ANALYSIS-Will Argentina pay warrants? Likely in 2013, not in 2014
BUENOS AIRES, Aug 2 (Reuters) - Argentina is on track to post strong enough economic growth in 2013 to trigger billions of dollars in bond warrant payments, but the uptick will likely prove short-lived, leaving warrant holders empty handed in 2014.
President Cristina Fernandez has prioritized economic growth ahead of an October mid-term election that will determine whether she keeps control of Congress. The 60-year-old Peronist leader promises 4.4 percent economic expansion in 2013 on the back of strong soy and corn harvests.
To pump life into Latin America's third largest economy, her government has used extra government spending to temporarily reverse the effects of currency and capital controls she imposed shortly after starting her second term in late 2011.
Economic activity jumped 7.8 percent in May and 7.0 percent in April, well above forecasts. Even private economists, long skeptical of the veracity of Argentina's official data, now expect official 2013 growth above the 3.22 percent that would require the warrant payments.
So Argentina will likely have to dip into diminishing foreign currency reserves and pay up to $3 billion in GDP-linked bond warrants in December 2014, according to seven out of 10 banks and analysis firms surveyed by Reuters in the past week.
No one expects 2014 growth to merit another payment.
Private growth forecasts for next year range from 0.5 to 2.8 percent, a sign Fernandez's high-spending, high-growth model will lose steam after the Oct. 27 vote.
"The growth is not sustainable - in 2014 we will have a serious financing problem," Rodolfo Rossi, a former director of Argentina's central bank, said in an interview.
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A small, 1.9 percent expansion in 2012 put an end to a decade of galloping growth and prompted Fernandez to raise official annual public spending by 16.8 percent for 2013. Private estimates indicate spending will actually balloon by more than 30 percent this year.
Government spending has surpassed income for years and escalated more recently. Argentina's primary budget surplus, a measure of government finances before debts are serviced, fell by 30 percent in May compared with a year earlier.
Other pro-growth measures, like ordering banks to lend 5.0 percent of all deposits to small businesses, have pushed up consumer prices, forcing Fernandez to impose price controls on 500 supermarket items.
The country's INDEC statistics agency is widely accused of under-reporting inflation and, to a lesser extent, misreporting growth data. There were suspicions the government lowered growth figures in 2012 to avoid warrant payments.
Private estimates put 12-month inflation at about 25 percent in Argentina, one of the highest rates in the world.
"The government is making no effort to solve the underlying problem of inflation," said Fiona Mackie, an Argentina analyst for the Economist Intelligence Unit. "It will be increasingly difficult for it to engineer some sort of easy exit."
Yet Fernandez, who recently raised the minimum wage, frequently tells Argentines they are better off. Consumer confidence rose in June and July according to a survey from the private Di Tella University.
"You see it in the clothes of the people coming to our events, you see it in the shoes worn by the kids, you see it in the record used car sales," Fernandez said in a recent speech.
'SOMETHING WILL HAVE TO BE DONE'
Auto production, a key component of industrial production, indeed rose 19.8 percent in June from a year earlier according to industry group AdeFa. Car sales jumped by 22.1 percent.
Many of those sales are desperation buys from a population that can't access U.S. dollars due to currency controls, doesn't trust the peso, and buys material goods as a way of saving. Farmers for example are piling up their corn and soybean reserves rather than putting pesos in the bank.
Grain exports are one of Argentina's main sources of dollars, and higher 2013 output following last year's drought helped the economy. The sector could take a hit if demand from top-customer China falls, as expected.
Economists generally see growth continuing through the third quarter of this year, although below April and May levels, and slowing sharply in the fourth quarter. Industrial output missed expectations in June in a sign a cool-down may already be on the way.
At a time of waning dollar inflows, the government is spending more to import energy as its natural gas production drops and borrowing from its own foreign currency reserves. The country has been virtually locked out of capital markets since its massive 2002 sovereign debt default.
Central bank reserves are $37 billion, half the size of the central bank of Peru, a much smaller country in the region.
To avoid a balance of payment crisis, something might have to give. Though Fernandez denies it, the government may devalue the currency, which is trading on the black market at nearly half the official rate.
"Something will have to be done after the election - likely deepening foreign exchange and import controls, it will be similar to what happened in 2012, when growth was weak," said one local economist who asked not to be named.
(Editing by Hugh Bronstein and Andrew Hay)