THE ARGENTINE EMBASSY IN THE UNITED KINGDOM ECONOMIC & COMMERCIAL SECTION 65 Brook St. London W1K 4AH Tel: 020 7318-1300 Fax: 020 7318-1331 [email protected] www.argentine-embassy-uk.org

NEWSLETTER

MAY 2004

Content

ARGENTINE ECONOMIC OVERVIEW *Extracts from the recent speech delivered by the Argentine Minister of Economy and Production, Roberto Lavagna, at the IMF (24 th April 2004) *Extracts from the latest Inflation Report published by the Argentine Central Bank (BCRA, 22 nd of April)

FINANCIAL SECTOR *Improved tax receipts and primary fiscal surplus *Extracts from the presentation and comments made by the Argentine Minister of Economy and Production, Roberto Lavagna, in the Council on Foreign Relations (New York, 21 st of April 2004)

ARGENTINE TRADE (provincial exports)

TRADE NEWS *MercoLáctea *The London International Wine & Spirits Fair (18-20 May 2004) *Argentine trade stands in Polo events *Co-operation Agreement between EU and INTI (the Argentine Institute for Industrial Technology)

ARGENTINE ECONOMIC OVERVIEW

Extracts from the recent speech delivered by the Argentine Minister of Economy and Production, Roberto Lavagna, at the IMF (International Monetary and Financial Committee, 24th April 2004):

- After a strong real GDP growth rate estimated at 8.7% during 2003, the growth momentum of the Argentine economy continues encompassing practically all areas of economic activity. Sound macroeconomic policies, including the elimination of the quasi-moneys and the appropriate level of the exchange rate, a favourable external environment, and the high degree of popular support for the government, in the context of a smooth political transition, have all contributed to strengthen investors and consumer confidence which is, in fact, the real underpinning of economic activity in Argentina these days.

- All fiscal and monetary targets of the program with the fund continue to be met with wide margins. Revenues are being sustained by the strength of the economy and by a much improved fiscal administration aimed at combating tax evasion. On the expenditures side a continued control, in particular over wages, is also contributing to achieve levels of primary surplus beyond those committed in the program. This represents a considerable effort considering the sudden impoverishment suffered by the Argentine people with 50% living under the poverty line and over 25% under the extreme poverty line. The present strong fiscal position has set the right conditions for addressing the projected structural fiscal reforms, starting with the earlier reduction of the distortionary financial transaction tax.

- The banking system which has been one of the areas most affected by the December 2001 crisis is showing signs of renewed strength. Total deposits grew 19% in real terms during 2003. Credit to the private sector has also increased in particular for consumer loans, while non-performing loans continue to show a declining trend with clear improvements in the consumers portfolio.

- The most recent crisis in the energy sector has highlighted the need to speed up the process of normalisation of contracts with privatised companies, where adequate pricing policies and a clear and enforceable commitment to appropriate levels of investments will be present. It should also be highlighted that the energy crisis also reflects a much higher than expected level of demand due to the vibrant pace of economic activity, which we all welcome. However, it was also due to much higher than average temperatures during the summer months which points to a rather negative development that seems to be affecting many countries.

- On the upcoming restructuring of the non-performing public debt the Argentine government is committed to seek in good faith an agreement with private creditors. In that context, Argentina will only assume commitments that could be fully honoured over the medium-term. Accepting an excessive debt service that could jeopardise economic and social recovery is in the interest of nobody, as it would only bring more instability to the region and to financial markets.

For further information on this speech, please visit www.imf.org .

Extracts from the latest Inflation Report published by the Argentine Central Bank (BCRA, 22 nd of April):

- The macroeconomic performance throughout 2003 -which combined quarterly real GDP growth at two digit annual rates and a decreasing year on year inflation- extended also into the first months of the current year. The current estimate for growth during the first quarter of 2004 stands at 10% in annual terms, while retail inflation fell from 3.7% year-on-year (y.o.y) in December to 2.3% y.o.y. in March. Although the results for both variables were better than expected by the Central Bank of Argentina (BCRA), we have retained our forecast from three month ago: a gradual deceleration in growth, a slight rise in the Consumer Price Index (CPI) and an additional drop in the unemployment rate over the coming quarters.

