G. Breuer's Newsletter
March 2009
Dear Clients & Friends,
We are sending to you the monthly edition of our Newsletter where you will find an update on:
Please do not hesitate to contact partners Jorge Otamendi and Diego Fissore for any specific question you may have after reading it or for any other issue you may need advise on.
Best regards,
G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
In this March 2009 there is very important political news related to the election date in Argentina. Such date was advanced for June 28, 2009 and thus we can say now that election time officially started in Argentina on March 20, 2009, when the law advancing the October election was published in the Official Gazette.
Of course, the political environment in Argentina was already influenced by 2009 being an election year, but, still, because the elections were to be held in October, the campaigns had not started, and other problems were seen as more urgent and demanding more attention from the people, such as the farm conflict, the US Dollar price and the crime rate. But at the end of the second week this March, the Executive Power announced that it would send to Congress a bill to advance the elections from October 2009 to June 28, 2009. Immediately, the political agenda of both the ruling party and the opposition changed, and the issue took front-pages.
The overwhelming majority of the opposition rejected the proposed date change, stating that it was yet another attack to the validity of the constitutional rulings, since the October law was fixed by a law already approved by Congress, and that consensus of all political forces, rather than necessary majorities, were necessary to change such date. And consensus was not there. The Government, using arguments of dubious value, said that it was necessary to “get over” the elections to be able to concentrate on the urgent and important problems that the international crisis has brought about to Argentina. Also, the omnipresent Mr. Kirchner said that these elections should be used as a vote of confidence for his wife, who is, according to him, being pushed from all sides by people who do not have support of the population -presumably referring to the representative of the farming sectors-.
Needless to say, the opposition held that those arguments were false, since the solutions to the problems should come first and then all parties should focus on elections and campaigns. The opposition argued that the actual reason behind the anticipation of the elections was the fact that the economic variables of Argentina do not look good and that they will not improve in 2009, reason for which the Government prefers to advance elections since the accounts and issues will be controlled -tightly?- up to June; however, after that, nothing is guaranteed and another crisis may be lethal for the Government.
With narrow margins, the proposed bill was passed in the House of Deputies and with a somewhat better margin was approved by the Senate, not without certain Ks typical moves such as co-opting two provincial members of the Senate from the opposition after advancing budget funds to such province. Pure Ks behavior.
So now, the election date is fixed for June 28 and the race started. These are midterm elections for all jurisdictions in Argentina. And the control of Congress is at stake, because the mandate of half of the representatives and senators are expiring. And in addition, according Mr. Kirchner, these elections will be sort of a ratification -or not?- for his wife’s administration. As it is easy to imagine, these are key elections.
Some jurisdictions are very important. Traditionally, the province of Buenos Aires is the most important one, since 37% of the Argentine population lives in such jurisdiction. Mr. Kirchner himself was evaluating heading the lists, but all of a sudden announcements were stopped. Apparently, opinion polls are not favoring him as much and he is considering stepping aside. If he does, Mr. Kirchner will have to create an argument for that, likely based on his not being qualified to run in the Province of Buenos Aires -as he is not, since his last domicile of voting was the Province of Santa Cruz- although if he takes such a step it will be certainly construed as an implicit acknowledgment of defeat. There is still time to define the issue.
What is true and uncontestable is that the Dissident Peronist Party, which is a branch of the Peronist Party that opposed Mr. Kirchner, chose its authorities, while the head of that list, Mr. De Narvaez, is certainly increasing daily voting intention in his favor in respected opinion polls.
Other key districts, like the City of Buenos Aires, Province of Santa Fe and Province of Cordoba, are less news because most likely there the ruling party will do very poorly. Among other causes for that anticipated bad performance are the farm conflict and a strong middle class opposed to the Kirchner style and that is seeing that problems are not solved in this Administration. For the ruling party, all its hopes are placed in the Province of Buenos Aires and in the Greater Buenos Aires, an area with substantive weight in the country, where the most important concentration of poor population lives. That is why the growth by Mr. De Narvaez in that area is really worrisome for the Government.
Currently, there is no reliable information as to the status of the race, but soon there will be news on that.
What is sure now is that nothing in the coming months will be solved or decided because the country will be campaigning. And there are many issues to be taken care of –we will point out some here-, and if anything goes wrong with any of those, it may mean a fatal blow for the Government. For the first time, the Government may be skating on thin ice. And as some analysts say, the advancement of the elections may mean that the Government problems will be advanced as well.
Other news worth mentioning has to do with the unresolved farm conflict. This conflict, which was very significant for Argentina in 2008 and proved to be a milestone -negative- for the Kirchner’s administration, has changed its characteristics. These days, Argentina is in the middle of a deep crisis and the farming sector is critically affected by a national drought and by the fall in commodity prices. No boom like in 2008. Additionally, the export duty levels are so high -35% on soy, and then the rest of the taxes- that they are driving the most important cash generating machine of Argentina out of business. And although demonstrations are not as popular as in 2008, the tension in the agricultural provinces is so high that a small incident may cause a big problem. In turn, the Government is taking measures that show its unwillingness to solve the problem, since in order not to show concessions to the sector it reassigned funds but not to the farmers -by decreasing export duty rates- but to provincial jurisdictions. In brief, the conflict is very tense, with all parties taking radical positions. So, no solution is at sight and anything may happen. Hopefully, no violence will arise. But this issue may bring about very bad news for the Government in the now imminent elections.
