November 23, 2014
ECLAC: Griesa’s rule endangers ‘pick-up in economic activity’
Also slashes close to percentage point from Brazil’s, expresses concern about debt case
In its latest report on regional economic activity, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has reduced its growth estimates for both Argentina and Brazil by 0.8 and 0.9 percentage points, respectively. The UN body noted Argentina’s legal battles with holdout hedge funds as placing a large dark cloud over the country’s economic potential for the rest of 2014.
Argentina had been expected to grow one percent during 2014, but in a report released yesterday in Santiago de Chile, ECLAC said growth will scrape in at a mere 0.2 percent. It warned that a “pick-up in economic activity” expected for the second half of 2014 was not entirely guaranteed in light of the ongoing legal saga Argentina faces against the holdouts in New York.
“This projection is subject to the performance of the external sector, while Argentina’s setback in its legal dispute with holdout investors (creditors from the default of 2001 who did not accept the debt swap offers of 2005 and 2010) endangers its access to external financing and, therefore, its potential for short-term economic growth,” it said, pointing to the potential for “new exchange-rate tensions” if the situation remains “unresolved.”
ECLAC’s secretary-general Alicia Bárena described the current estimate as “overly optimistic” during yesterday’s presentation of the report.
“We prepared it in July and that’s why given last week’s events (a lack of agreement with holdouts), we’ll leave it (the estimate) in suspense,” she added, describing the litigation as “an unprecedented situation which the world is watching.”
“It worries us a great deal,” she said, “because it may discourage renegotiations of sovereign debt and have many global repercussions.”
The report highlighted “regained momentum” in economic growth in 2013 from the previous year but pointed to the devaluation of the peso in January as having “had a contractile effect on economic activity.”
ECLAC’s revised assessment of Argentine economic performance paid heed to the prospect of better economic performance later in the year, recognizing the possibility of “improvement” in the current account balance.
“Burgeoning agricultural exports, slower import growth and a reduction in currency outflows associated with foreign travel mean that the current account could show some improvement in 2014,” it reported.
The government’s strategy shift at the start of the year, it added, “helped quell the financial and exchange-rate uncertainty that prevailed in the summer of late 2013 and early 2014, which in turn stabilized the stock of international reserves.”
However, ECLAC also had words of warning.
“The stock of international reserves is set to remain at current levels owing to difficulties in accessing external financing, the gradual but steady acquisition of foreign currency by residents and a debt maturity profile that, without being too onerous, has worsened as a result of the repayments agreed with the Paris Club.”
On the upside, 2013 saw expanded public consumption (up 7.4 percent), private consumption (up 4.3 percent), strong harvests, a slight recovery in the construction sector and positive financial intermediation.
But inflation remained “well above the regional average during 2013 and it quickened somewhat in the final quarter,” said ECLAC, which linked the rate of inflation to falling international food prices, the steep 16-percent devaluation of the value of the peso in January and a widening gap between the official and so-called “blue” black-market dollar. So far this year, it noted, trade had seen poor results, with grain exports plunging 55 percent from the same period last year, for instance.
Across the border
A drop in growth estimates for Brazil from 2.3 percent in April to 1.4 in the latest ECLAC report was linked to “the impact of the uncertainty relating to developments in the world economy and to changes in domestic economic policy.” Brazil’s trade surplus dropped from US$19.4 billion in 2012 to US$2.6 billion in 2013, the impact of which was softened slightly by foreign direct investment and higher portfolio investment, the report noted.
Both countries were affected by a slump in vehicle sales in Argentina, where Brazilian exports had enjoyed years of growth.
Argentina ended the year US$8 billion in the black, while so far in 2014 year-on-year exports have dropped 12 percent and 3.5 percent and year-on-year imports have fallen eight and 3.8 percent, for Argentina and Brazil, respectively.
“In contrast to the robust expansion in Brazilian exports to the Mercosur markets, especially Argentina, in 2013 (6.0% and 9.0%, respectively), in the first five months of 2014, they posted a sharp year-on-year decline to these destinations, dropping by 11.2% and 17.3%, respectively,” the report read.
In June, Argentina and Brazil signed a 12-month extension to their bilateral car trade pact, which grants the federal government much more favourable terms in the face of a shrinking trade surplus which applying pressure on the Central Bank’s foreign reserves. Cars make up half of the US$36-billion trade between the two countries.
The report linked the Argentine manufacturing industry’s negative growth to worsened “domestic conditions and the sluggish performance of Brazilian industry.”