finished with restructuring its debt. Government officials (Chief of Government and Senator/First Lady) traveled to Spain to explain Argentina’s plan to start to live without the IMF. While on the trip the First Lady criticized the IMF for its role in the country’s crisis.
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On the other hand, creditors are criticizing Kirchner for wanting to pay off the IMF, saying Argentina will eventually need additional funding from the IMF. They believe that paying off the IMF should not be their greatest concern right now. Creditors are also upset about the idea that the IMF would receive all its money now yet the creditors would have to accept a major reduction in their credit and would be paid back over the course of many years.
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Argentina claims it has $11billion available to repay the IMF that would not require it to resort to Reserves or alter the Central Bank’s charter. However, if Argentina restructures its debt by early 2005, government estimates indicate that they will only have enough money to meet IMF payments until the middle of the year without resorting to extraordinary means. As such Argentina recognizes that it will not be able to completely cut itself off from IMF funding but still hopes to change the conditions of its relationship.
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The US Secretary of State recently said that the US supports Argentina’s economic policy and Argentina’s Foreign Affairs Minister recognized that the US has been one of the country’s to provide the most support for “Argentina’s responsible efforts”, especially with regards to dealing with IMF.
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The Inter-American Development Bank recently approved several loans to Argentina for around u$s 500 million in order to provide social assistance and development of agricultural regions.
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President Kirchner finally signed the executive decrees authorizing the debt swap. The decrees contain the details of the offer to exchange debt which were sent to the various securities exchange regulators. In the decrees, New York, London and Japan were recognized as jurisdictions for resolving disputes.
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The Bank of New York (BoNY) was renamed as Argentina’s clearing and settlement agent on the promise that Argentina will put in place the appropriate formal contracts (and corresponding decrees). Argentina agreed to pay them substantially more in commission and to indemnify them against lawsuits from creditors in return for their promise to have the debt swap ready for January 17. After the renaming of BoNY the stock market went up 4% and performing bonds went up by 1.2%. The market continues to experience record increases on expectations that the debt restructuring is imminent.
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Argentina expects to launch a promotional road show, simultaneously in the US and Europe starting January 13 for around two weeks. The plan is still to launch the debt exchange January 17 and the country is already gearing up for this date. The US SEC has already given its go ahead. The other issue causing Argentina some concern is the potential for lawsuits in the US that could block the exchange from the Global Committee of Argentine Bondholders.
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The US which up to now has taken a relatively neutral role in Argentina’s restructuring has started to emphasize that it is important for Argentina to complete the debt structuring soon. The Paris Club has also emphasized the need for Argentina to restructure its debt and has said that it will not restructure the debt Argentina has with the organization until after it has successfully restructured its bonds and reinitiates the program with the IMF.
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Argentina has already started making initial contacts to bondholders in order to provide them with information regarding the debt swap. Argentina is also planning on setting up a call center to answer bondholders questions. The idea is to reach as many bondholders as possible.
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Economists now feel confident that Argentina will be able to obtain close to 75% acceptance for the debt swap due to decrease in international interest rates and return of BoNY. Also for the bonds that are tied to GNP growth predictions for 2005 have generated optimism.
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Improvement on an international level has increased the price of bonds and a decrease in US T-bonds have made Argentina’s debt restructuring deal more attractive.
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Inflation for next year, according to several studies, is expected to be around 7 to 8%. Despite expected increases in certain sectors the feeling is that inflation will still be under control.
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A recent study indicates that foreign companies have earned (profits and dividends) $1.6 billion so far this year compared to $566 earned last year. Many companies also brought capital into the country to pay income tax but others have taken money out to send profits to headquarters.
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The unemployment rate has dropped to 13.2% in the third quarter of the year the lowest in the past five years which reached a peak around 20%. However, if those who are not receiving government assistance are not included the rate is closer to 17.6%. Also, many are still employed under substandard conditions.
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The Economic Commission for Latin America and the Caribbean recently produced a report which shows that Latin America will grow by 5.5% in 2004, which is the largest growth in the past 24 years.
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The government in November had to buy a substantial amount of dollars that were in the market in order to maintain the peso-dollar exchange rate stable. This purchase in turn caused an increase in pesos in the market which the government had to counterbalance by using market instruments in order to avoid inflationary pressures caused by increases in the monetary base. On an international level the peso depreciated by 2.2% in November as compared to October partly due to the depreciation of the dollar. The impacts of the depreciation include an increase in exports and potential for more investment to flow into the country (provided investors feel there is a certain level of judicial security).
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A recent New York Times article, recognized Argentina’s unexpected and amazing recovery from the economic collapse in 2001 but the article also mentions that the future for Argentina is still not so clear because growth has to a large degree been based on high commodity prices, current account surplus and large levies on exports but it still has to restructure debt and eventually entice investment back to the country.
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At the recent 10th annual United Nations session on Climate Change held in Buenos Aires, President Kirchner took advantage of the opportunity to criticize the “double standards” of the wealthier nations that demand poorer nations to repay financial debt under their terms yet refuse to assist in the effort to stop global warming. These comments were mostly aimed at the US who has refused to sign the Kyoto Protocol requiring nations to reduce emissions.
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Relations with Cuba have recently been strained after Fidel Castro denied President Kirchner’s request to allow a Cuban doctor to visit her son in Argentina. Now the focus is on trying to reestablish the relationship and smooth over any differences which includes a change in the Argentine ambassador for Cuba.
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Argentina is slated to be a non-permanent member of the UN Security Council next year and has agreed to work with Russia in this context. The Minister of Foreign Affairs, Rafael Bielsa was appointed to be Argentina’s representative on the Council despite internal tension regarding the handling of the Cuba situation.
LEGAL
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During the month of January all courts are closed in Argentina.
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Utility rates have been frozen since the devaluation of the peso several years ago in order to avoid rates from skyrocketing. In the meantime, Argentina has been negotiating increases with each privatized company. Europe, which has significant investments in these companies, is pressuring Argentina to finish these negotiations. They claim that not being able to raise rates is affecting their ability to make needed investments. Supposedly by the end of January about 13 agreements will be completed. However, at the negotiation table Argentina has decided to request shareholders to not only give up lawsuits in exchange for the agreement but to also hold Argentina harmless in the event of any judgment against it brought by former shareholders.
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Congress recently approved several amendments to the Customs Code including the prohibition of trade transactions involving fake merchandise, redefinition of taxable base for certain trade transactions and the ability of customs to sell or donate seized merchandise.
If you wish to obtain specific advice or further information, please contact Jorge Otamendi joo@gbreuer.com.ar or Alberto Navarro anavarro@gbreuer.com.ar
G. BREUER
25 de mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313-8100
Fax: +54 11 4313-8180
E-mail: info@gbreuer.com.ar