Economic Overview

Items

• ARGENTINA

  19 October 2008 Hits: 272

  Martí­n Redrado, the president of the central bank, has emphasised that Argentina would not follow the example of region's strongest economies, Brazil and Chile, and allow the local currency to depreciate against the dollar in the face of the global financial crisis. What is interesting is that Argentine economic policymaking is still out of step with international policymaking. Argentina is sticking to its heterodox mix of polices: a virtually fixed exchange rate, a hefty fiscal surplus (at least at the operating level), and a fixation about the inflation rate. The signs of tension in the economy are clear. Although the peso exchange rate has remained pretty stable at Arg$3.2US$, this has only been achieved with a tremendous effort. Redrado jacked up interest rates twice in the first 10 days of October. Such rises are complicating life for business and not really preventing a flight from the peso to the dollar. Yields on domestic currency government bonds have touched 35% which is close to the levels they hit before the default in 2001.

  Inflation: Almost no-one believes the official consumer price inflation figures. In September, the monthly rate was 0.5%, the same as August. For the first nine months the official rate was 6.1% and the rate for the past 12 months 8.7%. In 2007 the official inflation rate was 8.7%. Most reputable economists reckon that the true inflation rate is between 20% and 25%. The government benefits directly from cooking the figures because around a third of local currency government debt is indexed to the official inflation rate.
  

• CHILE

  19 October 2008 Hits: 282

  The central bank president, José de Gregorio, has claimed that he and his fellow policymakers had steered the economy through the financial crisis in September and October without incurring too much damage.The bank was quick to reverse its policy of buying dollars to keep the exchange rate competitive and to start selling dollars to banks so that they could have sufficient liquidity to avoid problems. The  bank also refused to increase interest rates at its 9 October meetings, holding them at 8.25%, despite a poor inflation figure for September. It expects the economy to grow faster in the second half of this year than in the first half. It noted that domestic demand was continuing to grow comparatively fast, which was leading to higher imports and a stable outlook for unemployment.  On 11 October the bank decided to inject US$5bn into the domestic money markets to improve liquidity. The move was similar to those announced by industrialised countries in North America; Europe and Asia. The move should also take some of pressure off the peso because the bank is selling dollars for pesos. The money will inject gradually, at weekly auctions of US$500m. The swaps (of pesos for dollars) will alternate between 60 days and 90 days.

  Inflation:Consumer price inflation in September rose by 1.1% which was a bit above the consensus forecast for a rise of 0.8%. In August the CPI rose by 0.9%. The September figure meant that lagging 12 month inflation was 9.2%, well above the central bank's target for a rate of 3% a year. In 2007 inflation was 2.6%.

• PARAGUAY

  19 October 2008 Hits: 295

  Real annual GDP growth in the first six months of 2008 was 8.2%. Growth in the second quarter was 8.9% year-on-year, considerably faster than first quarter growth of 7.6%. The fastest growing sectors of the economy are investment (which rose 25% in the first six months), imports (up 21%) and exports (up 15%). Household consumption is rising, but at the sustainable rate of 8.6%, while government spending is rising at a rate of only 1.6% year-on-year. There are signs that consumers are beginning to take a few more economic risks: sales of consumer durables are rising (particularly clothes, shoes, motorbikes and cars).What is extraordinary is the growth in mobile telephones. The mobile telephone business in the country is now worth more than two of the traditionally economically crucial sectors, meat-processing and transport, put together. The economy has had a pretty good run over the past five years. It has now grown quarter-on-quarter for 21 consecutive quarters.  National GDP, however, is still comparatively small at US$8.3bn, according to the central bank.

  Budget: The new government is coming under pressure to increase government spending. So far the appeals are for a modest increase of around 5%.

  Inflation: In September consumer prices fell by 0.3%. They had risen by 0.6% in August. The September figure brought the 12 month inflation rate down to 9.1%. In 2007 inflation was 7.7%.

• URUGUAY

  19 October 2008 Hits: 250

  On 3 October the central bank raised its interest rates by half a percentage point to 7.75%.  This chunky rise was the first move by the central bank so far this year, and came at an odd time, when the rest of the international financial world was in crisis.

  Inflation in September was 0.6%, a considerable improvement on August's 1.02%.  The September figure was only a bit above the consensus forecast collated by the central bank (0.46%). The lagging 12-month figure for inflation is now 7.46%. The government target is for a rate of between 3% and 7% for 2008.
  In September, prices set by the government barely rose as did fresh foods, so the recidivists were tradeables and non-tradeables. These rose by almost 1% in September, which suggests that bank had to act decisively to break the spiral of inflationary expectations. One reason  prices are shooting up is that the domestic economy has been much stronger than policymakers expected. Some of this growth has been produced by the one-off effect of the commissioning of the Botnia paper mill.  The central bank is clearly bothered that it may have let the economy get ahead of itself: the bank doubled the overnight lending rate (to 20%) to make banks more cautious about lending and also ruled that banks can only use this facility a maximum of three times each month.

  Another reason for the interest rate increase at the beginning of October was to put some sort of floor under the peso. In September the peso had began to weaken against the dollar, along with the Real and the Chilean peso.