G.BREUER
SINCE 1869
GB Newsletter
December 2005
Dear Clients & Friends,
The year came to its end and, differently to the northern hemisphere, it ends in every aspect in December. Argentina experienced an improvement of 29.5 points in its GDP in the last three years, which is the highest of the last hundred years. As a result, in that sense, we feel that the year ends positively. We are also happy with the recent ratification of the new Economy Minister, Felisa Miceli, and with the strong fiscal discipline that Argentine wishes to maintain. This is particularly important when Argentina has decided some days ago to fully cancel the debt for 9,810 million dollars with the IMF, as a result of not wanting to abide by the restrictions imposed by the Fund. The way in which this payment will be made is still uncertain, given that it implies the use of reserves from our Central Bank, which entails the need to vote a law, to be passed by Parliament during the next days. The government anticipated that on January 2 it plans to cancel the debt, probably following the steps of Brazil of also paying to the Paris Club.
On the other hand, we inform that the government sent to Parliament the extension to the Economy Emergency Law, in order for Argentina to continue under this system, which of course is mainly created as a tool to stop the strategies of the holdouts remaining outside the exchange. The truth is that Argentina has many reasons to declare that the emergency continues, although the numbers shown by the GDP, the trade surplus and the decrease in unemployment seems not to accompany the idea that the emergency is comparable to that of 2002.
Below, please find some news on economy and law, as well as on the idea of prepaying to the IMF, among others.
We would also like to take this opportunity to wish you a very Merry Christmas and all the best for 2006, and to invite you to open our Christmas Card.
With warmest regards,
G.BREUER
Buenos Aires - Argentina
Tel: +54 114313 8100
Political and Economic News: IMF prepayment and little else
As expected, the most stunning event of this month has been the announcement by the Argentine Government to cancel the debt that Argentina with the IMF. This news was announced by the government just one day after Brazil’s announcement.
Technically, the measure was taken through the issuance of Emergency Decree no. 1066/2005, which modified several sections of Law 23.928 (a.k.a Convertibility Law), which stated that reserves could only be used to back the monetary base. The decree created what is called “free disposable reserves” that are those reserves held by the Central Bank that exceed the monetary base. After the issuance of Decree 1599/05 such reserves can be used to pay debts with international financial organizations.
The prepayment of said debt is going to be made in a single payment which amounts to US Dollars 9.81 billion. As it was published in many newspapers the payment is going to be made on December the 29th, once Decree 1066/2005 is ratified by the Congress.
Argentina is the third largest debtor of the IMF and newspapers reported that Argentina would have to pay an amount of $1.9 billion US Dollars to the IMF next year. And two days after announcing the IMF prepayment, Argentina is likely to take a loan with the World Bank for an amount of $3 billion US Dollars.
It is said in Argentina that the IMF prepayment is more a political issue than an economical issue. It is also said that President Kirchner, through prepayment, is trying to avoid pressures from IMF.
The (new) Economy Minister, Ms. Miceli, said that the IMF prepayment makes Argentina more predictable and financially stronger, and that the Central Bank will easily recover the reserves that are being applied to the cancellation with the IMF.
News in the Economy
The most important challenge that the Economy Minister, Ms. Miceli, faces is the threatening inflation. Currently, retail inflation is close to 11,1 % p.a.
Next year it is expected that inflation will be even higher, around 15%, since there are still many prices to be adjusted or negotiated (e.g. tariffs).
So far the government’s strategy to tackle inflation has been closing agreements with the supermarkets and meat packers. More agreements are expected and many economists are questioning how effective those agreements will be against real inflation.
And of course, many specialists say that the main cause of inflation was the daily purchase of foreign exchange of the Central Bank and the increasing demand of goods and services pushed by the government’s expenditures.
Ggovernment is willing to maintain the value of the US Dollar close to three Argentine Pesos so as to keep the Argentine economy competitive, and hence keep the important export taxes flooding government’s revenues.
International Trade
The World Trade Organization (WTO) held the Doha round in Hong-Kong, and signed an accord where they agreed to eliminate agriculture subsidies by the end of 2013. The accord was signed by the 149 WTO member countries.
Notwithstanding that Brazil and Argentina expect to eliminate the subsidies for the year 2010, there is consensus on that it is an important achievement to have a specific day for this to happen.
Legal news
As anticipated, the most important legal news of this month has been the issuance of Emergency Decree 1599/05, which amend the BCRA functions regarding its reserves. And we mention also Decree 1601/05 by which the Government ordered to pay.
(i) Decree 1599/2005
Decree 1599 amended the Convertibility Law (23.928, Sections 4, 5 and 6) stating that the Central Bank of Argentina’s reserves that exceed the aggregate amount of the monetary base can be considered to be “Disposable” and be destined to the payment of the loans granted to Argentina by multilateral lenders, whenever such operation payment is monetary of neutral effect.
Even though Decree 1599/05 was sent to Congress for ratification, it is valid and applicable from the very day of its publication (16-12-05) since it is an emergency decree and it is so provided therein (Section 2 of the Decree 1599/02 and Section 99.3, paragraph 3 of the National Constitution).
According the Decree 1599/05, reserves to pay to multilateral lenders is the aggregate amount of 100% of the monetary base, which is composed by circulating amounts of pesos, plus the deposits on demand by financial entities on the BCRA. Such amounts are to be seen in the BCRA balance sheet.
This Wednesday, December 21st, it is expected that this decree will be discussed by the Senate and then by the House of Representatives. Those sessions will be very important because the opposition claimed that the decision to make such an important payment with reserves should have been discussed by Congress prior to its approval through an emergency decree.
(ii) Decree 1601/05
Through Decree 1601/05 the Executive Power instructed the Ministry of Economy to undertake payment of the amounts owed to the IMF (through the Central Bank).
This decree is a common decree (i.e. not an emergency one) and relies upon Decree 1599/05, referred to above.
As said before, the matter dealt with in Decree 1601/05 is closely linked to the prior Decree, reason for which the discussions held in Congress, and the result of the voting there, will be important to see the political and probably economic effects of this measure.
G.BREUER NEWS
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You may consult the December 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