Argentina’s Punishing Inflation
Argentine stocks and bonds extended losses on their respective MSCI and EMBI indices as IMF officials at their spring conclave expressed doubt that the government would accept a technical mission’s recommendations for a new inflation index. President Fernandez, with a 60 percent approval rating heading into October elections although her candidacy remains undeclared, reported a 10 percent number in February while allowing a public sector wage hike of 25 percent, which outside analysts cast as the true reading. However private consulting firms have become more hesitant to challenge the official figure after they were ordered to divulge their methodologies or face hefty fines. The pattern of commercial interference has crossed into big companies where the state has a minority stake through pension fund and other holdings following a directive that shares will be actively voted. Steelmaker Siderar has taken the issue to court, but the Finance Ministry asserts full legal authority to press its interests in the same fashion that the social security portfolio is used for buying Treasury debt. The central bank meanwhile with over $50 billion in foreign reserves continues to manage the exchange rate at 4 to the dollar, and the commerce department has introduced limits on automatic import license renewals, both in an effort to boost the trade surplus. Strong commodity exports and stimulus-induced domestic demand are due to deliver 6-7 percent GDP growth this year after 2010’s almost double-digit clip. Record prices for soybeans, wheat and flour sold abroad have combined with a 30 percent rise in infrastructure spending at home to bring a consumption boom that has also been accompanied by a physical cash squeeze and mounting law and order problems. Security is likely to feature alongside economic policy as a prominent element in the presidential campaign and has already been raised by the Radical Party standard-bearer Alfonsin. Within the Peronist grouping President Fernandez may be challenged on these fronts for the nomination, but a potential rival provincial governor has demurred after accusations of vote-rigging.
As a G-20 member, Argentine representatives continued Paris Club debt renegotiations at the Washington meetings, but their reduction and payback period demands have been rebuffed by counterparts. An eventual deal may be complicated by the political uncertainty of the polling period, and any attempt to resume sovereign bond issuance will too likely be deferred into next year. The provinces and corporates together have tapped external markets for $5 billion since 2010’s reopened exchange, with non-participating foreign creditors still moving to attach assets. However data trackers report sustained overseas inflows into local inflation-adjusted debt which offer high yields even if confidence in the measure is at the opposite extreme.
