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21/10/2005 | Current-Account Surplus Shrinks in Argentina in Q2

WMRC Staff

The latest release on balance of payments shows that the Argentine current-account surplus continues to shrink in 2005; the trend is expected to persist in the short and medium term.

 

Global Insight Perspective

Significance

The current-account surplus is continuing to decrease due to a slight reduction in the trade surplus, together with an increase in profits and dividends repatriation, and a higher deficit in the balance of services.

Implications Although the external accounts are weaker than in 2004, they are still strong enough to make the authorities feel comfortable.

Outlook As the economy keeps growing close to full capacity, the increase in total exports and capital inflows will not match the higher import bill and profit repatriation. At Global Insight, we expect Argentine external accounts to continue deteriorating at a slow pace in the short and medium term.

Shrinking Surplus

The current-account surplus for the second quarter of this year reached US$1.8 billion, practically the same as that recorded in the same quarter a year earlier. However, this year's figures include lower interest payments (approximately US$1.0 billion) as a consequence of the debt exchange. After isolating this effect, it is clear that the current-account surplus is continuing to shrink. Causal factors include a slight reduction of the trade balance, together with an increase in profits and dividends repatriation, and a higher deficit in the services balance. The cumulative current-account surplus for the first half of 2005 reached US$1.8 billion (the current account posted a deficit of US$5 million in the first quarter), an important reduction from the US$2.3 billion observed during the same period a year earlier .

The financial account for the second quarter of 2005 reached US$1.4 billion. This amount includes private inflows of capital equivalent to US$2.4 billion, and public outflows of US$1.0 billion due to interest payments on the new debt issued, as well as amortisation to debt with multilateral organisations. The increase in private capital inflows corresponds to higher foreign direct investment, and also to greater portfolio investment attracted by higher interest rates in local currency and the potential gain of a nominal appreciation of the Argentine peso.

The last two releases on Argentine trade reveal some recovery compared to the first half of 2005, when the trade surplus was sliding from its 2004 figures. Total exports reached US$3.79 billion in August 2005, which represents a 28.8% increase year-on-year (y/y). This increase was supported by higher volume exported (up 19% y/y) and higher prices (up 8%). This important increase in exports in August was matched by a 29.2% increase (y/y) in imports, which reached US$2.63 billion. This advance is a result of higher prices of imports (up 5% y/y) and quantities imported (up 23% y/y). Total imports for the first eight months of 2005 reached US$18.51 billion, a 31% y/y increase.

As a consequence of this balance-of-trade profile, with imports growing faster than exports, the cumulative trade surplus for the period January-August decreased from US$8.57 billion in 2004, to US$7.89 billion in 2005.

Outlook and Implications

The latest two releases on Argentine exports and imports reveal some recovery in the level of trade surplus with respect to the previous year. In addition, we expect the surplus in the capital account to remain strong in the third quarter, as there has been an important inflow of portfolio investments, mainly attracted by higher interest rates in peso-denominated debt. Together, these spell good news for total external accounts for the third quarter of 2005. However, as the economy keeps growing close to full capacity, the increase in total exports and capital inflows will not match the higher import bill and profit repatriation in the medium term. We expect the current-account surplus to be equivalent to 1.9% of total GDP in 2005.

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com

WMRC (Reino Unido)

 


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