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G. Breuer's Newsletter
August 2010
Dear Clients & Friends,
We are sending to you the monthly edition of our Newsletter, where you will find an update on:
Political News
Economy News
G. Breuer News

Please do not hesitate to contact partners Jorge Otamendi and Diego Fissore for any specific question you may have after reading the news below, or for any other issue you may need advice on.
Best regards,


G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
www.gbreuer.com.ar

Political News
The months of July and August so far have been politically active. We start by saying that even though the presidential elections in Argentina will be held almost a year from these days, the movements towards candidacies have started. And the time for definitions started both in the official party and in the opposition.

As to the official party, some polls show that both members of the presidential couple improved their image and would now stand at about 36% of positive image. Mrs. Kirncher would enjoy now a better image than her husband. Months ago, both Mr. and Mrs. Kirchner were well below 30% of positive image. Because of this, and although it is unknown who will head the presidential ticket for the official party, the presidential couple’s hopes of running and winning in the first round of next year’s elections are increasing.

In order for a candidate to win in first round, he or she needs to obtain more than 40% of the votes and a difference of at least 10% with respect to the next contender. It is said that if any of the Ks does not win in the first round, it is extremely unlikely that they will win in the runoff, since their negative image is still very high, close to 60%.

Some say that the main reason for which the presidential couple still has some hopes of winning the elections in 2011 is due to a much divided opposition. The opposition, for now, can be divided into three main groups: the dissident Peronists, the Civic Accord and certain left-wing parties.

The dissident Peronist party would stand a better chance in next year’s elections if it gathers forces with the political party of the Major of the City of Buenos Aires, a center-right party that has strong support in the biggest city of the country, where the Peronists, including the official party, do not have a strong candidate. But the current Major of the City of Buenos Aires wants to head the Presidential ticket for the group, something that is obviously resisted by the dissident Peronist candidates. And there is no clear figure there to take the lead.

With respect to the Civic Accord -formed by the UCR, main opposition party, the Civic Coalition (as of now) and an important sector of the Socialist Party-, it is having strong internal disputes. In that respect, two popular figures within the UCR are starting to take the lead to run for presidential nomination. One of them is the Vice-President of the Nation, Mr. Cobos, and the other one is the son of former President Ricardo Alfonsín, who is said to be growing fast in opinion polls. Probably these two will try to head the ticket with a Socialist and run in the primaries next year.

A very important member of this political caucus and a very popular figure, Ms. Carrió, left the spate saying that she did not want to be part of alliances only formed to gain power. Such move by Ms. Carrió is bringing uncertainty as to whether the Civic Accord will also be an electoral alternative.

Center-left parties, mainly formed by a party called Proyecto Sur and allies, have less chances of obtaining power, but it may take away votes to the official party and the Civic Accord. They have yet to define candidates, but it is unlikely that they will join forces with other parties, although not all doors are closed.

The internal level of confrontations within all opposition groups may risk being high, and breakups and new alliances may appear mixing any of the groups mentioned in the precedent paragraphs. That is the state of affairs.

With this scenario, it is not surprising that the only party that seems to be organized and preparing to run a serious campaign is the official party, and thus its chances grow. The opposition should know better and see that they are only playing for the official party.

Despite all we have said, it is true that it is still early for Argentine standards, and anything may happen until the next elections.

This pre-electoral and highly confrontational environment has effects in Congressional activity. The opposition is trying to show society that it can foster an agenda.

In that respect, Senate approved with wide margin (39-26) the opposition-sponsored draft legislation to reform the state-ran statistics bureau called INDEC, which has been under the control of the Secretary of Commerce since early 2007 and is accused of manipulating inflation and other indexes. The approved draft legislation orders the regularization of the statistics office in 150 days, fosters Congressional supervision of such office through a permanent bicameral commission, mandates that the personnel separated from their positions be reappointed, and states that certain key positions need to be covered by a qualifications-based public selection process of professionals.

The official party in the Senate obviously opposed to this draft, but it was defeated, even with votes of some usual friendly senators. This draft law is now being considered in the House, and it is likely that amendments be introduced to make the regularization of the statistics office faster.

In the meantime, the House approved in the second week of August a draft legislation increasing minimum retirement payments to 82% of the minimum wage (1,740 Pesos). The official party accuses opposition of being irresponsible, and tells that such measure -if approved- will cause the country to default on its debt again since according to them there would be no funds for such an increase, which would imply 40 billion Pesos in additional payments as per the Economy Minister. Also, the approved draft legislation mandates that the retirement payments other than the minimum be indexed according to the indexes provided for in Supreme Court judgments.

This draft legislation will pass now to the Senate and its fate is uncertain, since this issue is very sensitive and many senators may break free from alliances. Meanwhile, the official party is pressing aggressively friends and foes saying that default is likely if this legislation is approved.

