Argentina

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S 25 February 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 8392. E-mail : rolf.danielsen@seb.se

An acrymonous dispute over statistical estimates of consumer prices will come to a head this fall as
trade unioins seek compensation for a rate of inflation they believe is really 10-20% higher than
officially admitted. Such an outfall could trigger a wage-price spiral and raise the specter of new
financial instability, although larger reserves mitigates the risk of a worst case scenario.

Country Risk Analysis
The economy continues at high speed, but with growing signs of overheating.
For the fourth consecutive year the vigor of the Argentine economy astonished outside
observers as well as inside policy makers. In 2007, the economy grew at a clip of 8,7%,
buoyed by both external and domestic demand including a pre-election fiscal spending
spree. That was some 3-4 percentage points more than expected by most observers,
beating by a whisker the similar performance of the preceding year which also had
outperformed most projections. For 2008, observers are again beating the retreat and
predicting a sharp slowdown to about 6% followed by continued deceleration into 2009.
While we see reasons they once again may prove wrong, we also see warning signals
that temper our optimism.

1) Catching up effect is over. First of all, the recovery from the financial and economic
collapse that followed
in the wake of the
largest sovereign
default of 2001-2002
in history has now run
its course. In terms
of income per capita,
Argentines are back
to the level from
before the crisis,
around $7000, more
or less at par with
Russia and Brazil, but
with a more even
income distribution, in
particular compared with its northern neighbor.
Income per capita
0
2000
4000
6000
8000
2001 2003 2005 2007
U
S
$

m
i
l
l
i
o
n
s

2) The external environment may turn sour. Argentina’s exports have been favored
by high commodity prices of recent years, but may suffer as that boom comes to an end.
World market prices of soy-beans (25% of exports) are already declining, and that will
now combine with draught to lower production. Total export value may still see a small
SEB Merchant Banking Country Risk Analysis February 25, 2008

2
rise this year, and the picture could improve again in 2009, barring adverse climatic
conditions, but the spectacular 23% increase in 2007 is unlikely to be repeated.

3) The government will wind down pre-election pork-barrel policies. Now that the
Kirchener family has secured a new four-year term in the Pink House, as Ms. Kirchener
last spring won by a landslide victory to succeed her husband into the president palace,
the fiscal stimulus should be reduced. It appears that the government plans to raise the
primary surplus back to 3%/GDP or more after temporarily falling below 2% (discounting
the government’s cosmetic change to save its official target).

4) Spat over official CPI numbers could take its toll on the government. Last fall
in May, serious allegations emerged that the government had been leaning on the
country’s official statistical services to produce CPI numbers supportive of government
policies but grossly understating realities on the ground. The seriousness of the situation
was underscored as employees of the statistical services, who supported the allegations,
were fired. The immediate result was a sell-off of sovereign debt, the newly 75%
reconstructed part of the defaulted debt of 2002, more than doubling the spread to
some 450 basispoints, because the yield on a part of this debt had been linked to the
official inflation rate. Even though the government may not be heavily dependent on
international capital markets in the near term, the sovereign spread is often used as a
benchmark for private borrowing terms and may now increase the borrowing costs for
Argentine companies. As importantly, the uncertainty about the real inflation suggests
trade unions will raise wage demands more than would have been the case otherwise. In
a tightening labor market -- unemployment is down to less than 9%, trade unions are
being emboldened to demand 20-30% higher wages in line with last year’s increase in
public-sector wages. Such an outcome, would probably bring an immediate stimulus to
private demand, meaning higher growth for 2008, but could return with a vengeance for
growth prospects in 2009 and beyond.