- Acceleration in the rate of economic expansion in the second half of 2003 took the rate of GDP growth for the year to 8.7%. The statistical carry-over for the current year is 4.1% which, when added to the seasonally-adjusted 2.5% growth forecasted on the basis of leading indicators for the first quarter, sets a floor of 6.7% for GDP growth in 2004, even if the economy were to cease to grow from the second quarter onward. In this context, the Central Bank has increased its GDP growth forecasts for 2004 from 6% to 8%, in spite of the slowdown predicted for the second half of this year.

- With respect to retail inflation, the CPI increased 1.1% during the first quarter of 2004, less than half the increase during the first quarter a year earlier. Excluding the impact from “one time only” increases in prices, the accumulated inflation over the quarter was only 0.8%. Although this inflation rate (between 3% and 4% in annualised terms) is still below the range foreseen in the Monetary Programme, a premature revision of the monetary growth guidelines is not advisable.

- Investment, shored up by the lowering of interest rates and less uncertainty about the course of the economy, continues to increase at over 40% y.o.y., ending the fall in the productive capital stock observed for two straight years.

- Labour indicators show a noteworthy improvement, with job growth standing well above GDP growth causing a sharp decline in poverty levels. In just one year, the economic recovery triggered an 11.4% increase in employment, with the record creation of 1.3 million jobs. For 2004, the Central Bank forecasts a decline of approximately 4 p.p. in the unemployment rate.

- Among exogenous influences on the business cycle that must be monitored are some both external and internal. Among the former, the adjustment of the United States current account balance, which so far has only caused a decline in the US dollar against other currencies, can be pointed out as the principal source of uncertainty world-wide. Likewise, the sharp increase in agricultural commodity prices will probably continue throughout 2004, although the incipient overheating of the Chinese economy -which is the main buyer of these products- is a warning light for the medium run regarding changes in commodity prices. Lastly, although all signs point to the worst of the Brazilian recession being over and that the country is seeing the first steps of a recovery in output, doubts remain as to the strength of that recovery.

As to local sources of uncertainty, the renegotiation of public debt is in first place, as the fiscal sustainability necessary for long-term stability depends crucially on the results of these negotiations. In addition, the possible relative shortage of energy, which depends on the winter’s weather, is another risk factor to keep in mind. In the short term, however, it does not appear to be an important threat to either economic growth or the path of the price level”.

For further information on this Inflation Report, please visit www.bcra.gov.ar .

FINANCIAL SECTOR

Improved tax receipts and primary fiscal surplus:

The Argentine government recently announced that April tax receipts grew by 29% compared with April 2003 and that January-April tax receipts grew by 32% compared with the same period of 2003.

The government is currently working on a report that will determine how it would use the improved tax receipts and primary fiscal surplus. According to some official statements, the first priority will be to start solving the so-called “social debt” and to stimulate investment in the energy sector.

The Argentine Chief of Cabinet has said, regarding this strong performance and the so-called “social debt”, that “we have more money, but we have a lot of poor peoples, a lot of indigents, a lot of socials needs and also in Education. We still have an Argentina where the 13% of its population does not work. Even though Argentina is growing, we still have all these debts”.

Extracts from the presentation and comments made by the Argentine Minister of Economy and Production, Roberto Lavagna, in the Council on Foreign Relations (New York, 21 of April 2004):

- Looking ahead means achieving a restructuring that is credible, sustainable over time, and which minimises losses. Recovery and value creation are the central objectives and are part of the proposal made by Argentina in Dubai, which expressly takes into account the link between growth and payment capacity. We intend to complete the technical work in the second half of May or first week of June in order to start with the formal debt exchange process as soon as possible.

