News October 26, 2009

ECONOMY

Deloitte´s Companies Barometer

During September Deloitte completed the 15th Companies´ Barometer; this survey includes 116 companies with total revenues of over $ 80000 millions with over 152000 employees. Some of the opinions were the following, which in general demonstrated a lower pessimism than in the June’s edition:

• on the investment climate during the last year: 19.5 % the expectations remained stable, 77 % the expectations worsened; on the coming year: 12.5 % expects an improvement, 42 % a deterioration; the issues that are preoccupying more include: the political confrontation 40.2 %, the increase in public expenditures 15.2 %, the social conflicts 14.3 %
• on the economy’s situation during the last year: 7.9 % stated that the economy improved, 23.7 % there were no changes, 68.4 % it worsened; on the expectations for the coming year: 33.9 % expects improvements, 39.3 % expects a deterioration
• on the employment during the last 12 months: 15.9 % there were no changes, 84.1 % there was a deterioration; for the coming year: 48.2 % expects a decrease in the unemployment, 36.6 % does not expect changes, 15.2 % anticipates an increase in the unemployment

Primary fiscal surplus

The government reported that during September the primary fiscal surplus was $ 223 millions, 93.7 % less than in the same month of last year, the financial result (after the payment of interest) was again a deficit, $ 2181 millions; a journalist commented, "...the primary expenditures increased 28.6 % in September while the revenues increased only 6 %, in the first 9 months of the year the expenditures increased 30 % and the revenues 10.8 %... the primary fiscal surplus during the first 9 months of the year was $ 8696 millions and the financial deficit $ 4735 millions... the international crisis and the domestic one, ended with one of the two pillars highlighted by the government when referring to their economic program, now we have only one left the trade surplus, which is not little... minister Boudou commented: despite the reduction of the surplus we are satisfied with the fiscal performance of this year, which is the product of the restructuring made since 2003 to date and of our counter cycle policies which have allowed to sustain the production and employment levels...":

Trade surplus

The Indec reported that during September the trade surplus was US$ 926 millions, 42.8 % less than in the same month of 2008, the exports reached US$ 4581 millions (34 % less than in 2008) and the imports US$ 3655 millions (31 % less); a journalist commented "...the current signs of a recuperation in the activity level have not modified the collapse of the foreign trade, which suffered a significant contraction for the second consecutive month, and September’s surplus became the lowest of the year... despite the decrease in the trade surpluses the accumulated for the year reached US$ 13257 millions -exceeding the total surplus of 2008- and for this year it is estimated that it will be around US$ 16000 millions... according to the analysts these results can not be taken as good news, since both the exports and imports are decreasing, and specially the import of intermediate goods -which fell 38 % in September and 43 % during this year-, and this means that we can expect fewer exports of manufactured goods in the future...".

Debt swap

The government announced that the swap of the debt still in default will be reopened, a journalist commented "...the hair cut will be greater than that of 2005 (65 %) and the investors will have to contribute with fresh fund in exchange of another bond for the unpaid interests... according to minister Boudou the transaction has an acceptance floor of 60 % on the US$ 20000 millions, or US$ 29000 millions if the unpaid interest is included... the government will have to submit to Congress a project to suspend -while the new offer is being negotiated- the law that prohibited reopening the swap… Boudou highlighted that this was the main target established by the government’s financial strategy, this comment was interpreted as if the negotiations to reassume normal relationships with the IMF will develop much slowly, the minister added that the country wants to return to the voluntary credit markets with an interest rate of one digit...".

Business climate and investments

A journalist commented a survey prepared by the firm SEL Consultores among 170 large and medium size companies, "...the results show a difference between the perception of the present situation and that of the future, 46.5 % considered positive their business´ situation, 6.5 % good, 44 % regular and the rest bad… this tenuous optimism disappears when the question is on new investments, 61 % believe that the government's decisions and the political and social situation affect negatively the investment decisions, this indicator was 50 % during the first quarter... when asked on the comparative impact of the international situation vis-à-vis the local factors at the time of deciding investments, in the first quarter 49 % attributed to local factors the retraction in new investments but this percentage increased to 88 % during the third quarter... on the business climate 67 % of the executives considered that it had worsened, 27 % expected an even worst situation in 2010 and 50 % a similar situation...".

