Argentina: New GDP calculation reveals weaker economy, sparks controversy on warrant payment
March 27, 2014
On 27 March, Finance Minister Axel Kicillof announced that the Argentine economy grew 3.0% in 2013 according to preliminary figures. The increase undershot the 5.1% expansion the government forecast in September 2013 as well as the 4.9% growth suggested by the monthly economic activity figures that were released in February, which are a close proxy for GDP growth. The reading is based on a new GDP calculation methodology that shifts the base year of calculation from 1993 to 2004. New figures bring official estimates closer to the independent estimates that local private analysts produce, which had pointed to lower growth than official sources had been reporting. Previous official GDP figures had been viewed with suspicion both within the country and abroad for overestimating economic growth ever since President Nestor Kirchner changed senior personnel at the National Statistics Institute (INDEC) in 2007. Provision of inaccurate economic data prompted the International Monetary Fund (IMF) to censure Argentina last year. Within this context, the Fund set out a timeline in December 2013 for the country to take remedial measures, which required Argentina to release new GDP and inflation figures by March 2014. Last year's 3.0% expansion fell short of the 3.2% GDP growth threshold that would have triggered payments of around USD 3.5 billions to GDP warrant holders. GDP warrants-which linked coupon payments to the economy performing above pre-set targets-were issued as a part of the 2005 and 2010 debt restructuring that followed Argentina's default in 2002. It is still not clear whether the government will actually forego warrant repayment or whether it will set another reference trigger due to the change in the base of GDP growth calculation. On 7 April, Kicillof-who, during the 27 March press conference, stated that eventual payment would be based on new GDP data-announced that all details on warrant repayment will be provided in September, when a release of more detailed GDP figures is scheduled. On the eve of the news, the reaction among investors was broadly negative as prices for GDP warrants dropped sizably. That said, government bonds experienced a rally, since, by not paying the GDP warrants, economic authorities now have more reserves at their disposal to service the debt. During the same press conference, Kicillof announced the result of the monthly indicator of economic activity for January. Economic activity expanded 1.2% over the same month of the previous year, which was lower than the 1.6% growth the market had expected. This reading was also affected by the change of base year, which explains the lower-than-expected performance. On a monthly basis, economic activity contracted a seasonally-adjusted 0.4% over the previous month. While the new GDP figures reflect private analysts' estimates more closely, a discrepancy between official and non-official figures still exists. LatinFocus Consensus Forecast panelists expect official GDP to experience flat growth this year, which is down 0.5 percentage points from last month's forecast. For 2015, participants expect official GDP to grow 1.2%. Additionally, LatinFocus panelists expect non-official GDP to experience a 1.6% contraction in 2014 and to expand a meager 0.5% in 2015. Governmental authorities' decision to provide more realistic GDP data represents a further step away from the unorthodox style of economic policy management that the administration has adopted since Kirchner won re-election in 2011. That said, many analysts believe that the decision represented what was mainly an opportunistic move to avoid the warrant repayment, thus tarnishing the credibility of Kirchner's administration. Meanwhile, the government recently adopted measures to improve its fiscal position and reduce dependence on Central Bank financing. Economic authorities recently announced a 20.0% reduction on heating gas subsidies, which will affect households, but not industrial users. Moreover, the government issued ARS 5.5 billion worth of peso-denominated bonds maturing in 2017, marking the first bond issue since 2008. However, the road ahead will be tough for the government. Amid rampant inflation and stagnating economic activity, social unrest is mounting. On 10 April, a nationwide strike organized by the country's biggest unions brought the country to a virtual standstill. This is the second general strike the Kirchner administration has faced. Workers are protesting in order to convince the government to lower taxes and raise wages as inflation around 30.0% is eroding workers' purchasing power.
Author: Armando Ciccarelli, Head of Data Solutions