- In the meantime, let me say that the Argentine economy is recovering, and significant business opportunities appear in our country. The GDP grew 8.7% in 2003, and private estimates put it up over 7% this year. Industry grew more than 16%. The construction grew practically 38%. Inflation was, last year, at 3.7%, and is currently up at a level consistent with international levels.

- For the first time in four decades the central government has booked two consecutive years of primary fiscal surplus. There is also surplus in the provinces as a whole. The fiscal effort made by Argentina in the middle of this crisis in two years is equivalent to 5% of the GDP, going from under 2% during the ‘90s to over 3% now.

- In the middle of the crisis in the year 2000 and 2001, the provinces issued something like 11 provincial currencies. The central government had redefined the domestic currency, which, of course, is essential to implement a unified monetary policy. Reserves are being rebuilt in spite of nearly 7 billion dollars in net payments to multilateral lending agencies. And maybe it should be noted that Argentina is the only country among the large debtors of the IMF, the World Bank and IDB (Inter- American Development Bank), to have reduced its debt to these agencies in net terms in the last two years. There is a floating exchange rate practically without restrictions in exchange markets, and the external trade surplus is around 12% of the GDP.

- The financial sector has recapitalized, practically increasing 25% their capital, which is extremely important in terms of sustainability. In two years, a little more than 2 million jobs were created. That means that we bring down the unemployment rate from 24% to 14.5%. Of course, this is still a high figure, and it is -and it will continue to be- the central axis of economic policy to continue to create conditions for the private sector to generate employment.

- A very important and essential element to maintain the future growth is investment. Investment in equipment, machinery increased 45% in 2003. And this year, in the first quarter, the import of capital assets has grown over 100%.

- In four months, we practically got the total amount of surplus we had agreed upon with the IMF in September, but you have to take into account that not all this money goes directly to the treasurer. Part of this money goes directly, without any kind of possibility of changing things, to the provinces. This is the co-participation, the sharing of revenues between central government and the provinces. Other parts go directly to some funds related to investments -funds to investment in roads, in energy, and things like that. Again, this is automatic without any possibility of the central government to intervene. The last part is what you can call discretionary expenses or the spendability. In that case, we have a combination of a decrease in taxes and increase in some expenses.

The decreases in taxes are three. The first is a decrease in financial transactions taxes, starting the process for reducing these taxes, which is, of course, not precisely a very good kind of tax for the financial system. The second one is the reduction of the value-added tax (VAT) for all the people -2 million people- which has --will have a card. It’s a social programme. They buy goods in different parts of the country and they will receive 100% return of the VAT. The third one is a project we sent yesterday to the congress to decrease the value-added taxes on new investments and also some acceleration in fiscal amortisation --I think the word is amortisation-- fiscal amortisation also in new investment. This is the side of the decrease in taxes.

Concerning the increase in expenses, we are still discussing, but up to now, the only probable additional expense is an increase in the minimum pensions that is received by the pensioners --not all the pensioners, but just the minimum category, which is now 240 pesos. And that means less than 100 dollars. This is the sharing of this additional amount. As you can see, we have some precise use for that.

- Argentina has employed three international, very important banks to assist Argentina for the discussion of the external debt, the part of the debt which is in the international markets, and three banks that will take care of the debt in the hands of people living in Argentina. We are working with these six banks in the context of the framework we created in Dubai. And maybe it will be useful if we recall what this proposal of Dubai is, because there was a lot of, maybe, misunderstanding, maybe a lot of pressure over Argentina, saying that this offer will imply a haircut of 92%. This is absolutely wrong. The offer includes 25% repayment, and a very important decision in terms of social and political decision in the Argentine economy, which is the decision of sharing the benefits of the future growth, including in all the menus we will present, a bond related to growth. I know the markets are not used to these kinds of bonds, but this is a different restructuring. It is not the usual one, and we will see the results. In any case, we are working with the banks in order to recover value, to create value, and the only way to do that is some kind of link between growth and payment capacity.

For further details on this presentation, please visit www.cfr.org/pub6984/paul_a_volcker_roberto_lavagna/a_conversation_with_roberto _lavagna.php .

