News Center

Argentina's image worsens on Wall Street
La Nacion
February 25, 2008

The wait-and-see stage for Argentina in the hands of Cristina Fernandez de Kirchner on Wall Street is coming to an end. And the release of latest reports by investment banks and analysts shows that they are more cautious, even pessimistic, about the current economic reality, and the one to come.

Inflation will continue rising, the INDEC data is "irrelevant", the energy grid will face "challenges" this winter and salary agreements are only "temporary" with more "indexing" before the end of the year. But still, the country is not ready for a global economic slowdown which is beginning to be seen. That is the consensus of the latest reports from Morgan Stanley, Credit Suisse, Lehman Brothers, the Eurasia Group consulting house and a pair of experts with ample experience on Wall Street, according to what LA NACION collated.

For Daniel Volberg of Morgan Stanley, the most relevant aspect is the local position before the world. "We suspect that Argentina is badly prepared to cope with the impact of a slowing world economy" in a few months, he said.

According to his most recent report last week, the dollar will appreciate, while the Brazilian real will depreciate, raising pressure on the local exchange rate. By running eight possible scenarios, Morgan Stanley estimated that the real value of the peso "is ready for a strong appreciation" which Lehman Brothers concurred with and that the authorities will seek to avoid it with "an acute depreciation of the nominal exchange rate" which could leave it between 3.35 and 4 pesos to the dollar, "with significant risk of a reduction in growth and high inflation."

For Volberg, inflation is around 20% annually and, with the salary hikes, could top 25% this year, for which "a second round of salary increases could leave Argentina with the highest inflation in the region, close to 30%."

The Latin America expert at Eurasia Group, Daniel Kerner, agrees that salary negotiations could reopen in a matter of months. "To focus only on the March-April period could be foolish, since the demands of the unions will continue over the course of the year," he explained, as happened at the end of 2007 "when more than 2.5 million workers received a special annual bonus to compensate them for higher inflation."

Questioned statistics

Economist Carola Sandy of Credit Suisse also contrasted "published" inflation by the INDEC and the real level in the country, in a newsletter from the Inter-American Dialogue.

"We were hoping before that over the course of the next few months the government would be gradually cutting the gap between 'real' inflationary projects and 'published' ones. However, the published data on February 7th suggest that the government is not going to do this in the short term," with a widening gap between the two realities.

More relevant, Sandy warned, was the controversy over the "credibility" of official statistics could lead the International Monetary Fund (IMF) to remove Argentina from the list of those subscribing to the Special Dissemination of Data Standards (SDDS).

"Similar moves by the IMF would be a blow to Argentina's international image (which, according to her statements, President Cristina Kirchner wanted to rebuild] and could delay Argentina's return to international financial markets," she wrote.

From Lehman Brothers, Guillermo Mondino of Argentina made a central point: the strong growth rate is continuing and he hopes that the Economy Ministry "will plan to keep up growth in demand." But he also explained that supplies can't keep up with the current rhythm, "slowed by inflation", which would be at about 20% annually.

And to get the situation under control, he argued, the government "appealed to a number of macroeconomic distortions that, while temporarily successful, are creating a very negative business environment." But still, he said that "2008 promises to be a decisive year on this front," with official policies "being put to the test in the coming months."

For his part, one of the most respected economic portals in this country RGE Monitor includes a section about the "irrelevance" of the official Argentina inflation index that INDEC puts out. In the top lines, it asks if "the real indexing of salaries" will be blanked out.

On this portal there is also a column by another Argentine, Joaqu n Cottani, which some time ago worked for Lehman Brothers and now is working as a consultant for LatinSource, a reference for dozens of international banks.

He called members of the government "economic neophytes" that are close to "killing the goose that laid the golden eggs," as for agricultural exporters, due to high inflation, it will result in ever more "high costs to eradicate."