ARGENTINA: Financial problems loom
Although tax receipts are high, the government appears to feel that it is likely to run short of money. This fear is the most likely explanation for the controversial decision to issue seven-year high yield bonds to its ally Venezuela (at a rate of 15%) at the beginning of August.
The move sent the Buenos Aires financial markets into a panic. The country's risk premium (i.e. the chance of a default) jumped on 8 August to over 700 basis points over US Treasuries. To be fair, the premium fell back on 11 August when traders realised that the government had used the Venezuelan money to buy back debt at an artificially depressed price. The government spent about US$1bn on buying back bonds.
As a result of the government action, bond prices recovered. Dollar-denominated discount bonds jumped almost 7% on 11 August as traders realised that if the government was prepared to buy back debt it was unlikely to default. Peso debt also recovered but because it had been sold less aggressively in early August it bounced less on 11 August. The announcement of the buyback by the economy ministry was designed specifically to put a floor under bonds prices and puncture rumours of a new default.
Tax receipts in July, at Arg$24.518bn (US$8bn) were 40% higher than in July 2007. In the first seven months of 2008, tax receipts totalled Arg$151.66bn (US$49.56bn), up 39% on the first seven months of 2007. In 2007 as a whole, tax revenues amounted to Arg$199.78bn (US$65.28bn), up 33% on 2006.
The government says that revenues are currently strong because exports are high and the domestic economy is robust, with employment and retail sales both rising. The government is budgeting on tax revenues of Arg$233.5bn in 2008.
The headlong fall in international grain and oilseed prices since the beginning of July has prompted international investors to question whether the government's tax position moving forward will remain as comfortable as it was in the first seven months of 2008. The price of soya, the country's key export, has fallen 27% since the start of July, while the price of wheat is down even more. Argentina is heavily reliant on agricultural exports both for its trade surplus and its fiscal surplus: export duties provide 85% of the primary fiscal surplus. At the end of July the government lost its battle to impose new windfall taxes on grains exports.
The government is also having to put up with a lot of criticism from the private business sector about the level of inflation. On 6 August the vice-president of the Unión Industrial Argentina (UIA), José Ignacio de Mendiguren, urged the government to come clean about inflation, which he reckons is running at over 25% annually.
On 11 August the government published the official retail price index for July which showed prices rising by just 0.4% on a monthly basis and only 9.1% on an annual basis. The official inflation index is calculated by the Instituto Nacional de Estadística y Censos (Indec). Most private sector economists reckon that in July retail prices actually rose by between 1% and 1.5%. The Indec said that accumulated inflation in the first seven months of 2008 was officially 5%. In 2007, the official inflation rate was 8.5%. In the budget for 2008 the government forecast a rate of between 7.5% and 8%.
The July figure was below what the government had been expecting (0.5% to 0.6%) and was, incredibly, the lowest inflation rate for July in the whole of Latin America. In June the monthly inflation rate had been 0.6%.
De Mendiguren's remarks echo what private-sector economists have been saying for many months. What makes his comments significant is that last year the UIA was one of many industrial groups that was fiercely loyal to the government and which came out in support of the inflation data produced by Indec.
De Mendiguren claimed that he was speaking on behalf of numerous industrial organizations, all of whom want the government to be honest about the rate of inflation. He said that he and his associates typically ignore the national inflation figure and use regional price data instead. He added that rising costs and falling consumer demand was eroding profit margins.
Aerolineas: On 21 July President Cristina Fernández de
Kirchner announced the renationalisation of Aerolineas Argentinas, the country's
flagship carrier, and its sister carrier, Austral. The airline's largest
shareholder, the Spanish travel group Marsans, has been struggling to cope with
rising fuel bills and crippling debt levels. The two airlines are losing US$1m
per day and have debts of US$890m.
The government said that it was reluctant
to buy back the airlines, which were privatised almost 20 years ago. However,
the renationalisation is fortunately timed for Fernández following her
humiliating defeat at the hands of the rural sector. There was overwhelming
support for the government to buy back the airlines, especially among trade
unions.
Auto exports: In July 2008, auto exports reached 39,018 units, up 33% on the previous month and up 48.2% on July 2007. The Asociación de Fábricas de Automotores (ADEFA) reported that total vehicle exports in the first seven months of 2008 came to 196,927 units, up 32% on an annual basis. Total putput in the sector was 348,525 in the first seven months of the year, up 26% on the same period of 2007. In 2007 the industry had a record year, with total production of 544,647 vehicles, 316,410 of which were destined for the export market.
- Presidential asssets
The personal fortunes of the Presidential couple, President Cristina Fernández de Kirchner and her husband Néstor Kirchner, increased by US$187,535 in the first half of 2008 to reach US$4.4m. Under anticorruption laws, ministers and government officials have to file regular statements of their personal assets. Strangely, the president owns up to four houses but no car, while her husband claims three cars and 38 properties. They are building a luxury hotel by the Perito Moreno glacier in Santa Cruz.