G.BREUER
DESDE 1869
GB Newsletter
July 2005
Dear Clients & Friends,
News in the Argentine winter recess are dominated by the legislative elections to be held next October, although the London terrorist attacks were given plenty of attention and called for the solidarity of the media and the unanimous disapproval by every sector.
Below, we provide a monthly panorama of the political and economic front, making special reference to the negotiations with the IMF, the recent regulations regarding the inflow of capitals and foreign trade in Argentina.
Sincerely,
G.BREUER
Buenos Aires - Argentina
Tel: (54-11)4313-8100
Internal Political Front In View Of Next October’s Elections
In the internal political front, the central problem is that our governing party –PJ (Partido Justicialista) or peronist- has finally been divided into two main forces: one responding to President Kirchner, on the one hand, and another responding to his mentor and former president, Eduardo Duhalde.
The division became evident with the launching of the candidacy of their respective wives last week, who will run for different political parties for the senate seat in representation of the political district that defines all elections in Argentina: the province of Buenos Aires. Forecasts predict a victory of Cristina Fernandez, president Kirchner’s wife.
Most businessmen consider that the division of the PJ shall not affect the normal administration of the government affairs. However, some rumors even suggested that it was possible a departure by Economy Minister, Roberto Lavagna, who was originally appointed by Eduardo Duhalde. We think it is unlikely that such departure will take place, at least, until October, when Kirchner shall try to consolidate his government after an electoral success.
Political divisions as the one mentioned before do not help in a country particularly needed of internal quietness to face the important and almost permanent persisting fronts: possible inflationary outbursts, social dissatisfaction –expressed through a countless number of strikes and labor conflicts-, insufficient investments, and endemic poverty and corruption, to mention just a few.
The IMF Front. Public Debt
In the last days, the board of directors of the IMF finally approved the formal commencement of the negotiations with Argentina aiming at reaching a new long-term agreement, though without approving or referring to the eventual refinancing of the debt in the amount of US$ 12,230 million that Argentina never stops paying.
Although Argentina wants to reach a long-term agreement, the truth is that the business community is not that much concerned as to whether said agreement will be reached or not, since Argentina continues paying on time, and thus it is repaying its debt like never before –no disbursement of new funds are taking place).
The approval by the IMF, that also depends economically from its large debtors, has been very opportune at a time where the old-fashioned critical discourse against the IMF was starting to reappear.
In the meantime, the IMF continues to press Argentina to increase its primary surplus, necessary to service debt payments. Argentina is resisting such pressure because it could put in jeopardy the economic growth. Some analysts note that the IMF holds positions that can be considered difficult to reconcile with its own suggestions, since on one hand it is asking to increase the country’s surplus but at the same time it is suggesting that most of the taxes that account for the surplus be repealed.
Before negotiations have even commenced, the IMF has already taken a hard line with Argentina in its written reports questioning the Central Bank’s autonomy in attacking inflation, which should be the priority instead of the exchange rate. Some IMF directors also question the recent controls on capital inflows.
Several analysts consider very important that Argentina secure a deal with the IMF to roll over debt before August, when Argentina is scheduled to pay some $2.8 billion. Within the next days, a mission shall leave for Washington to negotiate with the IMF in Washington, DC and the usual items will be included on the agenda: prices for public utilities, the primary surplus, inflation goals and the situation of holdout creditors.
In this last regard, there are still over 200 lawsuits initiated by creditors against Argentina and there is strong pressure for the Argentine government to provide a solution to that problem. So far, the prospects for bond holdouts are looking grim. Argentina is showing no interest in paying them the same price it offered the others bondholders, and market prices for the now thinly traded bonds have been ranging from 23 cents to 30 cents, indicating a lower final payout for the holdouts. Some economists advise holdouts to accept whatever offer Argentina makes, especially those small bondholders who cannot afford a long drawn out legal battle. Some big investors who can withstand the long haul are hoping to seize interest payments, although they did not have luck in seizing initial bond payments.
Economy. Capital Control. Inflationary Concerns
Capital Inflow Controls
Following up on what we informed last month on the control of capital inflows (see our June Newsletter), president Kirchner in recent speeches ratified the capital inflow controls recently passed and the new special reserve of 30% for financial investment funds, though he noted that the measure will last “the minimum and strictly necessary term”.
As far as capital flows are concerned, the Ministry of Economy announced further controls on entrance of speculative funds into the country. As anticipated, residents who bring in more than 2 million dollars per month are required to immobilize 30% of the funds in an account. Also, those who bring in money to participate in bids of Central Bank bonds have to freeze 30%. Finally, anyone who exchanges more than US$ 50,000 needs to report the transaction to the Argentine tax authorities. As a result of these new measures, the Merval stock market index fell 3.18%. The idea behind the controls is to decrease the amount of speculative dollars entering into Argentina, as result of investors looking for higher earnings due to low international rates.
The US Dollar Price
The Central Bank continues to buy record amount of dollars to maintain the exchange rate stable and thereby maintain the competitiveness of Argentine exports. Despite of that policy, the US Dollar continues to fall. The government is considering allowing some exporters to leave foreign currencies offshore.
In connection with inflation, as a result of decrease of the inflation rate experienced by the economy during the last months, the government decided not to renew price agreements with certain industries. The decrease was due, in part, to companies who postponed expenditures to make tax payments. However, consumption is expected to pick up due to winter vacations. Concern over inflation has caused some analysts to note that the economy is growing too fast for the little investment made and they recommend that the economy be slowed down.
Other Economic News
There are good news for the tourism industry in Argentina, which experienced a major growth in the inflow of tourists from the northern hemisphere, thanks to the good prices and substantial improvements in the security record.
The second quarter of this year was marked by vigorous growth after a lull in the beginning of this year. The increase is attributable not only to seasonal fluctuations but to the end of the exchange process and the decrease in the inflation rate in the second quarter. Minister of Economy Roberto Lavagna recently warned, however, that more investment is needed to sustain the growth in the long term, mostly in infrastructure.
An important piece of information is that the country is issuing its first dollar-denominated debt issuance since the default in December 2001. Argentina sold in the last days $442 Million of bonds maturing in 2012.
Argentina continues to negotiate utility company contracts with the headquarter companies, mostly located in Spain and France. After a few months of disagreements, Spain claims that for the most part progress is being made.
So far the government has closed 22 of the 46 outstanding agreements and the pressure is on to advance further in light of new negotiations with the IMF. However, a certain tendency may be observed towards the return to Argentine hands of many companies that during the 90’s were sold to foreign entities. The example of the month was Edenor, power distribution company from the “Great Buenos Aires”, that returned to Argentine hands.
There were good news in the energy front: Brazil, Chile, Argentina and Uruguay are set to sign a memorandum of intent to study building a regional energy system through which natural gas from Peru's large Camisea field would flow to Chile and from there to neighboring countries.
Trade and Exports
Regarding exports, the period ended with a new record driven by good harvests and increase in the demand from Brazil. Imports have also increased more than 30% this year.
Considering the current complications in the bilateral relationship with Brazil, president Kirchner has also been contemplating an offer by the US to negotiate the entering into a free trade agreement between both countries, although the idea of negotiations with Mercosur as a block is still prevailing.
Please do not hesitate to contact Alberto Navarro at anavarro@gbreuer.com.ar for any questions you may have on these matters.
G.BREUER NEWS
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You may consult the July editions of our Boletín Informativo and Boletín Informativo Tributario -by accessing the corresponding links, G. BREUER's publications focus on general legal information and tax issues, respectively, sent to our Argentine Clients & Friends.
You can 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 you may need advice 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