The Argentine Economy by Alexander Holmes

The Argentine Economy Eduardo Luis Fracchia - Cristian Alonso IAE â&#x20AC;&#x201C; Universidad Austral March 16, 2011

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

Old phantoms still around…

1930

Japan 90’s

1973

Global crisis asked for aggressive expansive policies Interest rates cannot be lower! 7

Europe

USA

England

Japan

6 5

4 3 2

Source: Bloomberg

ene-11

oct-10

jul-10

abr-10

ene-10

oct-09

jul-09

abr-09

ene-09

oct-08

jul-08

abr-08

ene-08

oct-07

jul-07

abr-07

ene-07

Global crisis asked for aggressive expansive policies Such as Obamaâ&#x20AC;&#x2122;s fiscal stimulus package and the two rounds of quantitative easing 12

US Federal Deficit as % of GDP 9,9

8,9

8 6 3,5

3,5

3,2

2,6 2

Monetary Base (SA - Billions)

1,9

1,5

1,2

2.000

1.500

1.000

500

2011-01

2010-11

2010-09

2010-07

2010-05

2010-03

2010-01

2009-11

2009-09

2009-07

2009-05

2010

2009-03

2009

2009-01

2008

2008-11

2007

2008-09

2006

2008-07

2005

2008-05

2004

2008-03

2003

2008-01

2002

Global crisis has been overcome Although there are nuancesâ&#x20AC;Ś 12%

GDP Growth Rate

10% 8% 6% 4% 2% 0% 2004

2005

2006

2007

2008

-2% -4%

World

USA

-6%

Emerging Asia

Latin America

Euro area

Source: World Economic Outlook, IMF

2009

2010

2011 (p)

Global crisis has been overcome Although there are nuancesâ&#x20AC;Ś Emerging markets lead the recovery 2008 0,2% 0,0% 0,5% -1,2% -0,1% 0,5% 1,7%

2009 -3,2% -2,6% -4,1% -5,2% -4,9% -2,5% -1,2%

2010 2,7% 2,6% 1,7% 2,8% 1,7% 3,1% 5,4%

2011 (p) 2,2% 2,3% 1,5% 1,5% 2,0% 2,7% 3,7%

Emerging Economies Sub-Saharan Africa Central and Eastern Europe CIS (former URSS) Emerging Asia Middle East and North Africa Latin America

6,0% 5,5% 3,0% 5,3% 7,7% 5,0% 4,3%

2,5% 2,6% 0,0% -6,5% 6,9% 2,0% -1,7%

7,1% 5,0% 3,7% 4,3% 9,4% 4,1% 5,7%

6,4% 5,5% 3,1% 4,6% 8,4% 5,1% 4,0%

World Output

2,8%

-0,6%

4,8%

4,2%

Developed Economies US Euro area Japan UK Canada Others

Source: World Economic Outlook, IMF

Emerging power is consolidating • Emerging countries’ share on the world output will increase from a 25% before the crisis to a 35% in 2020 in current dollars and from 42% to a 55% in dollars by PPP. • Recovery is clearly fueled by emerging economies.

Emerging power is consolidating

Global crisis has been overcome Although there are nuances… Good signs in US… 12 8,0

600

Job Creation

Quarterly GDP Growth (Seasonally adjusted) 5,4

4,0

3,2

3,0 1,4

2,0

2,3

1,7

1,6

0,9

0,1

200

3,7

2,9

2,6

3,2

-0,7

0,6

-2,0

400

5,0

-200 -400

-0,7

-600 2

-4,0

240

dic-10

may-10

oct-09

mar-09

ago-08

ene-08

jun-07

nov-06

abr-06

sep-05

feb-05

jul-04

dic-03

may-03

oct-02

mar-02

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

3Q08

2Q08

1Q08

4Q07

3Q07

2Q07

1Q07

4Q06

3Q06

2Q06

1Q06

4Q08

-6,8

-8,0

-1.000 ago-01

-4,9

-6,0

-800

ene-01

-4,0

Home Price Indexes

220

180

160 140 120

CSXR-SA

SPCS20R-SA jul-10

ene-10

jul-09

ene-09

jul-08

ene-08

jul-07

ene-07

jul-06

ene-06

jul-05

ene-05

jul-04

ene-04

jul-03

ene-03

jul-02

ene-02

100

jul-01

…But concern remains on fiscal budget problem and still overleveraged consumers

200

ene-01

6,0

Unemployment Rate

Global crisis has been overcome Although there are nuancesâ&#x20AC;Ś In Europe, PIIGS are a headache 5,0

2010

2011

4,0 3,0 2,0 1,0 -1,0 -2,0 1,70

EUR-USD

-3,0 1,60

1,40 1,30 1,20 1,10

feb-11

oct-10

jun-10

feb-10

oct-09

jun-09

feb-09

oct-08

jun-08

feb-08

oct-07

jun-07

feb-07

oct-06

1,00 jun-06

-5,0

1,50

feb-06

-4,0

Global crisis has been overcome Macro imbalances have reduced, but not enough Current Account as % of GDP 12,0 10,0

USA

8,0 6,0

4,0 2,0 -2,0 -4,0

-6,0 -8,0

Source: IMF

China

Global crisis has been overcome Although there are nuances…

Slow yuan appreciation. The phantom of a currency war is still there.

