Brazil & Southern Cone - May 2016 (ISSN 1741-4431)

The cabinet chief, Marcos Peña, has admitted that Argentina is at its “worst moment” amid stubbornly high inflation and rising utility tariffs, which hits low-income sectors hardest. Peña, like his cabinet colleagues, insists that the government is trying to correct the structural distortions in the domestic economy that, if not removed now, would create an even worse situation down the line. With poverty rates on the increase, the call by President Mauricio Macri on Argentine consumers to be patient, risks wearing thin.

“We are conscious [of the difficulties] and we are working on all possible measures so that it doesn’t deepen”, Peña declared at a 24 May press conference. Finance Minister Alfonso Prat-Gay, has been insisting on almost a daily basis that the second half of the year would see lower inflation. Both Peña and Prat-Gay emphasised efforts to boost investment and job creation, with Prat-Gay noting that the government was “identifying various projects, and this year we think that it [investment] could be around 20% of GDP”. The press conference had been called to announce a US$1.5bn investment by Axion Energy (controlled by the Argentine group Brindas and China’s CNOOC), to expand the Campana oil refinery, located 70kms northwest of the city of Buenos Aires. Prat-Gay said the project would receive an input of US$378m from the International Finance Corporation and would create some 1,600 jobs. The minister also expressed confidence in future prospects, noting that “externally, there is a decision to invest in Argentina”. Peña reiterated that “we received a very badly damaged economy” but insisted that “the worst of this is now” and that “this is the end of the crisis”.

With the national statistics institute (Indec) still trying to reconstruct the country’s national inflation index, the inflation index for the city of Buenos Aires (IPCBA) is being used as a gauge of price movements. In April, the IPCBA rose by a strong 6.5% month-on-month, taking the annual inflation rate in the capital to 40.5%, the highest in 14 years.

Likewise, the IPC Congreso price index, which is compiled by the federal congress, rose by 6.7% month-on-month in April, almost double the March result (3.2%) and the highest since 2002. While the latest utility tariff adjustments made by the government accounted for over two-thirds of the IPC Congreso increase, food and drink prices were up by 2% month-on-month, while there was also an increase in education prices. The inflation nucleus remained above 2% in the month, indicating continued pressure on the index. With the April result, accumulated inflation in the first four months was 19.4% on the IPC Congreso index, compared with 8% for the same period of last year; while the annual rate was a painful 41.7%, the highest since January 1992.

Prat-Gay explained that most of the April increase was due to the “correction” of utility tariffs, which he said had been ‘hyper-subsidised’ during the preceding 12 years under the successive Kirchnerista governments in 2003-2015. Between March and April, some utility tariffs increased by as much as 300% on average. Private economists estimated that up to 80% of the April inflation figure was due to the one-off effect of higher utility tariffs.

Likewise, the head of the central bank (BCRA), Federico Sturzenegger, insists that the efforts to control inflation are working. He notes that on BCRA data, underlying inflation in March-April was lower than in the preceding two months (January-February). Sturzenegger has expressed confidence that end-2016 inflation will be close to the government’s target of 25%. He adds that the majority of independent economists do expect inflation to slow in the second half. However, the private sector consensus is for a slower pace of decline, to about 36% by year-end. Partly, this is on base effects, as inflation was relatively low in 2015.

• Lebac movements

On 24 May, Argentina’s central bank (BCRA) cut the benchmark interest rate (Lebac) from 36.75% to 35.25%, citing reduced inflation pressures and noting that its focus is now on switching to efforts to re-stimulate domestic economic activity. The move, the second consecutive reduction in interest rates, should also help slow the influx of US dollars into the country seeking to take advantage of the high interest rates, which has recently put upwards pressure on the peso, leading to some complaints by local exporters.