Argentina July 2006

Argentina is expected to grow at a 7.2- to 7.5-percent GDP pace in 2006, following 2005’s 9.2-percent reading. Strength in soybean and livestock prices have supported healthy growth figures there. Also supporting the Argentine growth outlook is a growing automobile sector, with exports to regional players, including Europe and China.

“Domestic consumption and investment has been very strong,” Delgado says. “Demand has grown more violently,which has induced a lot of pressure on prices.”

Inflation ran at a 12.3 percent pace in 2005, with expectations around the 13-percent level in 2006, he says.

The central bank doesn’t have a specific overnight target rate; instead, Delgado believes their policy is to reduce prices by implementing price controls on food and clothing. “Monetary policy continues to be loose,” he says. “So far, they’ve been somewhat successful, but inflation pressures continue to build up. Many people see Argentina growing strongly, but the rules of the game are not pro-market. You have a government trying to control what you can charge for prices. People still view it with some caution.”

Argentine banking authorities have basically been managing the exchange rate. The central bank actively intervenes in the forex market, buying U.S. dollars in order to keep the peso at a relatively low level. The peso recently fell to a three-year low vs. the U.S. dollar.

“They want a competitive exchange rate to boost exports,” de la Fuente says.

He calls the peso “highly undervalued” in the wake of the intervention. The “Achilles heel” for Argentina is inflation, which is not under control, he says.

The Argentine peso, trading around 3.07 in mid-June, could retreat to 3.20 by year-end.

“I’m still quite concerned about economic policy and the way they are trying to manage prices,” Alvarez says.

Looking ahead, a slowdown in the global economy could weigh on export revenues for Argentina.

The bottom line is that some international investors remain wary of plunging into Argentine assets in the wake of the 2001 Argentine debt default.

“It’s like lending money to a person who went through bankruptcy,” Delgado says. “The currency policy mix of price controls and inflationary pressures don’t give confidence to external investors.”