G.BREUER
DESDE 1869
G. BREUER's Newsletter
February 2006
Dear Clients & Friends,
This month’s headlines were dominated by measures against inflation through the tightening of the domestic beef price, the conflict with Uruguay around the pulp-mill projects and the political crisis in Santa Cruz.
All three matters could be seen as not-so-problematic, but in Argentina they are very important since beef, Uruguay and the domestic land of the President are always issues that capture attention.
The fight against inflation seems to be a very difficult mission. Beef prices were skyrocketing. And the high impact that beef prices have over inflation prompted very controversial measures by the Kirchner administration. Given that the agreements reached with some companies in that respect in the past seemed not to have worked, the government implemented a measure consisting in suspending beef exports for 180 days, thus tightening the control of beef prices.
This new measure did not prove effective so far, since the offer of cattle in the market remained very low. The press reported a drop in volume at the Liniers’ Market –main beef market in Buenos Aires- as a boycott by cattle producers.
In a threatening message, President Kirchner announced that this measure would be extended if producers persist with their policy of restricting the sending of cattle to the markets.
As we can see, the government is favoring subsidies of present consumption levels to avoid inflation over the increase in production and investments. And this measure comes at a very important time, when finally the world markets were opening for the Argentine beef after years of bans due to the foot and mouth disease.
This measure has not been well received by independent economists and press –and it was lambasted by cattle producers-, who remark that it implies a short term view of the beef problem, because if investments and earnings are not favored in the cattle industry, local production -even without exports- will not be enough to cover the domestic consumption artificially inflated by subsidized prices.
The result of this fights, the ones of the Government against inflation and against cattle producers, are not clear. The only sure thing seems to be that Argentine exporters are certainly the losers.
On another front, and regarding the conflict between Argentina and Uruguay for the construction of two paper pulp mills on the Uruguay River bank, the presidents of both countries met in Chile in an attempt to reach an agreement to put an end to this conflict.
Presidents Kirchner and Tabaré Vazquez seemed to have agreed to halt pulp-mills projects constructions and blockades to the bridges that link both countries for 90 days, so that in the meantime all parties could meet and reach a solution. Then, the agreement was denied by the Uruguayan president and, in practice, blockades never stopped and Uruguay is likely to file a claim before Argentina’s court requesting compensation for the loss suffered.
One of the major consequences suffered by Uruguay due to the existing conflict is the blockade of the bridges that linked both countries, which not only prevents the circulation of trucks carrying construction materials to the mills, but also brought about a decrease in the tourism revenues for Uruguay. Tourism is one of the most important industries in Uruguay. President Vazquez announced that the loss amounts to 200 and 300 billion dollars.
Finally, the other major political news of this month has been the resignation of Santa Cruz Governor, Sergio Acevedo, who used to belong to President Kirchner’s inner circle.
Former Governor Acevedo mentioned that he resigned for personal reasons. The tragedy that took place last month in a small Santa Cruz oil town called Las Heras, where a police officer was murdered during a riot organized by oil union workers, was quoted as the most evident reason for the distance created between President Kirchner and the Governor, resulting in his resignation.
However, there are many grounded rumors claiming that the differences between Governor Acevedo and Kirchner’s aids related to the handling of the money for public works in Santa Cruz were the actual factor that made the Governor to step down. In the President’s circles, Acevedo is accused of trying to create an independent political base from Kirchner in Santa Cruz. And this does not seem to be accepted in Kirchner’s world.
As we can see, Argentina always has political news of interest.
In the Economy front, the fierce fight against inflation constituted our first comment on the Politics section of this month’s report. It is worth mentioning that inflation is also –or mostly- a political issue in Argentina.
With respect to the economy -and also very related to inflation-, as it happened all throughout the current administration, President Kirchner’s government continues to keep a weak exchange rate of the AR peso (around 3 Pesos per Dollar) to boost Argentine exports and to make Argentina more competitive at the international markets.
However –since there is no such a thing as a free lunch- this policy may not be helping the government with its anti-inflation policy, and that is why the Central Bank sells Dollars each time the exchange rate climbs up to the rate fixed for the current year.
It will be interesting to see how the Central Bank manages this policy in the forthcoming months, when it faces some payments, and therefore the market expects said entity to start buying more dollars at the foreign exchange market, injecting pesos which can affect directly the Consumer Prices Index, at a market that already has enough pesos and prices that are being kept under control with very unorthodox measures.
We will see.
