ARGENTINA TRADE OVERVIEW N§ 17 (July 2004) GROWTH IN SOUTH AMERICA MARKET IS BEHIND THE INCREASE OF INDUSTRIAL MANUFACTURES SALES _________________________________________________________________________ * Exports of industrial manufactures amounted to USD 3.37 billion in the first five months of the year (+13% year on year), just 3% lower in value than the historical maximum of May 1998. * The rise of industrial exports is explained by the rapid growth of sales in South America, a region that absorbs approximately 2/3 of all industrial exports. Led by the recovery in exports to Brazil (+18% year on year), sales to Mercosur were up by 23%, while sales to Chile and the Andean Community rose by 29% and 50% respectively. * The increase in foreign sales spills over to all industrial sectors (metals and metal-based goods were the only MIO exports to fall), including both the large exporting industries (chemicals and automobiles) and those with more modest foreign sales (textiles and paper and cardboard). * High growth rates in the leading economies in the region were mostly responsible for this improvement. Although of lesser relative significance, international economic stability and the real exchange rate with Brazil were also contributing factors. _________________________________________________________________________ STRONG INCREASE IN INDUSTRIAL SALES TO SOUTH AMERICA During the first five months of the year, exports of industrial manufactures totaled USD 3.37 billion (+13% year on year). This positive performance can basically be explained by the considerable increase in amounts sold (+10% year on year), and also the favorable behavior of prices (+3% a year). These results reflect the upward trend in industrial exports which began in September 2003. In May 2004 they reached their highest value since June 2001, when the decline in industrial sales set in. Today manufacturing exports are just 3% below their historical maximum of May 1998. This continuous growth in foreign sales affects all industrial sectors (the only MIO exports to fall were metals and metal-based products) including both large exporting industries (chemicals and automobiles) and those with a more modest level of foreign sales (textiles and paper and paperboard). Regionally, the increase in industrial sales is explained by the great dynamism of sales in South America, a region which absorbs approximately 2/3 of all Argentina's industrial exports. Led by the recovery in exports to Brazil (+18% year on year), sales to Mercosur rose 23%, while sales to Chile and to the Community of Andean Nations (1) showed year-on-year increases of 29% and 50% respectively. CHANGE IN INDUSTRIAL EXPORTS -USD million- 5 months 5 months Variation 2003 2004 ------------------------------------------------------- Mercosur 1.020 1.253 23% Chile 325 420 29% Andean Community 179 270 51% TOTAL SOUTH AMERICA 1.524 1.943 27% NAFTA 695 687 -1% European Union 372 355 -5% Asia 143 141 -1% Others 248 241 -3% TOTAL WORLD 2.982 3.367 13% ------------------------------------------------------- Source: CEI (based on INDEC figures). In the first five months of the year, industrial exports to Mercosur countries showed a year-on-year rise of 23%. The vast majority of industrial sectors have experienced an increase in intra-bloc sales, which is explained by two factors: the increase in sales to Brazil (+18% year on year) and the rapid growth in sales to the two smaller members of the bloc (+55% year on year in both cases). The growth in regional trade can be explained by the general recovery in trade in four main sectors: automobiles (+6% year on year), chemicals (+14% p.a.), plastics (+32% p.a.) and machines and equipment (+25% p.a.). Less important sectors such as paper and cardboard (+14% p.a.), metals and metal-based products (+25% p.a.) and textile products (+33% p.a.), particularly sales of cotton fiber to Brazil, also performed very well. So far this year industrial exports to Chile have totaled some USD 420 million (+29% year on year), making it the second largest customer in Latin America. Significant increases have been recorded in all the most traditional export sectors, led by chemical products (+27% p.a.), paper and cardboard (+32% p.a.), plastics (+62% p.a.), metals and metal-based products (+18% p.a.) and cars (+11% p.a.). Of less relative importance, at around USD 200 million, the Community of Andean Nations became the most dynamic partner in the regional market. Although exports to Peru have undergone no great change in comparison with 2003, there has been a significant increase in demand from Bolivia and Ecuador (+38% year on year in both cases). Also of interest is the situation in Venezuela, whose demand for goods has more than trebled over the same period of 2003. This positive result is explained by the high pace of sales of automobiles, plastics and metals and metal-based products. Sales in the chemical industry, the main export sector to that bloc, amounted to around USD 62 million (+83% year on year). Equally significant are the performance of sales of plastics (+73% p.a.), metals and metal-based products (+23% p.a.), automobiles (+30% p.a.) and machinery and equipment (+13% p.a.). HIGH REGIONAL GROWTH RATES BEHIND THE GROWTH IN INDUSTRIAL EXPORTS A series of factors helps to explain the positive performance of the external sector. The most important is, of course, the strong growth of the South American region. Estimates show that in 2004 all the South American economies will return to positive growth rates (in the first quarter of 2004 regional GDP appears to have grown by over 4% a year), phenomenon that will be repeated in 2005. If this is so, the region will be growing in a synchronised fashion for the first time in 35 years. Figures from Brazil for the first quarter of 2004 show that the country's GDP has grown by 2.7% in comparison with 2003, thus reversing the four consecutive falls of last year. The engine for reactivation was the recovery in previously weak internal demand: private consumption seems to have broken the cycle of 10 consecutive quarters without growth. Meanwhile, demand for investment grew 2.2% year on year, after falling throughout 2003. In the case of Chile, the Central Bank has maintained its growth projections at around 5% a year for 2004. The CAN economies are also enjoying a situation of tranquility. During the first quarter of the year, along with a strong recovery in consumption, Colombia's GDP grew almost 4% over 2003 and Peru's was up 4.6%. Meanwhile, it is estimated that Venezuela will grow by around 8% this year. The favorable regional scenario is to a great extent thanks to the relative strength of the "fundamentals", high growth rates and high raw material prices. This positive scenario has been unaffected by the recent rise in interest rates. The start of a rising cycle in US monetary policy was anticipated by the markets, so the FED's announcement had no relevant short-term impact on regional financial flows or on growth estimates. Of lesser relative importance, the figures for this year show an appreciation in the real exchange rate with Brazil. Although this makes Argentine products within the Brazilian market more expensive, the real parity is still around 10% lower than last year. (1) The countries that make up the Community of Andean Nations (CAN) are: Bolivia, Colombia, Ecuador, Peru and Venezuela.