G.BREUER
SINCE 1869
GB Newsletter
January 2006
Dear Clients & Friends,
Hoping you started this 2006 in peace, we would like to take the opportunity of this first publication of the year to renew our best wishes to all of you for this new year.
2006 brings its own challenges for everyone and in particular for our country and the South American region, where we see with optimism the electoral results of Chile and with much less concern than a couple of weeks ago the new Bolivian government.
We do observe with concern the future of Mercosur fifteen years after the Asunción Treaty of 1991, which appears to be suffering once again, now due to the recent threats of the minority partners of not supporting it through different free trade bilateral agreements with the United States. Perhaps Uruguay and Paraguay –if they follow the successful path of Chile- have reasons to think that Brazil and Argentina are acting and discussing -without its participation- matters that from the never materialized Ouro Preto Customs Union in 1994 had to have been already left behind, such as the reestablishment of the –promised to abandon- Safeguards. The truth is that the free circulation of goods and services through the four founding territories is far from being a reality, simply due to the absence, among others, of a sole customs or of macroeconomic harmonization principles, which have practically provided nothing to the smallest member countries. Maybe this is the time when they can develop –without passions or resents- the basis for the awaited FTAA where alternatives beneficial to the 21st century commerce are negotiated.
Argentina, after three magnificent years of economic and institutional recovery, looks at 2006 with optimism. The miraculous recovery and GDP growth, according to the forecasts, shall continue in the new year. We are aware that there is still much to do and that we are not yet the preferred destination of those who suffered the 2001 and 2002 crisis, but the truth is that Argentina is in the correct path and we are very optimistic about the immediate future of our country.
As every other month, below you will find some interesting news.
With warmest regards,
G.BREUER
Buenos Aires - Argentina
Tel: +54 114313 8100
Political News
Argentina commenced the year 2006 making effective the cancellation of its debt with the IMF (US$ 9.5 billion). That payment was not of simple accomplishment, since in order to reach the necessary reserves as provided in the Emergency Decree 1599/2005, the Argentine government had to seek financial aid from Venezuela through the sale of bonds maturing 2012. The first sale was for $ 496 million and the second one for US$ 270,4 million bonds.
In exchange for those reserves, belonging to the Argentine Central Bank (BCRA), the Argentine government extended to the BCRA a non-negotiable ten-year maturity bond, in US dollars, with an interest rate similar to that paid by the IMF. Such bond will be reflected in the financial statements of the BCRA, so that in the BCRA´s books the use of reserves for payment to the IMF will appear to be of neutral effect. The answer to that question is still unknown. However of course, it is not neutral for the market that was speculating how will affect the Argentine economy a level of reserves that is almost to US$ 10 billion lower than before.
The payment to the IMF was, more than anything, of great political significance and will decrease both IMF’s pressure and supervision on Argentina’s accounts. However, Argentina remains being a member of the IMF and subject to its annual review.
The government’s new objective is tackling the increasing inflation. 2005 showed that the inflation issue needs more than simple cosmetic measures. During 2005, the CPI (Consumer Prices Index) raised 12.2% exceeding the Argentine Government’s expectations (the forecasted inflation was between 8 and 11 percent). The Government is trying to remedy this situation with a number of price agreements that are currently being put in place.
The latest news revealed that some basic food manufacturers (major dairy producers) agreed to freeze prices of nine basic products for the whole year, subject to conditions. This is the beginning of a process in which Kirchner’s administration will try to reach more agreements to control inflation. The effectiveness of those agreements is looked skeptically by most people in Argentina, not only by economists.
With reference to the proposed amendment of the system to appoint members of the judiciary (backed by Kirchner’s Administration and seen by many as a way to increase control over the judiciary by the current a administration), Kirchner’s party is confident in that it will obtain the votes necessary to pass such law (129 votes at the Lower House). The truth of that is also to be seen.
The bill has not been passed yet since the ruling party faced a unified opposition of almost all the political spectrum, with the leading head of former Economy Minister Ricardo Lopez Murphy. This proposed legislation is to be treated within the extraordinary sessions of Congress. This bill seems to have made the opposition -and Argentines in general- realize that more attention should be payed to the preservation of the quality of Argentine political institutions, which have been under attack by both the Argentine 2001 crisis and by a long tradition of strong presidential leadership.
Economic News
Argentina closed year 2005 with a 3.5 percent fiscal surplus over GDP.
December’s tax revenues raised 31%, compared with the same month the previous year, to 10.5 billion pesos and 2005 ended with tax revenues of AR$ 118.5 billion. According to the 2006 budget bill, the Argentine Government expects an increase of 11.8 percent in tax revenues.
All of these figures are indeed good news since, according to analysts, the current administration needs to sustain strong tax revenues to achieve its target of a 2006 primary budget surplus of 3.3 percent of GDP. Due to the strong economic activity that Argentina is experiencing, such target is likely to be achieved.
As previously informed, budgetary surplus will be essential for the Argentine government to be able to recover reserves, which will be very important to tackle inflationary threats.
International Trade
The main news on this front are related to the renegotiation of natural gas prices between Argentina and Bolivia. Bolivia said that, for assessing the correct price, it will start working on the basis of a regional market price that will fundamentally benefit the country. This issue arose at the time when Evo Morales was elected as the new president of Bolivia.
It is worth mentioning that although energy exports in Bolivia are run by Spain’s Repsol YPF and Brazil’s Petrobras, it is the Bolivian government who is in charge of price negotiations. Beyond this fact, it is also important to notice that Evo Morales had said that he will try to nationalize the gas business.
Additionally on the international field some worries brought about the news of a possible trade deal that Uruguay would be negotiating with the US. Some confusing declarations made believe that the agreement was already signed, which was later denied.
A treaty in that respect would need to be approved by Mercosur members since permission in that sense is mandatory according to the rules that governs the Mercosur’s trade block.
What is impossible to deny is that Mercosur needs to be rethought. And that seems to have been understood by Presidents Kirchner and Lula who discussed several matters related to Mercosur and trade imbalances this week in Brasilia. For sure, news will soon follow in this field.
Legal News
(i) Laws
We mention as an important legal news that, through Law 26.077, general public emergency status declared in the peak of the 2001 crisis was extended up to December 31st, 2006. The law was passed amidst allegations of manipulations of the voting mechanism by members of Congress, who alleged that opposition congressmen could not express their views. This law, and the way in which it was approved, is a good example of the way in which the current administration handles power and its relation with Congress.
(ii) Law Projects
Among all the bills which where filed before the Congress in December 2005, it is worth mentioning the bill dealing with the refinancing of mortgages, which attempts to amend Law 26.062 (passed for suspending foreclosures of single family homes). The proposed bill most relevant provisions are:
1) Only those persons who are actually debtors or that are facing foreclosures will be able to request the opening of the refinancing mortgage system.
2) In order for the system to apply, the original amount of the corresponding loan shall not exceed of AR$ 300,000.
G.BREUER NEWS
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You may consult the January editions of our Boletín Informativo and Boletín Informativo Tributario, G. BREUER's publications focus on general legal information and tax issues, respectively, sent to our Argentine Clients & Friends.
Please, do not hesitate to contact partners Jorge Otamendi (joo@gbreuer.com.ar) and Alberto Navarro (anavarro@gbreuer.com.ar) for any specific question that may arise after reading this edition as well as for any other issue should you need advise on.
G.BREUER
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313-8100
Fax: +54 11 4313-8180
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© G.Breuer, 2005