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September 30, 2014
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GDP growth of 3 percent saves Gov’t a fortune

Economy Minister Axel Kicillof is flanked by INDEC directors Ana María Edwin and Norberto Itzcovich.
By Fermin Koop & Francisco Aldaya
Herald Staff

Questions abound over lower than expected number, which will save country US$3B

The country’s Gross Domestic Product expanded three percent last year, a surprising number that was below the 3.22 percent mark that would have triggered about US$3.5 billion in payments to holders of GDP bond warrants.
Economy Minister Axel Kicillof said the 2013 growth data was calculated using 2004 as the base year, rather than 1993, with the move once again  inevitably stirring up debate in markets regarding the reliability of the country’s statistics.
Recognizing lesser growth has thus come with an upside: saving substantially on debt repayment in a context of dwindling Central Bank foreign reserves.

“Three percent growth is still very good considering the international context, which was very complicated,” Kicillof said yesterday.

Warrants trading in the secondary debt market fell up to 13.7 percent after the government announced the figure.

If the government had used 1993 as the base, growth would have come in at 5.1 percent, triggering costly payments to warrant holders.

The figure remains provisional, with another set for release in June, and the final one in September, although Kicillof predicted that “differences are unlikely to be great.”

Argentina issued GDP warrants, payable if economic growth exceeds pre-set yearly levels, as part of debt restructurings that were negotiated in 2005 and 2010.

The bond revampings followed the country’s 2002 sovereign default, which triggered the economic meltdown that pushed millions into poverty.

Early last year, the country had been censured by the International Monetary Fund for publishing inaccurate economic data.

After a year of collaboration with IMF technicians, in January, the Argentine government unveiled a new consumer price index, which so far has clocked inflation at a rate much closer to the estimates of private economists, who see prices soaring more than 30 percent higher per year.

New Methodology

“We have worked for three years ... following international recommendations, analyzing 249 branches of economic production and 360 products, with 95,000 cells analyzed one by one,” said INDEC Director Ana María Edwin at the news conference yesterday, explaining the new methodology.

Her number two, Norberto Itzcovich said that the mining, industrial and agricultural sectors are now taken into greater account, while the financial sector’s overal relevance in the economy has decreased.

Caught off guard

“This was not part of what was expected, at all,” UBA economist Mariano Kestelboim told the Herald, defining the move as “deceptive and a significant hit that goes against the debt reduction policy that (the government) had been endorsing.”

Going from growth figures of close to five percent during the first three quarters and saying this represents a significant shift away from what was being upheld until now, Kestelboim added.

La Gran MaKro Agustín D’Attellis economist opined to the contrary, considering “GDP had been overestimated in recent years due to the overestimation of the CPI,” and its adjustment downward “may have brought down GDP in real terms.”

“The good news is that Argentina saves money at the end of the year,” he told the Herald.

“The decision to make such a large revision to GDP data confirms concerns about manipulation of the country’s macroeconomic data,” Walter Molano, emerging markets analyst at US-based BCP Securities, told Reuters.

But Siobhan Morden, New York-based head of Latin American strategy at Jefferies LLC, said the 3 percent growth figure is closer to the estimates of private economists than what it would have been under the previous base year.

“The pros versus cons argued in favour of downward revision of GDP growth to align with private sector estimates of 2.9 to 3 percent,” Morden said.

While some raised their eyebrows in suspicion, former Central Bank governor Alfonso Prat-Gay slammed the government for having squandered “US$2.4 billion’s worth of reserves through unnecessary GDP-linked bond payments,” emphasizing he had filed a complaint against former Domestic Trade secretary Guillermo Moreno and President Cristina Fernández de Kirchner for nudging up growth data.

Changed ways

With Argentina’s finances feeling the strain of having been cut off from the international capital markets since 2002, aside from credible inflation rates, the government has made progress in reverting the situation by agreeing to pay compensation to Spanish oil company Repsol for the expropriation of YPF, loosening currency controls and negotiating outstanding debt with the Paris Club group of creditor nations.

On the backfoot of submitting an amicus before the US Supreme Court in support of Argentina during its litigation against holdout hedge funds, brokerage and investment banking firm Puente Hermanos CEO Federico Tomasevich told the Herald: “This is an unfortunate event for Argentina, because the government had been providing information on growth consistently” above the limit to trigger GDP-linked payment, adding that “the justification is not important, because the rulebook has been changed suddenly, simply to save US$3 billion.”

Tomasevich expressed regret that after encouraging developments, the Economy Ministry has regressed to being “convinced that what matters are reserves and not credit and credibility,” adding that the latter two are what “finance development, growth and sustainability.”

 

@ferminkoop @franma1990

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