Argentina’s Inflation ‘Fire’ Poised to Accelerate: Week Ahead

Argentine inflation is poised to accelerate as President Cristina Fernandez de Kirchner gains access to as much as 24.7 billion pesos ($6.4 billion) in central bank profits to help her avoid cutting spending.

Fernandez, facing a hostile Congress for the first time since taking office in 2007, will use the money before next year’s presidential election, a move that will “add fuel to the inflationary fire” in Latin America’s second-biggest economy, said Boris Segura, an economist at RBS Securities Inc.

RBS forecasts that Argentina’s budget deficit will double to 1.2 percent of gross domestic product this year, pressuring the government to find funding sources. The plan for the central bank profits is in addition to Fernandez’s Dec. 14 decree, halted by a federal court, to claim $6.6 billion in reserves for the Treasury to pay debt due this year.

“There’s a risk of an inflation-wage spiral,” Segura, 41, said in a Feb. 25 telephone interview from Stamford, Connecticut. “The government’s strategy to promote economic growth in the short-term has a very high price in terms of inflation and that’s something that will backfire.”

Central bank profits, which aren’t part of the institution’s $47.8 billion in reserves, result from gains in investments and the effects of a weakening peso.

Opposition leaders in Congress say they have enough support to reject Fernandez’s reserves decree this week. Fernandez, 57, will address the legislature’s opening session today.

Surging Prices

Consumer prices in Argentina may rise at least 20 percent this year, the second-highest among 13 Latin American economies tracked by Bloomberg, because of government policies aimed at encouraging consumption, Segura said. Inflation was about 15 percent last year, almost double the official estimate, he said.

The government said consumer prices rose 8.2 percent in January from a year earlier. The reports have been questioned by economists and politicians including Vice President Julio Cobos since January 2007, when then-President Nestor Kirchner began changing personnel at the National Statistics Institute.

Quickening inflation is cutting further into Fernandez’s support, after her ruling coalition lost control of Congress in elections last June, said Daniel Kerner, a political analyst at the Eurasia Group in New York. Confidence in the government fell 6 percent in February from January and 13.8 percent from a year earlier, according to a survey Buenos Aires-based Poliarquia Consultores conducted for Torcuato Di Tella University.

Central Bank President Mercedes Marco del Pont told reporters Feb. 18 that price increases are caused by a lack of investment by companies.

Supply ‘Bottlenecks’

“The phenomenon of price increases is related to what happens on the supply side with bottlenecks and lower productivity,” said Marco del Pont, 50, who took office last month after a dispute over the use of reserves to pay debt led Fernandez to fire former Central Bank President Martin Redrado.

Argentines last month expected prices to rise 31.1 percent over the coming year, according to the average estimate in a poll by Torcuato Di Tella University. The survey of 1,201 people had a margin of error of 3.5 percentage points.

Argentina is constrained from tapping international credit markets because of lawsuits tied to its 2001 default on $95 billion, the biggest ever. Government spending rose 21.8 percent in January from a year earlier to 27 billion pesos while revenue rose 16 percent to 28.1 billion pesos over the same period, the economy ministry reported on Feb. 19.

The central bank approved an early transfer of 1.5 billion pesos to the Treasury last week.

“This is a sign of how bad the fiscal numbers are,” Kerner, 34, said in a Feb. 25 interview. “It’s harder and harder for such a weak government to tighten spending growth, to cut subsidies or increase utility rates.”

A spokesman at the Economy Ministry didn’t return messages left at his office and mobile phone by Bloomberg News. Fernandez’s spokesman, Alfredo Scoccimarro, didn’t return a message left at his office.

Central Bank Profits

The central bank’s charter says that profits from its operations should be directed to the government. The government received about 4.5 billion pesos from the institution in 2008 and 2009, said a central bank official who asked not to be identified, in line with government policy. The bank will release its 2009 earnings report in April, he said.

Central bank profits rose in 2009 to about 24.7 billion pesos, newspaper La Nacion reported on Feb. 21, citing Economy Minister Amado Boudou. Newspaper Ambito Financiero estimated profits of 22 billion pesos on Feb. 26, without saying where it obtained the information.

Fernandez ruled out a slowdown in spending growth in a Feb. 24 speech to business leaders in Buenos Aires.

“I don’t believe that we can keep saying that it’s good to shrink or freeze the domestic market in order to have a good economy,” Fernandez said. “To have a vibrant domestic market is essential. We have to keep doing infrastructure projects because for decades they weren’t being done.”

Markets Last Week

The yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 rose 4 basis points to 12.98 percent, according to JPMorgan. The peso was little changed at 3.8582 per dollar. The Merval stock index fell 4.9 percent to 2,221.38.