beyondbrics

The Argentine central bank’s first quarter inflation report contains many insights into the authorities’ views of how Latin America’s No. 3 economy will perform this year, but has almost nothing to say about inflation itself.

The 27-page report does not contain an estimate for the pace of price rises this year and also glosses over exactly how much prices rose in 2010 – which is just as well, considering that the official rate of 10.9 per cent is disregarded by the market and private economists, who say the real level is more than double that and likely to be approaching 30 per cent in 2011.

The central bank, widely considered to have moved closer to the government under the leadership of development economist Mercedes Marcó del Pont, who took over last year, cites “guaranteeing financial stability and the sustainability of growth” as a new key role, alongside traditional jobs such as defending the value of the currency.

The bank highlighted the following:

Food price inflation – which was some 40 per cent by some estimates last year – should moderate in 2011, especially in the first quarter provided there are no supply shocks or weather problems. Meat prices went through the roof in Argentina last year, largely because of squeezed supply after a serious drought. But the bank put a positive spin on what is, for consumers, a sensitive issue: “The increasing expensiveness of these goods found support in solid demand, reflecting a strengthened internal market.”

Prices in Argentina are likely to remain under pressure in 2011 from rising international commodities prices but high international reserves and solid fiscal and trade positions meant “the risks associated with any spiralling in price dynamics are limited”.

However, high commodities prices will benefit Argentina’s key agriculture sector. At current prices, 2011 farm exports would be worth $30.5bn.

The central bank “foresees a macroeconomic context in which the principal factors which led to GDP growth of 9 per cent in 2010, which enabled (Argentina) to overcome the impact of the global crisis in record time, will remain in force. GDP in 2011 expected to grow 6 per cent.

Trade with Brazil and China to remain strong. Brazil is a top customer for Argentine cars, which had a boom year, while China is a prime agricultural goods client.

Imports to outstrip exports but a 2011 trade surplus of around $10bn.

Monetary base is expected to continue to expand strongly – M2 growth of 27.9 per cent and Private M2 growth of 29.2 per cent.

Domestic demand to continue driving the economy with investment of 24 per cent of GDP, a 30-year high.

The car industry accounted for 52.5 per cent of the rise in manufacturing output last year and production should rise 12 per cent this year and hit a new record of 840,000 cars. Car exports should grow some 6 per cent.

Unemployment, at early 1990s levels, should continue to fall gradually but after high collective bargaining deals in 2010 – which in some cases reached 42 per cent – the first salary negotiations of the year have led to agreements on an advance fixed-sum payment, “postponing collective bargaining until the second quarter of 2011”.

The bank will continue to issue debt to “sterilise” excess liquidity and expects a 50 per cent rise in the amount sterilised this year. The managed flotation exchange rate will continue.

So, no surprises, and no changes – which means continued easy monetary policy with low interest rates in an election year likely to be marked by high government spending, now running above 30 per cent year-on-year.