Wage Inflation Pressure in Argentina

As annual salary negotiations begin in Argentina, the country’s public and private sector unions in Buenos Aires and other major cities are demanding salary increases of more than 30%. These are above the controversial official inflation estimates (11% y/y in 2010) published by the National Statistics Bureau INDEC, as many unions question the data and expect greater inflationary pressure in 2011 given the upcoming presidential election in October. Quoted in the local press, several leading figures of the construction (UOCRA) and health unions (ATSA) said that the demands merely reflected the evolution of day-to-day prices. Most unions are demanding quadrennial salary adjustments to prevent deterioration in their real incomes, with inflation remaining on the upward trend.

Argentina’s Trade Surplus to Shrink Significantly

RGE expects Argentina’s trade balance to register a US$589 million surplus in December, compared with surpluses of US$0.4 billion in November and US$1.2 billion in December 2009. This would shrink the trade surplus to US$12.4 billion from US$16.9 billion in 2009 as a result of strong domestic demand. An over-stimulated and unsustainable domestic demand growth likely kept imports increasing at a strong pace (50% y/y), while exports (24% y/y) likely benefited from higher commodity prices and demand from Brazil—particularly industrial products.  

Argentina’s Inflation Expected Around 26%

Argentina’s National Statistics Bureau (INDEC) will likely report that inflation increased by 0.9% m/m to 11% y/y in December, after growing by 0.73% m/m to 11.02% y/y in November. Non-official inflation estimates, measured by local analysts, anticipate inflation to be around 1.8%-2% m/m or around 26% annualized, driven by food and fuel prices. Meanwhile, Torcuato Di Tella University’s December inflation survey suggested that 12-month-ahead inflation expectations are over 35% y/y and deteriorating. Overall, loose macroeconomic policies—as the government looks at a presidential election in October 2011—along with elevated inflation expectations and an inflationary external backdrop should continue to feed inflation inertia across the board in 2011.

Argentina’s Monthly Trade Balance (USD millions)

RGE expects the trade balance to register a US$1 billion surplus in October, compared with surpluses of US$1.15 billion in October 2009 and US$1.1 billion in September 2010, slightly shrinking the 12-month rolling basis trade surplus to US$13.97 billion from US$14.1 billion in September. Slowing demand from Brazil, despite high soft commodity prices, likely eased export growth to 34% y/y, while an over-stimulated and unsustainable domestic demand growth likely kept pushing imports up by 48% y/y.  

RGE’s Wednesday Note – Uncertainty Now, Stability Later for Argentina

The sudden death of former president Néstor Kirchner, widely considered Argentina’s most powerful politician, has called into question the sustainability of the current administration’s mandate. In the short term, Kirchner’s death will fuel political uncertainty, especially regarding who will represent the Peronist Party in next October’s presidential elections. In the medium term, however, the death of the man widely thought to be the power behind the current president—his wife Cristina Fernández de Kirchner—opens the door for greater political stability.

Argentina’s Spending Continues to Grow

RGE anticipates Argentina’s tax revenues to increase by 38% y/y to ARS36.5 billion in October (37% y/y three-month moving average, 3MMA). Argentina’s economic recovery and elevated inflation, together with a low base, are likely to continue to drive up income (25% y/y) and VAT revenues (39% y/y). Moreover, income captured from the nationalized pension system (31% y/y) should continue to contribute considerably to fiscal revenues, while international trade taxes should have grown at a strong pace (62% y/y) on the back of high grain prices and import growth.

Argentina’s Inflation Expected Around 30% in 2010

Argentina’s mistrusted National Statistics Bureau (INDEC) will likely report that official inflation increased by 0.7% m/m to 11.06% y/y in September 2010, after climbing by 0.74% m/m to 11.1% y/y in August. Non-official inflation estimates, measured by local analysts, anticipate inflation to be around 1.5%-1.8% m/m or above 20% annualized, driven by food prices.

Argentina’s Tax Revenues Increase

RGE anticipates tax revenues to increase by 31% y/y to ARS34.1 billion in September 2010 (39.6% y/y three-month moving average, 3MMA). Argentina’s economic recovery and elevated inflation, together with a low base, are likely to continue to drive up income (26% y/y) and VAT revenues (30% y/y). Moreover, income captured from the nationalized pension system (29% y/y) should continue to contribute considerably to fiscal revenues, while international trade taxes should have grown at a strong pace (61% y/y) on the back of high grain prices, especially wheat, and import growth. However, as long as fiscal spending continues to grow at rates above 30%, which has been mostly due to upcoming presidential election in October 2011, strong tax revenues will have a limited effect on Argentina’s primary fiscal standing. Needless to say, large transfers from the central bank are making fiscal accounts look better than they actually are. We maintain our forecast for a primary fiscal surplus of 1.1% of GDP in 2010 from 1.7% in 2009.

Argentina’s Current Account Surplus Narrows

Argentina’s current account surplus narrowed to US$3.1 billion in Q2 2010 from US$4.6 billion in Q2 2009, but it reversed from the US$0.3 billion deficit registered in Q1 2010. The result was worse than consensus expectations of US$3.3 billion, but broadly in line with RGE’s US$3 billion. The narrowing of the trade surplus to US$6 billion in Q2 2010 from US$6.8 billion in Q2 2009, as imports grew (51% y/y) faster than exports (24% y/y), together with a larger deficit in investment income to US$2.5 billion from US$2 billion in Q2 2009, shrunk the current account surplus. In H1 2010, the current account surplus narrowed to US$2.78 billion from US$ 6.1 billion in H1 2009.

Argentina’s Tax Revenues Surprise on the Downside

Argentina’s total tax revenues surprised on the downside, increasing by 36.7% y/y to 34.6 billion Argentine pesos (ARS) in August (consensus, ARS37 billion; RGE, ARS35.4 billion), easing from 40.6% y/y 3MMA. Government income benefited from strong, although decelerating, income (29% y/y), VAT (37% y/y) and social security contributions (26% y/y). Meanwhile, trade taxes buoyed at 69% y/y, as exports and import taxes increased strongly by 68% y/y and 74.5% y/y, respectively. Adjusted for official inflation, tax revenues increased by 23% y/y versus 27% y/y 3MMA; however, after adjusting for unofficial inflation of around 25% y/y, tax collection increased only around 11% y/y.