Pending financial regulation reform. A Mediterranean default will damage other vulnerable economies and the European financial system.

American twin deficits are unsustainable.

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

Argentine per capita GDP as % of US per capita GDP 0,9 0,8 0,7 0,6 0,5

0,4 0,3 0,2 0,1 1870 1876 1882 1888 1894 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008

Source: Total Economy Database - The Conference Board

Are Chinese growth rates back? 10%

8,8%

9,0%

9,2% 8,5%

8,7%

8,5%

6,8%

5,0%

4% 2% 0%

2003

2004

2005

2006

2007

2008

2009

-2% -2,3% -4% Source: INDEC and IAE estimates

2010

2011

Both official and non-official indexes show economic recovery… 16

Monthly Economic Activity Index (y-o-y)

… Although the official data is much more optimistic

12 10 8 6 4 2 0 -2 -4

20%

Industrial Production (y-o-y)

15%

10% 5% 0%

-5% -10% -15% -20%

EMI - INDEC

IPI - FIEL

Industry experienced a great year, mainly due to the automobile sector Industry Growth by Sector (y-o-y) Metalworking Automotives

Basic metal industries Non-metallic mineral products Chemicals Textile products IPI - FIEL Tobacco products

EMI - INDEC

Automobile production

Growth

180%

5% 10% 15% 20% 25% 30% 35% 40% 45%70

160%

140% 120%

100%

80%

60%

40%

20%

feb-11

ene-11

dic-10

nov-10

oct-10

sep-10

ago-10

jul-10

jun-10

abr-10

mar-10

feb-10

ene-10

-5%

may-10

Foods and drinks

Whereas consumption benefited from negative real interest rates 60

Consumer Confidence Index (UTDT)

55 50 45 40 35 30

16%

14% 12%

Sales Indicators (y-o-y) CAME INDEC (Prices adjusted according BACity)

10% 8% 6% 4% 2%

0% ene-10

mar-10

may-10

jul-10

sep-10

nov-10

ene-11

2010 /11

2009 /10

010 /11

25 2008 /09

009 /10

7 2007 /08

008 /09

2006 /07

2005 /06

2004 /05

2003 /04

2002 /03

2001 /02

2000 /01

1999 /00

1998 /99

1997 /98

1996 /97

1995 /96

1994 /95

007 /08

006 /07

005 /06

004 /05

003 /04

002 /03

001 /02

000 /01

999 /00

2 1993 /94

998 /99

997 /98

996 /97

995 /96

994 /95

8 1992 /93

993 /94

1991 /92

992 /93

1990 /91

990 /91

2010 /11

991 /92

010 /11

009 /10

008 /09

2009 /10

007 /08

2008 /09

2007 /08

006 /07

005 /06

004 /05

2006 /07

2005 /06

2004 /05

2003 /04

003 /04

2002 /03

2001 /02

2000 /01

1999 /00

1998 /99

1997 /98

Sunflower

002 /03

001 /02

000 /01

999 /00

998 /99

997 /98

996 /97

995 /96

994 /95

993 /94

992 /93

991 /92

990 /91

1996 /97

1995 /96

1994 /95

1993 /94

1992 /93

1991 /92

1990 /91

Strong performance in agriculture Soybean 55

Wheat 16

12 9

Corn 23

20 20

5 13

1 5

And so, employment has raised 12 10

Unemployment Rate 9,8

8,5

8,1

8,4 7,5

8,0 7,8

8,4

8,8 9,1

8,4 8,3

7,3

7,9

7,5 7,3

6 4 2

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

4Q07

3Q07

2Q07

1Q07

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

Inflation • Annual inflation reached 25% in 2010 according to several non-official estimates. • Government continues denying the problem, while expansive monetary and fiscal policies worsen it. • Exchange rate is being used as nominal anchor yielding a strong real appreciation.

• Distributive struggle is getting harder. • For 2011, we expect increases in prices to accelerate.