What seems sure is that if both draft legislations -INDEC and increase in retirement payments- are approved, Mrs. Kirchner may have to use her veto powers, something that may be very unpopular particularly prior to an electoral year.

In the coming weeks key legislation will likely be discussed by Congress. Among them is the renewal of the delegation of powers from Congress to the Executive Branch. In this respect, on August 24th the delegation of very important legislative abilities in favor of Congress lapsed, including the ability to tax exports, a key resource for the State. The opposition will not renew most of such powers so, for some, a festival of emergency decrees may follow. In turn, opposition may try to restrict the power of the Executive Branch to the discretional use of funds. More political tension and crisis may follow.

We conclude this political section by mentioning two facts that have created concern in Argentina. First, the tension between the Government and the main media group of the country -the Clarin Group- is escalating to unprecedented levels. The Secretary of Commerce is making unbelievable presentations in legal meetings of the main supplier of papers for the Argentine press, inviting officers to fight officers of such company. On the third week of August, the Secretary of Communications canceled the license of Fibertel, an internet service provider belonging to a company of the Clarin Group, risking that 1 million subscribers be left without internet service. These events are seen with serious concern by the independent public and may damage the image of the official party, already tarnished in institutional matters. A court battle may follow and the last word may be that of the Supreme Court.

And second, the Secretary of Commerce ordered gas prices to go back to July 31st, 2010, which implied that Shell had to undo certain gas price increases. The measure, really, is not that relevant, and would be consenting severe price increases in the gas field. Of course, a legal battle began also with Shell.

These two facts show that the political environment is harsh, full of escalating confrontation, and there is the feeling that things may be going too far. Let’s all hope for the best.

In the coming days many of the open questions left here may have an answer, particularly Congressional battles. We will keep you posted.

Top
Economy News
The good winds, blowing from an expansive official policy, continue.

Economic experts report that Argentina’s economy could grow by 6.5% this year while exports may increase by 6.9% by volume. Also, all factors considered, the economy could grow by 4.5% in 2011.

Meanwhile, and as it was expected, INDEC announced that the increase in inflation in July 2010 was only 0.8%. Private firms had reported an increase ranging from 1.5% to 1.9%, mainly, and from 15.5% to 15.6% for 2010 so far. According to INDEC, the inflation so far in 2010 was only 6.7%. Despite that, INDEC would have acknowledged that the products whose prices increased the most were the ones belonging to the basic food basket, affecting mainly poor people.

Despite the Government’s efforts to hide it, there are several indicators that would be saying that inflation is not as measured by INDEC. Salary negotiations are one of those indicators, and the increases sought by unions are more in keeping with private firms’ numbers.

Inflation would be in a range close to 1.9%, and lately there were some concerns that it may be boosted by the expansive Central Bank policies, which purchase US Dollars coming from the trade surplus to increase reserves. In order to do that, it issues pesos. The Central Bank may have to make special efforts to try that the monetary expansion does not bring about higher inflation rates. Economic reports from private analysts said that the monetary base grew 6.9 billion pesos in July 2010. Central Bank would have bought US$ 1.7 billion in July 2010. The bank also transferred 2.7 billion pesos to the Treasury to meet payment of staff and pensioners’ wages as well as debt obligations.

Also, earlier in August minimum wage was hiked from 1.500 to 1.740 Pesos for September 2010, and 1.840 Pesos for January 2011. Is that not recognizing inflation?

Argentina’s tax revenues soared 38.4% in July 2010 from the same month a year ago, driven by higher income from consumer taxes and export levies. July tax revenue totaled 37.3 billion Pesos (US$ 9,331 billion), exceeding forecasts.

The inflation rate as well as the economic growth, which the Government estimates at 6.5% this year, is boosting consumer spending and thus the income derived from VAT rose 30.2% in July 2010 year-on-year.

Public bonds are having a very good time also, even those in pesos and indexed using INDEC’s indexes, supported by the chances that INDEC is improved, or by the fact that the inflation increase may make them profitable even though the acknowledged inflation is still lower than the real one. An almost fixed Dollar exchange rate may make such logic true. The likelihood of a soon new debt issuance by Argentina also helped increase prices. That is why the profile of the Argentine country risk rating is improving and becoming better than the worst tier of Latin American issuers, like Venezuela and Ecuador.

At the beginning of August, the Government reduced subsidies to energy firms, leading to increases of between 22% and 93% in electricity and natural gas prices. According to experts, the hike is a consequence of a policy that has maintained utility prices meltdown. That policy may have to reach to an end.

As seen, the economy looks good, with growth and increasing activity. But there is inflation. Hopefully, measures will be taken to grab control of it before it is too late.

Top
G. Breuer News
For more information, you may read the July and August editions of our Boletín Informativo sent to our Argentine clients & friends.
Top
G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
www.gbreuer.com.ar


Please note that the information given in this bulletin is for general purposes only and does not intend to provide comprehensive legal advice on any issue.
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© G. Breuer, 2010.


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