Argentine Data May Signal First GDP Drop Since 2002: Week Ahead

By Eliana Raszewski

May 18 (Bloomberg) -- Argentine data due this week may cement forecasts that gross domestic product is heading for its first contraction since 2002 as a global financial crisis and June mid-term elections cause companies to delay investment.

South America’s second-biggest economy will shrink 2.5 percent in the second quarter from a year earlier, said Juan Pablo Fuentes, an economist at Moody’s Economy.com in West Chester, Pennsylvania. It would be the first drop since a 3.4 percent GDP decline in the final quarter of 2002.

“Argentina’s economy has been slowing since the second half of 2008,” Fuentes said in a telephone interview. “A drop in domestic demand, consumption and investment will be reflected in a contraction starting in April.”

The National Statistics Institute will release industrial output for April on May 22, giving economists and analysts an indication of how the economy fared in the first month of the second quarter. The agency will release economic activity for March on May 21.

Argentina’s economy has already shown signs of weakness stemming from the global financial crisis. Economic activity expanded at the slowest pace since 2002 in January and February.

April’s new-vehicle sales fell 33 percent from a year earlier, and industrial production declined 0.9 percent in March after shrinking 1.5 percent in February and 4.4 percent in January.

Farm Output

A drop in agricultural output is also hurting growth.

The worst drought in 70 years will cause the soybean crop, which is now being harvested, to drop to 32.8 million metric tons from a record 48 million tons a year ago, according to the Buenos Aires Cereal Exchange.

Output from the current corn harvest will decline to 12.7 million tons from 21 million tons in 2008, the exchange said in a May 13 report.

Dry weather will also lead farmers to cut wheat planting to 3.7 million hectares (9.1 million acres), the smallest area since the exchange began collecting such data in 1910, the report said.

The approach of the June 28 elections is dragging on the economy by discouraging both investment and consumer spending, said Mariano Lamothe, an economist at Abeceb.com, a research company in Buenos Aires. President Cristina Fernandez de Kirchner is seeking to keep her majority in Congress.

“Everybody is waiting to see how the government will react to the election results,” Lamothe said in an interview. “They want to see if the government will create more uncertainty.”

Shrinking Economy

The economy, which has expanded at least 7 percent a year since 2003, may contract 3 percent in the second quarter and 0.5 percent to 2 percent over the whole year, Lamothe said.

Fernandez used her dominance of Congress to nationalize about $24 billion in private pension funds last year and to take over the country’s biggest airline, Aerolineas Argentinas SA.

She described the measures as an effort to extend the policies of her husband and predecessor Nestor Kirchner, which she said helped spur the six years of growth.

Kirchner, who is running for a seat in the lower house, said on April 28 that if Fernandez loses her majority the country may slip back into a financial crisis. In 2001, the government limited bank withdrawals and defaulted on $95 billion in debt, before abandoning its one-to-one peg with the U.S. dollar in early 2002.

Such talk prompted Mario Nollmann, owner of Nollmann SA, a 73-year-old factory that makes electrical components and circuit boards, to put off plans to move to a bigger plant.

“I’m worried,” Nollmann, 72, said in a telephone interview from his factory in Buenos Aires. “I heard a speech that says that after the elections we could fall again into chaos, so I prefer to wait and see.”

In April, he suspended overtime for his 110 employees as sales fell 30 percent from a year earlier.

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 rose 170 basis points, or 1.7 percentage points, to 22.15 percent, according to Bloomberg data. The bond’s price slid 3.25 cents to 52 cents on the dollar.

The Buenos Aires benchmark Merval stock index fell 4.1 percent to 1,438.64. Grupo Financiero Galicia SA (GGAL AR), which controls the nation’s third-biggest private lender, rose 12.8 percent. Pampa Energia SA (PAMP AR), Argentina’s biggest energy holding company, declined 2.8 percent.

The following is a list of events in Argentina this week:

Event                         Date
Budget Balance                May 18 - 22
Inflationary Expectations     May 18
Economic Activity             May 21
Industrial Production         May 22
Unemployment Rate             May 22

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net