However, while it is very regrettable that the government has not yet come clean on
these statistical
issues, the claims by
trade unions and
investors that official
CPI numbers
seriously
underestimate real
inflation, are not
really borne out by
available information
on monetary
developments.
Monetary statistics
for 2006 and 2007
do not give hard
evidence of high
double digit inflation.
20-25% annual money growth is high but would normally be considered insufficient to
support more than 10-15% inflation keeping in mind high real GDP growth of more than
8%pa. (Conf. chart.)
Money, GDP and prices growth
Consumer Prices, Total, Index
Money supply, M2, ARS
Source: Reuters EcoWin
jan mar maj jul sep nov jan mar maj jul sep nov jan mar maj jul sep nov
05 06 07
%

c
h
a
n
g
e

a

y
e
a
r
5
8
10
13
15
18
20
23
25
28
CPI
GDP
M2

Risks mitigated by strengthened macro fundamentals. Against the looming risk of a
wage-price spiral in the making combined with ongoing uncertainties in the global

SEB Merchant Banking Country Risk Analysis February 25, 2008

3
economy, the central bank can mobilize relatively large reserves in the defense of
financial stability.
The government can
also point to a much
improved fiscal
position to the same
ends. Robust, albeit
declining, external
current account
surplus and
substantial capital
inflows have enabled
the central bank to
build reserves to
more than $40 bill. or more than 10 months of imports. That is, of course, because the
central bank, have intervened to keep the peso undervalued in line with government
policies aimed at supporting the export sector. The government on its side has
persevered with primary surpluses, albeit not always in line with targets, to reduce the
debt/GDP ratio, which has fallen to 62% (54% excluding defaulted non-restructured debt).
Reserves
0
10 000
20 000
30 000
40 000
50 000
2002 2004 2006 2008
U
S
$

m
i
l
l
i
o
n
s

- * -

Argentina has improved notably since the unsustainable policies of the late 1990s, which
were followed by default and economic morass. The government could now crown its
success by entering into new negotiations with the holders of non-restructured defaulted
debt and settle outstanding Paris Club claims. Unfortunately, the new Kirchener
government have followed in the footsteps of the previous Kirchener government and
have chosen a more confrontational path by refusing the IMF program needed for a Paris
Club settlement and by not coming clean on the disagreement with large parts of the
Argentine and foreign communities on the statistical issues regarding the consumer price
development, rather trivial affair in most other countries. That may not bode well for the
present presidential term and heightens the risk for the country’s creditworthiness in the
medium term.


Key ratins 2007
IopuIalion (miII.) 40
GDI/capila ($) 6470
GDI clange 8,6°
InfIalion 9°
Curr.Acc. BaIance/GDI 3°
Reserves/imporls (monlls) 10
Budgel BaIance/GDI 1°
Governmenl nel debl/GDI 54°
0
2
4
6
8
10
12
ResiIience
Iiquidily
Informalion
Absence of
evenl risI
acro baIance
Argentina Average EM
How to read the chart?
Moving out from the
center reduces risk.
ExternaI Ratings
S&I: B+
Iilcl: RD
(performing Bonds: B )
Peers
TurIey
BraziI
Sri IanIa
Graµh: Argenlina's risI profiIe is onIy sIigllIy veaIer
llan lle average of aII emerging marIel counlries on
macrobaIance, Iiquidily and resiIience, bul scores mucl
beIov on informalion refeIcling lle recenl spal belveen
inveslors and lle governmenl over lle CII.




