November 28, 2014
IMF: Venezuela, Argentina see low growth
Fund says country’s GDP expanded 4.3 percent last year, fuelling controversy on warrant payment
Argentina and Venezulea are the only countries in Latin America whose economies the International Monetary Fund expects will grow no more than one percent this year, while the former’s Gross Domestic Product (GDP) was said to have expanded 4.3 percent in 2013, stoking the fire of an ongoing dispute over whether holders of growth-linked bonds should be paid at the end of the year.
The IMF forecasts that the country will grow at a barely perceptible 0.5 percent this year and one percent in 2015.
“Near-term prospects in Argentina and Venezuela have deteriorated further,” reads the IMF report on global growth released yesterday, drawing comparisons between the countries’ economies, and arguing that both “continue to grapple with difficult external funding conditions and the negative impact on output from pervasive exchange and administrative controls.”
On the more immediate horizon, the IMF’s report fuelled controversy over the payment of approximately US$3 billion in debt to holders of bonds triggered if the economy grew above 3.22 percent in 2013.
Although the government’s final figure will be posted in September, on March 27, Economy Minister surprised observers by announcing GDP had surged not the previously reported 4.9 percent but three percent.
In an interview on Sunday, Kicillof avoided confirming such bondholders wouldn’t be paid their warrants, but strongly hinted as much.
On March 27, the president’s Communication Secretariat said that “according to the provisional figure, the government would not have to pay around US$2.5 billion” in bond warrants, providing a figure below most estimates.
Interest rates for public debt have plummeted and surged since Kicillof’s announcement, with yesterday’s news seemingly considered encouraging for investors.
Kicillof said the 2013 growth data was calculated using 2004 as the base year, rather than 1993. The move inevitably stirred up debate in markets regarding the reliability of the country’s statistics, with most of the opposition condemning an apparent honesty-by-convenience approach.
The IMF’s growth estimate 4.3 percent thus raised eyebrows, as it clocked in near neither the government’s three nor the opposition’s estimates of 2.9 percent, but was said to reflect official data.
IMF press officer Raphael Anspach explained to Ámbito.com that the number “was based on the (government’s) methodology for GDP during the last three quarters of 2013 and the IMF staff’s own projections.”
Anspach went on: “The deadline to submit forecasts came before the revision of the product (GDP methodology) by the government,” he said, seemingly playing down murmurs that the international organization would speak out against the statistical U-turn.
Par with Venezuela
“Activity in Argentina and Venezuela is expected to slow markedly during 2014,” the IMF projected, emphasizing however that the “outlook is subject to high uncertainty.”
Both countries are accused of “persistently loose macroeconomic policies” that have “generated high inflation and a drain on official foreign exchange reserves.”
Special attention is drawn to a problem that has plagued two Cabinet teams under President Cristina Fernández de Kirchner’s presidency: “The gap between official and market exchange rates remains large in both countries, and has continued to widen in Venezuela.”
With the latter remark, the institution headed by Christine Lagarde seemingly took note of the gap having been reduced under the Central Bank leadership of Juan Carlos Fábrega.
With the official dollar closing yesterday at a recently steady 8.01 pesos and the illicit “blue” at 10.32 pesos, the gap stands at 25.2 percent. Although the exchange market remains unpredictable, a gap of 50 percent in January last year clearly indicates comparative progress, achieved in part by the partial lifting of the dollar clamp to satisfy demand for savings purposes.
The horizon in Venezuela was bleaker, with its economy predicted to shrink 0.5 percent this year.
“Administrative measures taken to manage domestic and external imbalances, including controls on prices, exchange rates, and trade, are weighing further on confidence and activity,” the IMF says about the countries at opposite poles of South America.
Both countries recently adjusted their exchange rates, it notes, “while Argentina raised interest rates, but more significant policy changes are needed to stave off a disorderly adjustment.”
In fact, among the topics currently under debate by economists is whether the Fernández de Kirchner administration will go further with the lifting of the dollar clamp.
A further problem in over-dependence on soy and oil, respectively was pointed out: “Argentina and Venezuela experience large output fluctuations—likely reflecting their narrow export bases, but also domestic policies.”
For Argentina “the growth correlation with China’s growth is stronger than that with the euro area or the United States,” which is explained by the Asian giant’s demand for soy. China’s growth is expected to decelerate from 7.7 percent last year to 7.5 percent in 2014.
Censure no more
Regarding a potential lift of the organization’s censure on the country for unreliable data following the reform of the INDEC national statistic bureau’s Consumer Price Index, the IMF said its “Executive Board will review this issue again as per the calendar specified in December 2013 and in line with the procedures set forth in the Fund’s legal framework.”
Due to the shift in methodology to account for price fluctuations at the federal level, the IMF abstains from providing estimates for inflation in Argentina in years ahead.