Crisis, economists and Krugman

A journalist referred to comments made by Paul Krugman in How did the economists get it so wrong?, "...according to Krugman the fact that a few economists anticipated the crisis is not as important as the blindness of the profession to the possibility of a catastrophic failure of the market economy... for years the financial economists believed that the markets were inherently stable, that the price of the shares and other assets were right and there was nothing in their models that could suggest the possibility of a collapse as that of last year... on the macro economists side, their visions were divided between those that insisted that the market economies could never go astray and those that believed that the economy could go stray but that the all powerful Fed was able to make them return to prosperity... none of them was prepared to face an economy in which the Fed´s efforts would not be enough... according to Krugman the profession derailed because the economists as a group mistook the beauty of the mathematical models for reality, and as the memories of the Great Depression faded away they again became in love with the idealized vision of an economy in which rational individuals interact in perfect markets, which could be beautifully represented by fancy equations... regrettably this romantic vision of the economy made most of the economists forget the many things that could go wrong, they left aside the limitations of humans´ rationality, the problem of the institutions that run amok, the imperfection of the markets specially in the financial markets, and the danger of believing that it is not necessary to regulate... regarding the future, Krugman states that the economists will have to learn to live with disorder, recognize the importance of irrational and unpredictable behaviors, face the intrinsic imperfection of the markets and accept that an elegant and comprehensive economic theory that explains everything is still far away...":

Our markets´ trends

In our country the indexes closed last week as follows: the index “Bonos IAMC” (Instituto Argentino del Mercado de Capitales – argentine capital markets bond index) increased 3.45 % last week and the country’s risk (EMBI Argentina) closed at 679 b.p. which compares with 694 b.p. on the prior week; with respect to the stock market, the Merval -an index based on a group of shares- closed at 2295.88 which compares with 2207.28 on the prior week.

The dollar closed at $ 3.83 (0.01 less than in the prior week) and at the Rofex the dollar futures´ market closed at $ 3.83 by the end of November and $ 4.07 by the end of August; the CB´s international reserves are estimated at US$ 46032 million which compare to US$ 45770 on the prior week.

Last week the CB bid for $ 800 million in Lebacs and Nobacs, received offers for $ 2834 million and accepted $ 2102 million; the rates for the Lebacs were: 147 days 13.46 %, 168 days 13.79 %, 189 days 14.30 %, 252 days 14.75 %, 294 days 15.21 %, 343 days 15.50 %, 490 days 16.49 %, 553 days 16.95 % and for the Nobacs (private banks Badlar rate plus 2.50 % annual) the additional rates were 161 days 0.60 % and 273 days 0.90 %.

The Banco Nación’s interest rates continued at the following levels: fixed term deposits for 30/59 days at 9.38 % annual, 60/89 days at 9.88 %, 90/179 days at 10.65 % and over 180 days 10.78 %, general loans at 20.57 % annual and overdrafts at 35.81 % also annual.

 
POLITICS

An opinion on our politics

A journalist commented, “…a significant wave of corruption covers the country, affects all levels almost without exception, impacts the morality, the institutions, the politicians, the social and economic context, and all of this is happening at the same time, something which has happened very few times in our history… not only impacts the reiteration of the episodes which already constitute an epidemic, but the impudence of them… it is clear in the disdain for minimum ethics in the public sector, everything seems to have a price for some argentines, even their own consciences… the people knows or feels this, this is why they rejected the present administration at the time of the recent elections, but this result has been ignored by those who should have taken notice, what they have done is to deepen their model and to emphasize the worst of their behaviors and aims …”.

A vision on the government and the center-left ideology

A journalist referred to comments made by Tomás Abraham on the government and its followers, "...the government continues to do what it has been doing since the beginning of it mandate, since the inauguration of the Museo de la Memoria (a museum to remember the terrorists of the 70s) it assumed certain reclaims of Argentina's society and used them politically to legitimate obscure policies, policies in which the use of the funds is not clarified, where there are sudden enrichments apparently illegal, where a new oligarchy is created and acquires significant power as soon as they get close to the government, and all of this is legitimated with speeches that follow a revolutionary style... what they have done is: they went to the markets and bought everything that was left from the 70s and this is being justified by people who are trying to protect a government that they consider popular and that in their view is defending the people from a new right... when the government kisses Evo Morales and at the same time US$ 1000 disappear in Santa Cruz, I do not see an avant-garde government, this is something else, this is a fraud and we are living times of ideological frauds...".