There are other two issues worthy of mention, related to non-political administration matters that are starting to have consequences into politics. The main concern of the population in Argentina during this electoral year, aside of the economic situation, is related to the called “lack of safety” or crime rate. The crime rate, particularly in the Greater Buenos Aires area, is increasing highly particularly in degrees, since there are more violent crimes than ever before. The Government has not been able to find satisfactory solutions on the matter, and that may rest plenty of votes also, despite the spinning and the accusations to the press that it overreacts to the events.
The other extra-political issue worthy of mention is an outbreak of dengue in a Northern Province of Argentina, called Chaco. The outbreak is said to come from a neighboring country but it is hardly impossible to hide at this point that the Provincial Government has not taken any precautions, and now the outbreak is extending even to the Province of Buenos Aires, creating health concerns in the most important urban concentration in the country. Very likely, lower temperatures will put an end to the issue, hopefully.
These issues, the unresolved farm conflict, the unresolved safety issue with growing crime rate and the health concerns totally unknown for Argentina in the past are creating serious doubt as to the capacity of the current administration (Mr. and Mrs. Kirchner’s) to effectively run the country. The question is what would have happened if no economic tail winds would have been there to help in the first 5 years of the administration? As said before, any alteration in the current very tight and tense equilibrium in all of these major problems may make the answer to this question too obvious, and thus alter the results of the June 28 elections.
As always, we will have interesting months ahead.
This month the most important economic news is related to the pressure on the US Dollar exchange rate, which this month increased steadily and daily. The Central Bank´s reserves, with the help of other official banks such as Banco de la Nación Argentina or Banco Provincia, were enough to restrain the value of the currency. In 2009, the value of US Dollar has increased at least 10%, rising from 3.40 pesos per US Dollar to 3.73.
The Central Bank has been selling around 100 million US Dollars per day into the market in order to maintain the value. In the last days of March, an agreement was reached with China’s Central Bank in order to swap Pesos for Yuans and help replenish the Argentine Central Bank’s reserves if necessary. The exact terms of the agreements are unclear, and concerns were raised by Argentine industrial groups saying that such an agreement may be the door for a wide range of Chinese goods to enter the Argentine market.
Most analysts agree on that the bringing forward of the elections and the conflict with the farm sector are two of the main factors that put pressure on the currency.
It is unclear how the Dollar battle will end. Analysts report that the Central Bank may abandon its policies of “controlling the US Dollar Exchange Rate” for a “Controlling Devaluation of the Peso” policy, because reserves are not endless. We will have to wait and see. For those who do not understand why the value of the US Dollar is so important in Argentina, we say that historically such exchange rate is the main indicator of confidence in the Government and that Argentines preserve themselves from economic crisis -and they have had very many-, placing savings in US Dollars to return to the domestic markets when the rules are clear. Thus, with official indexes totally unreliable, the Dollar exchange rate may be one of the most credibly economic data of Argentina these days. That explains the battle.
Regarding inflation rate, this month INDEC -official statistics bureau- published several indexes. February’s IPC was reported in 0.4%, while several private firms obtained an index that was twice such percentage. INDEC also published a correction of the January GDP, and it placed it at a positive 2.3% -just a slowdown-, while private estimates reported that the activity fell at least 3% from a year earlier. Private firms say that official GDP estimations are unreliable because the INDEC considers Economic Activity Monthly Estimators ("EMAE") that are unusually high.
As to the public debt issue, there was information this month about a proposal to honor public debt payments due on August 2009 (Boden 2012), which consists on an advanced payment with the requirement of the acquisition of new securities maturing in 7 years. The information was not well received since it gives the idea that a new exchange was coming.
Overall, there is consensus that the Argentine economy is greatly slowing down. In a sign of deterioration, two economic pillars of the domestic activity have slumped in recent months: commodities’ exports fell 56% in January as compared with the same month last year, and auto production was also down 56% in February.
To conclude, the economic news of this month is not very promising. But we have to remain optimistic, since it is also said in Argentina that if political conflicts are solved, particularly the farming issue, at least exports will resume their level and that will bring new strength to the economy.
You may read the March edition of our Boletín Informativo, G. Breuer’s monthly publication focused on general legal information sent to our Argentine clients & friends.
For more information on local legislation, you may read the March edition of our Boletín Informativo sent to our Argentine clients & friends.
G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
Nota: Este es un servicio gratuito que proveemos a nuestros clientes & amigos. La información aquí contenida, de carácter general, no deberá ser considerada como asesoramiento legal específico.
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© G. Breuer, 2009.