Annual Inflation Rate 30%

INDEC

Buenos Aires City

25% 20% 15% 10% 5%

0% 2007

2008

2009

2010

2011e

Inflation rate on annual basis 30% 25% 20% 15% 10% 5% 0%

CPI - INDEC

CPI - Baires City

CPI - IAE

Moyano: Wages growth determined by the â&#x20AC;&#x153;supermarket inflationâ&#x20AC;? 30% 25% 20% 15% 10% 5% 0%

Wages - Indec (y-o-y)

Wage negociations in 2010 40

35 30 25 20

15 10 5 -

29 24

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

Amazing increase in taxes driven by inflation, economic recovery and exports Millones de $ Ganancias IVA Retenciones Aranceles Cheque Contribuciones patronales Aportes personales Otros tributos TOTAL Recaudaci贸n sin SS Recaudaci贸n sin SS ni Comercio Exterior

2007

2008

2009

2010

42.855 62.669 20.450 7.018 15.065 14.323 24.175 13.386 199.940 161.443 133.975

53.646 80.229 36.055 8.986 19.495 23.243 33.167 14.554 269.375 212.966 167.924

55.552 87.386 32.042 7.700 20.561 28.779 40.887 32.024 304.930 235.265 195.523

76.652 116.386 45.547 11.427 26.885 37.603 54.656 40.745 409.901 317.642 260.667

2010 vs. 2009 38,0% 33,2% 42,2% 48,4% 30,8% 30,7% 33,7% 27,2% 34,4% 35,0% 33,3%

And we expect this to continue 600.000

Tax Revenues

500.000 400.000 300.000 200.000 100.000

2007

2008

2009

2010

2011e

However, federal expenditure has been very dynamic Primary Expenditure (Current $) 325

350

300

243

250

186

200 150 100

135

138

2006

2007

Mรกximo de los 90

2008

2009

2010

Primary Expenditure (Current U$S) 90 80 70 60 50 40 30 20 10 -

83 58

Mรกximo de los 90

2006

2007

2008

2009

2010

Fiscal Accounts • Tax revenues grow faster than nominal GDP. • But expenditure have increased strongly and we expect this trend to accelerate in 2011 because of the elections. • Funding is not a problem as the government counts with the help of the Central Bank, Anses and other public dependencies that can act as liquidity-providers. • Anyway, genuine fiscal result is in free fall.

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

After the crisis, trade flows recovered 90

Exports Trade Balance

Imports

2005

2006

2007

2008

2009

2010

2011e

Imports growth has been much stronger than exports because of the consumption boom and the dependence on foreign intermediate goods 80% 60%

40% 20% 0% -20%

-40% -60%

Exports (y-o-y) Imports (y-o-y)

Imports composition 20.000 18.000 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000 -

2009

2010

oct-10

Soybean

jul-10

abr-10

ene-10

oct-09

Corn

jul-09

abr-09

ene-09

Wheat

oct-08

jul-08

abr-08

ene-08

600

oct-07

jul-07

abr-07

ene-07

Global environment is excellent for our production Oil

500

400

300

200

100

0,00

1,75

ago-91 mar-92 oct-92 may-93 dic-93 jul-94 feb-95 sep-95 abr-96 nov-96 jun-97 ene-98 ago-98 mar-99 oct-99 may-00 dic-00 jul-01 feb-02 sep-02 abr-03 nov-03 jun-04 ene-05 ago-05 mar-06 oct-06 may-07 dic-07 jul-08 feb-09 sep-09 abr-10 nov-10

5,00

ene-91

ene-59 jun-60 nov-61 abr-63 sep-64 feb-66 jul-67 nov-68 abr-70 sep-71 feb-73 jul-74 nov-75 abr-77 sep-78 feb-80 jul-81 nov-82 abr-84 sep-85 feb-87 jul-88 nov-89 abr-91 sep-92 feb-94 jul-95 nov-96 abr-98 sep-99 feb-01 jul-02 nov-03 abr-05 sep-06 feb-08 jul-09

Inflation has damaged real exchange rate, but multilateral rate is still ok thanks to strong Brazilian real

25,00

20,00

15,00

10,00

Multilateral FX

6,75

5,75

Convertibilidad 4,75

3,75

Bilateral FX 2,75

Convertibilidad

0,75

Agenda 

International Scenario



Economic Activity



Inflation



Fiscal Accounts



External Accounts



Outlook

Outlook • 2011 is going to be a good year, with a fair increase in the economic activity level, high inflation and a deteriorated exchange rate. • Strong pressure from the public sector in an election year. • Too much uncertainty about the next president! • Fundamentals for long-term growth are outstanding.

Outlook Real GDP growth Real Consumption growth Real Investment growth Unemployment rate (End of period) Inflation rate Wage rate Exchange rate (End of period) Federal Primary Result (as % of GDP) Exports (in USD billions) Imports (in USD billions) Trade Balance (in USD billions)

2008 6,8 6,7 9,6 7,3 20,7 25,2 3,50 3,1 70,0 54,6 15,5

2009 -2,3 -1,9 -14,1 8,4 14,8 17,0 3,82 1,5 55,9 38,9 17,0

2010 8,0 7,6 14,0 8,0 25,0 22,0 4,05 -0,7 67,8 54,1 13,7

2011e 5,5 4,8 11,0 7,0 27,5 25,0 4,35 0,6 79,3 67,1 12,2