SEB Merchant Banking Country Risk Analysis February 25, 2008

4


Key data: 2002 2003 2004 2005 2006 2007 2008 2009
GDI (biII. US$) 105 130 153 183 214 256 290 321
GDI/capila (US$) 3427 3990 4728 5475 6470 7270 7953
GDI (clange) -10,9° 8,8° 9,0° 9,2° 8,5° 8,6° 5,8° 4,7°
Inveslmenls/GDI 11° 14° 18° 20° 22° 22° 23° 22°
Budgel baIance/GDI -1° 0° 3° 2° 2° 1° 1° 1
Govl debl/GDI (´) 137° 124° 121° 79° 62° 54° 47° 40°
CII infIalion (°) 25,9° 13,4° 4,4° 9,6° 10,9° 8,8° 10,8° 10,0°
Money demand (°) 81,7° 12,5° 25,3° 13,9° 10,3° 14,7° 2,9° 1,2°
SlocI prices (average) 20893 32522 48334 63903 83082 114371
Inleresl rales 39,3° 10,2° 2,6° 3,8° 6,4° 7,9° 10,1° 10,2°
Lxcl. Rale ($) 3,06 2,90 2,92 2,90 3,05 3,10 3,20 3,34
Trade/GDI (°) 33° 34° 37° 38° 38° 39° 36° 35°
OiI price (Brenl) $25 $29 $38 $54 $65 $73 $87 $77
MiIIinns US
°
$
Lxporl of goods 25 650 29 938 34 575 40 351 46 459 55 934 56 440 59 433
Imporls of goods 8 989 13 850 22 445 28 688 34 151 44 781 47 379 51 441
Oller: -7 895 -7 946 -8 914 -5 973 -4 216 -4 495 -4 974 -6 237
Currenl accounl 8 766 8 142 3 216 5 691 8 092 6 658 4 087 1 755
(° of GDI) 8,4° 6,3° 2,1° 3,1° 3,8° 2,6° 1,4° 0,5°
IDI 2 776 878 3 450 3 954 2 722 3 545 6 089 6 615
Ioan repaymenls -3 201 -12 223 -10 466 -7 509 -14 821 -17 201 -16 321 -16 749
Nel oller capilaI fIovs -17 075 4 143 8 238 1 802 9 459 22 617 8 667 8 115
BaIance of paymenls -8 734 940 4 437 3 937 5 453 15 619 2 521 -264
Reserves 10 552 11 493 15 930 19 867 25 320 40 939 43 460 43 196
TolaI debl 149 269 157 238 164 239 145 044 126 261 119 746 119 746 119 746
o/v slorl lerm debl 16 787 19 598 25 066 32 776 35 571 33 107 31 224 29 909
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Rating history
Fitch (eoy) DDD DDD DDD RD RD/B RD/B
S&P (eoy) SD SD SD B- B B+
Type of government: IarIiamenlary Democracy
Next elections Presidential elections in 2011.
Other:
Latest PC deal 1992
Latest IMF arrangements SBA 2003
R i s k s p r e a d
A l l E M c o untri e s J .P . M o r g a n, E M B I G l o b a l , A r g e nti na , Ind e x, A ll M a tur i ti e s , S tri p p e d S p r e a d , U S D
S o u rc e : R e u te r s E c o W i n
j un
0 5
o k t
0 6
f e b j u n o k t
0 7
f e b j u n o k t
0 8
f e b
B
a
s
i
s

P
o
i
n
t
s
1 5 0
2 0 0
2 5 0
3 0 0
3 5 0
4 0 0
4 5 0
5 0 0
5 5 0
Ex ch an g e r at e
S o u rc e: R e u te rs E c oW i n
j un
0 5
o k t
0 6
f e b j un ok t
07
f eb j un o k t
0 8
f e b
U
S
D
/
A
R
S
2, 85
2, 90
2, 95
3, 00
3, 05
3, 10
3, 15
3, 20
M o n e y m a r k e t r a t e s
Inte rb a nk R a tes , B A IB OR , F i xi ng Trea s ury B i lls , L E B A C Ra te
S o u rc e : R e u te rs E c o W i n
j un
0 5
o k t
0 6
f e b j un o k t
0 7
f e b j un o k t
0 8
f e b
P
e
r
c
e
n
t
6
7
8
9
1 0
1 1
1 2
1 3
1 4
1 5
( B A S E , M e r v a l)
S t o c k e x c h a n g e
S o u rc e : R e u te rs E c o W i n
j u n
0 5
o k t
0 6
f e b j u n o k t
0 7
f e b j u n o k t
0 8
f e b
I
n
d
e
x
1 1 0 0
1 2 0 0
1 3 0 0
1 4 0 0
1 5 0 0
1 6 0 0
1 7 0 0
1 8 0 0



SEB Merchant Banking Country Risk Analysis February 25, 2008

5


SEB Merchant Banking Country Risk Analysis February 25, 2008

6

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