On the avant-garde politicians who support the government's measures he commented, "...there is something which touches the Achilles heel's of certain people to whom the idea of the State is like if it were an angel with a harp, then the government tells them: we have to take Aerolíneas from the private sector and place it in the government's hands, after that they do the same with the Afjps (private pension funds administrators), and so on... to accept this is part of the socialists´ idiosyncrasy... in practice what they are really doing is giving the people's funds to a government who does not account what is doing with these funds... are they socializing?, no they are privatizing, since a privatization is not only to make private a public service, but also the appropriation of the public funds for a private use...".

An opinion on the opposition

An analyst commented, "...the different contenders continue not knowing how to organize an opposition, the key issue that the parties in the opposition have to face is not how to reach power but how to organize themselves to be able to resolve everything that is contaminated and is being discredited by the people, from the presidential post to the Justice power… the lack of such a vision makes many them voice a purpose which sounds inappropriate, I want to be president!, and in doing this they increase the fragmentation among them… this brings pleasure to the government, the more the opposition is fragmented the more will be their present and future chances... Kirchner is not willing to learn from his electoral defeat, but those that defeated the government are not prepared to learn from their victory, there is an unanimous triumph of the hypocrisy and the ineptitude...".

Additional political comments

The political comments made during last week include the following.

. "...in our Congress the votes change, slide, transform, a part of our politics and our society has lost all sense of morality, the colossal scandal for the bribes at the Senate that took place ten years ago, could occur today once a week and nothing would happen...".

. "...Kirchner understood the message of June 28th, 30 % of the argentines voted him to deepen the model, those that did not understood the message were those that won at the elections, they were asked to limit the government’s excesses and not only they did not do this but are allowing some of the supposed followers to join the government’s side...".

. "...the government plans to submit to Congress a project related to the political reform, through this initiative Néstor Kirchner expects to compete in the presidential dispute, he believes that with different game’s rules for the selection of the candidates, his chances will improve significantly in the midst of a Partido Justicialista deeply fragmented...".

. "...the government is preparing for the next battle at Congress, they want to preserve at any cost the main posts at the Representatives Chamber after December 10th (when those elected last June assume their seats), in order to achieve this they have started to co-opt legislators from the opposition through political favors and State’s funds...".

. "...the Peronistas need to be at the shadow of a strong leader and although Kirchner´s tree has lost many branches in reality he seems to be the only one available, for us it should be helpful to remember that with time the trees recuperate their strength...".

. "...the opposition’s vision is a candid one, they imagine a future with great plans limiting the Kirchners, without realizing that they are facing an acting government and that the Kirchnerism does not hesitate when faced with the line that separates what it is correct from what it is not...".

. "...as from December the Congress´ blocks from the center left parties will be crucial at the Representatives Chamber, they will be the ones who will tilt the balance either in favor of the government or the opposition, depending on the issues being considered...".

. "...those that voted against Kirchner should analyze what they have done with their vote, many of them deposited their votes in pseudo avant-garde candidates who today are openly aligned with the government and have forgotten that the people voted them to oppose to the government's excesses and to lead a change towards better institutions and more democracy...".

Economic and political scenario

An analyst commented. "...on June 29th a vision started to generalize, the result of the elections was the best possible, Kirchner had lost the elections but he retained enough power to negotiate minimum governing conditions with the opposition, including the Peronista´s dissidents... this opposition was supposed to place limits to the government's excesses until 2011 when the present government would be replaced... in summary, we had only to endure another two years in an orderly and predictable context... in this scenario the political uncertainty would be lower and greater the possibilities of Argentina coupling with the rest of the world's recuperation... today there are doubts that we will follow this road, due to the lack of a united and coherent opposition, Kirchner has returned to control the politics, he wanted to deepen the model and he is doing just that... probably the politicians and economists should start to revise the scenario on which they are projecting our country's future...".

Argentina and bigotry

During the last days new acts of intolerance were committed, one of them was against the president of the Partido Radical and the other against the U.S. ambassador, in both cases a majority of the press attributed these attacks to groups close to the national government; a journalist commented, "...in a democracy every person should be able to enjoy diversity, without being subject to the anarchy or tyranny of the absolute truths, politics and dialogue are those that allow a peaceful coexistence... notwithstanding, during the last year bigotry demonstrated and supported from the highest level of the political positions have expanded... today in Argentina physical violence has become a current episode against those that think differently and this is nothing else but an act of profound intolerance... it is vital that these habits, which regrettable are becoming a sort of political culture, be eradicated as soon as possible, no sector should assume the right to attack another, nor to exceed the precise frontiers delimited by our Constitution and our laws...".