With warmest regards,
G.BREUER
Buenos Aires - Argentina
Tel: +54 114313 8100
Political News
One of the most relevant political matters of February 2006 is the rising of inflation, which has been threatening not only Kirchner’s administration, but also to the Argentines’ level of income. Indeed, in January 2006 consumer prices climbed 1.3% and it is expected to continue growing if the Argentine Central Bank persists with its policy of daily acquisition of dollars.
The government tried to control inflation by reaching different agreements with industries and individual companies so as to freeze the prices of different products. Some of the companies which have entered into agreements with the Government are: Group Danone, Procter & Gamble Co., Arcor, Jhonson & Jhonson, Kimberly-Clark and Unilever. Some agreements provide for a price-freeze for a year, while others for a freeze for a couple of months. Using mechanisms such as these agreements, Kirchner’s administration expects to achieve an inflation rate of 8% in 2006.
Some economists criticized the Government’s plan as ineffectual, arguing that the Government is applying inconsistent measures so as to attack inflation. On the one hand, its main target is to try to keep a weak exchange rate (pesos $3.08 per dollar) during 2006; therefore, the Central Bank has been purchasing dollars in the foreign exchange market, injecting pesos in the market and, on the other hand, the Government is trying to take control of prices that continue to rise as a consequence of the latter problem. For the time being, it seems that the Government will continue implementing this two-faced policy, and then, more price-freeze agreements are expected for the rest of the year.
Another concern of the Government is the outbreak of foot and mouth disease detected in the Province of Corrientes. Immediately after the Government‘s declaration of sanitary emergency, many countries banned Argentine beef imports (Brazil, Chile, Paraguay, Israel, South Africa, Colombia, Peru and Albania) while some others persisted with the importation of beef but from other provinces. As a result, the Government expects significant losses for the economy.
Also of concern are the violent strikes that took place in Las Heras, Santa Cruz Province. Three weeks of strikes halted the oil crude production, and resulted in the death of a police officer. Workers are claiming better salaries and the review of the income tax regime. It is not an easy task to solve this matter since the conflict involves the Government, oil firms and the unions.
Oil workers’ salaries are frozen since December 2001, and in Santa Cruz wages and cost of living increased more in average than in the rest of the country. The Government sent 300 policemen who work for the civil guard, but there is no plan yet to solve the base problem.
Economic News
Beating all forecasts for 2005, the Argentine Economy expanded 9.1%. This is the third consecutive year of growth and reports revealed that it is the most vigorous period of growth of the last 100 years. The economy has grown 9.0% in 2004 and 8.8% in 2003.
Industrial production has marked a record, having grown 7.7 % in 2005, surpassing the records of 1998. Important economic improvements were also in the vehicle manufacturing sector as well as in the construction sector.
The employment rate grew 9.7% in 2005 reaching the same levels that of 1998.
Mercosur News
In the Mercosur front, it is worth mentioning that Argentina and Brazil agreed on a Trade Competition Mechanism (MAC) the purpose of which is to regulate bilateral trade. This pact enables both countries to apply safeguards in the event that imports from one of the countries begin to harm the corresponding local market. This measure will have to be applied together with mandatory negotiations. If no agreement is reached between both countries, a group of experts will have to decide the case and will be able to impose import measures that will last one year minimum and four years maximum.
Finally, the dispute on the installation of the two paper pulp mills in the east bank of the Uruguay river has not been settled yet. At this stage of the conflict, Argentina may request the Hague Court an injunction to order Uruguay to stop the construction of the mills until a new environmental study is prepared. In the meantime, Uruguay may denounce Argentina before the United Nations if it does not resort to the Mercosur block, of which the two countries are members.
For the time being, it is still uncertain whether both countries are going to file those actions, but if they do so, a tradition of good and friendly relationships between Argentina and Uruguay may come to an end and a more distant link may follow.
Legal News
During January and February there have been no relevant news or draft legislation that may be considered of interest for foreign investors and/or attorneys.
G.BREUER NEWS
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Jorge Otamendi, partner at G. BREUER, wrote the article "Argentina: The CNDC has an active year" for the Country Reviews published at the Competition & Antitrust Review 2006, a Euromoney Yearbooks publication.
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We are proud to announce that G. BREUER has been recognized once more by Chambers Global 2006 as a “Leading Firm” in Argentina in Competition / Anti-trust, and Jorge Otamendi as a “Leading Individual” in the matter.
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You may consult the February 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
Please note that the information given in this bulletin is for general purposes only and does not aim to provide comprehensive legal advice on any issue.
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© G. BREUER, 2006