ARGENTINE TRADE (provincial exports)

The good performance of commodity prices, the incipient recovery of world economic activity and the current high rate of exchange (as a result of the end of the Convertibility) led to a significant growth in Argentine exports last year (+14% y.o.y.). External sales grew in most of Argentina’s provinces, as reflected by the preliminary figures of exports during 2003. The most dynamic districts were: Santiago del Estero (+194% y.o.y.), Chaco (+47% y.o.y.), Entre Ríos (+56% y.o.y.), La Pampa (+36% y.o.y.) and Santa Fe (+28% y.o.y.). Only three provinces exported less than in 2002: Tucumán, Tierra del Fuego and Corrientes.

From the point of view of geographical distribution, approximately 70% of exports originated in the Pampean Region, mainly in (34%), Santa Fe (21%) and Córdoba (12%); followed by the Patagonian provinces, which accounted for 13% of total exports, prominent among them Chubut (5%), Neuquén (4%) and Santa Cruz (3%).

Owing to the strong position of the Pampean Region in the structure of external sales, shipments from Santa Fe, Buenos Aires, Córdoba and Entre Ríos contributed approximately with 80% of last year’s total growth in exports. This performance was mainly due to good trend in the agricultural sector generated by the increase in international prices last year, in particular for the soya and its by-products.

On the other hand, the Patagonian provinces of Neuquén, Santa Cruz and Chubut played an important role in the growth of total exports (together accounting for 11%), through the sale of fuels and unprocessed fish and seafood. The contribution of the provinces of Santiago del Estero and Chaco to the growth of total exports was also significant, with a remarkable expansion of external sales of oilseeds; and the province of Catamarca, basically through copper mineral exports. Together, these three districts accounted for a 7% increase in the total external shipments last year.

TRADE NEWS

MercoLáctea:

The 4th edition of MercoLáctea, the Dairy Show of , took place in the city of San Francisco, Córdoba (Argentina) from 6th to 9th of May 2004. The exhibition, which is the great annual gathering of the dairy sector of the region formed by Argentina, , Uruguay, Paraguay, Chile and Bolivia, received 46,000 visitors. It provided the ideal environment for promoting dairy business and closing deals, having being an excellent occasion for companies to enhance their institutional presence, launch new products and services.

For further information, please visit www.mercolactea.com.ar .

The London International Wine & Spirits Fair (18-20 May 2004):

Near 40 Argentine wineries will be participating in this important event, which will take place at ExCel. They will be exhibiting their products in stands P20 - P30 and Q20-Q30. Argentine wine exports to UK increased 45% in 2003 (+50% in quantity), comparing with 2002, and the British market has become the second main destination for Argentine wines, after the US.

For more information about this exhibition, please visit www.londonwinefair.com .

Argentine trade stands in Polo events:

The Embassy is organising and co-ordinating the participation of several Argentine companies, that will be exhibiting their products, in the following polo events: The Hildon Queen’s Cup Final (Guards Polo Club, Windsor, 13 June 2004), The Veuve Clicquot Gold Cup Finals (Cowdray Park Polo Club, 18 July 2004) and The Cartier International Polo Day (Guards Polo Club, Windsor, 25 July 2004).

The products to be exhibited, and in some cases tasted, will be leather articles (bags, boots), polo equipment, clothing, high quality handicrafts and meat, wine, pasta, marmalade, among others Argentine food products.

Co-operation Agreement between EU and INTI (the Argentine Institute for Industrial Technology):

INTI has recently signed a Co-operation Agreement with the regarding quality certification of Argentine export products. The EU will provide the Argentine Institute with 6 million Euros that will be used to equip INTI laboratories and give them technical advice regarding the certification of products like honey, cheese, software, no metal minerals, timber and furniture. The purpose of this agreement is to improve the productivity and competitiveness of small and medium Argentine companies. On the other hand, it will allow the harmonisation of quality standards with the EU.