Bernanke and the trade imbalances

The Federal Reserve’s president participated at a conference on Asia, at the Federal Reserve Bank of San Francisco; a journalist referred to his comments, "...according to Bernanke the U.S. trade deficits with the developed countries are decreasing, but they still constitute a significant threat to the global economy... he requested Asia's leaders to increase the fiscal expenditures, to develop better pension systems, in order to achieve a global growth less dependent from the U.S. consumers... between 2000 and 2006 the U.S. trade deficit increased from less than US$ 400000 millions to over US$ 800000 millions and as a percentage on GDP from 2 % at the middle of the 90s to over 5 %... although the production figures in many Asian countries are increasing more that their exports, a sign that the domestic demand is increasing, Bernanke highlights the risk of the imbalances increasing again once the global economy recuperates... according to many analysts balancing the global growth depends to a large extent on the appreciation of the Asian currencies, specially that of China... according to Bernanke once the U.S. trade deficits start to decrease the confidence on the dollar will increase, the U.S. consumers will save more and the global growth will be more balanced...".

 
REGION

Brazil

A journalist commented, "...this time the Brazilian recession was short, as many jobs are being created now as before the collapse of the economy in 2008, the foreign direct investments are increasing and in the third quarter the economy has returned to a growth rate of 5 % in annual terms... this rebound brings out different dilemmas than those being debated in most of the rest of the world... the real has strengthened with respect to the dollar, the exporters and manufacturers are complaining and the government has established a 2 % tax on the foreign capitals which are invested in the financial markets, but it is doubtful that this tax may discourage the inflow of speculative capitals, the stability of Brazil's economy and the high returns of the financial investments make them very attractive... a strong real has many benefits, helps to control inflation and promotes the importation of capital goods, but an increasing current account deficit financed with foreign capitals is also a preoccupation... it is possible for the CB to increase the reference rate (today at 8.75 %) which although at Brazil represents a record low level, it is significantly high compared to international standards, this is a decision very difficult to take in a political and electoral year...". Last week the dollar closed at 1.72 reales, which compares with 1.71 reales in the prior week, and the Bovespa index at 65058.84 which compares with 66200.48 on the prior week.

Chile

A journalist commented, "...the popularity of president Michelle Bachelet has reached 80 % but it has not been transferred to Eduardo Frei the candidate for the Concertación (the governing party during the last 20 years), in recent surveys Frei shares the second place with the independent candidate Marco Enríquez-Oromí, both with 20 % of the voting intention, while the rightist candidate Sebastián Piñera continuous leading the polls with 41 %...". Last week the dollar closed at $ 532.60 pesos which compares with $ 547.90 in the prior week and the stock index closed at 16069.43 which compares with 16194.00 on the prior week.

Uruguay

A journalist commented, "...yesterday’s elections ended in a ballottage, nevertheless, there is a consensus which permeates all political parties and the businessmen have this clear -despite their own personal preferences- whoever will run the next government is not a variable which preoccupies them at the moment of planning their investments...”. Last week the dollar closed at $ 20.85, which compares with $ 20.55 on the prior week.

LEGISLATION

Taxes on electronic products

The Senate approved and sent to the Representatives Chamber the project which applies a 26 % excise tax and doubles the applicable VAT rate (from 10.5 % to 21 %) to those products not manufactured or assembled in Tierra del Fuego.

Supreme Court vis-à-vis Congress

A journalist commented that those affected by the new audio visual media law would find support in a ruling by the Supreme Court back in 2007, "...the Supreme Court interpreted that the Senate had not respected their own internal rules when making a decision... the Court stated that the process to sanction a law may be reviewed by the Justice, that the judges can control if the other powers went beyond their own rules... that a violation of the rules that govern their functioning and affect individuals´ rights can not be exempted from the Justice's control...".

Promotion of industrial projects

A journalist commented, "...the government announced a new bid for up to $ 800 millions to be assigned before the end of the year, related to the law which promotes investments... the companies chosen for these benefits will be able to opt for the accelerated depreciation of the fixed assets in the income tax, or the anticipated reimbursement of the VAT... moreover, those projects which are associated to exports or have a sustainable environmental profile will be able to take advantage of both benefits...".

NOTE: The purpose of this Newsletter is to summarize last week’s news and is based on information available in the press at the date it was issued. It can be accessed at our website or you can request that we email it to you in Spanish or English. Visit our site www.deloitte.com/ar where you will find additional publications describing our economy, politics and legislation.