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Argentine News

Fitch Forecasts Actual Growth Close to 8% for Argentine Insurance Industry in 2010

This figure outperforms the values for 2009, when the business grew 3.9% in real terms (compared to 8.4% in 2008).
In a recent study conducted by analyst María Fernanda López, Fitch indicated that “the expected GDP increase, favorable expectations for vehicle licensing, and the rebound of the agricultural sector (with the ensuing positive impact on motor, farming and cargo insurance) will drive the growth of the Argentine insurance industry. In this scenario, and following a difficult 2009, the competition among carriers to gain additional market share will possibly increase. But for this situation, the rating agency noted the industry will not face major changes this year.
“The market structure will remain the same as far as low market share is concerned (hardly 2.5% of GDP), with a high share retained by Motor and Workers' Compensation (56% of total premiums), and little incentive to develop Universal Life insurance”, stated Fitch.
However, insurers are expected to have a positive return, but this depends on their financial investments. “In 2009 insurance companies booked good profits as a result of the high return on certain investments such as government bonds (accounting for 50.4% of their portfolios)” added the agency. “This trend will be maintained this year; as a result, their profitability will be tied to the volatility of financial gains”.
Fitch indicated that against this backdrop, the mid-term challenges facing the business are manifold, including the need to implement measures that accommodate inflationary expectations and their impact on reserves, structural costs, investment valuations and reinsurance rates, among other issues.
Two Occupational Hazard Bills Discussed in Congress

News received from the Argentine Congress, where the scope of future Occupational Hazard regulations is being discussed, is far from encouraging. Two bills have been tabled that propose a thorough reform of the system, which have big chances of being passed. The result will be a dramatic increase in corporate labor costs.
One of them is promoted by Héctor Recalde, a Representative of the ruling party and legal counsel to the Confederación General del Trabajo (CGT) (General Workers’ Union), whereas the other is authored by Margarita Stolbizer, a Representative of the Encuentro Nacional party. Though different in form, both bills are similar in substance, in that the two of them support the double indemnity, i.e. the employee being indemnified by the Workers’ Compensation Insurer (ART, as per its Spanish acronym), while maintaining the possibility of bringing a civil action for an additional amount if the indemnity is insufficient to meet the worker's needs. In turn, they both seek to regulate the so-called in-itinere accidents (accidents sustained while travelling to/from work), a highly controversial issue encountering outright rejection among businessmen.
Additionally, the two of them favor the approach whereby if a person sustains damage and may prove it originates (even if not exclusively) in his/her employment, the ART shall pay for the benefit and, if the amount proves insufficient, may also bring a claim against the employer.
Both businessmen and corporate advisors have emphatically questioned these two proposals by asserting that no company may be held liable for reasons alien to it and which are beyond the controls implemented within the workplace.
Second-hand Vehicle Sales Climb 17% in H1

According to data provided by the Cámara del Comercio Automotor (CCA) (Motor Vehicle Trade Association), second-hand vehicle sales totaled 123,812 units (720,163 in the first half of the year). This represents a 17% y-o-y Increase. Alberto Príncipe, president of the Association, underscored that key to this result was the number of sales in the provinces. “According to the figures, the mildest increase was recorded in the City of Buenos Aires (7%), whereas in the provinces it ranged between 10 and 34%. This proves what we have been arguing for some months now: such significant increase is underpinned by the rural sector” said the executive.
The province recording the largest percentage growth was Misiones (33.5%), followed by Formosa (33.4%) and La Rioja (32.7%). While in the Province of Buenos Aires the percentage growth was 18%, in Buenos Aires City it was 6.6%; 10.5% in Córdoba; 24.1% in Mendoza and 20.9% in Santa Fe.
However, if measured in absolute terms, only 11,989 second-hand vehicles were sold in Misiones in the period January-June, compared to 278,748 units in the Province of Buenos Aires.
If the current rate of increase is maintained during the second semester, over 1.5 M vehicles will have been sold by year end, thus outperforming 2008 and hitting a new all-time record.
Economic Overview

Though not as robust as 5 years ago, and with the high inflation rate which is a source of concern, the macroeconomic scenario is still favorable. This assertion is not only based on the growth prospects (estimated at 6.8% for 2010 by ECLAC and among the highest in Latin America) but also because the tax situation is gradually reaching a break-even point thanks to a marked increase in tax collection and a high, sustained trade surplus.
By failing to implement a comprehensive strategy to fight inflation (which, as recognized by collective bargaining agreements and pension benefits, is well above 20% per annum) the Argentine Government is playing with fire. However, this serious distortion does not for now disrupt the global macroeconomic scenario. Not only is growth sustained, but the pillars that render it feasible in the long term, i.e. fiscal and foreign trade surplus, are still in place.Economy Minister Amado Boudou stated that fiscal and foreign trade surplus will amount to 1.5% of GDP and USD 10 billion, respectively. This last figure has been the target of criticism from those who compare it to 2009 values, which approached USD 17 billion.
The impact of such a trend would be on the downside, since it would generate a currency surplus that would drag the real exchange rate downwards, thus impacting profitability and creating the conditions for subsequent macro-devaluations, or else would force the Central Bank to massively buy foreign currency, with the ensuing and dangerous money issuance that would drive the inflation rate further up.A significant trade surplus is important to ensure currency supply into the economy and to cover the deficit in debt servicing or cancellation and interest payments. The trade deficit – which evidences the private sector’s indebtedness–, is unsustainable in the long term.
However, one cannot ignore that the USD 7.5 billion surplus that Argentina booked in the first semester and the prospects of exceeding USD 10 billion throughout the year evidence that the foreign sector is doing very well, a situation that would only be reverted by the increase in imports driven by today’s high inflation rate. This scenario, coupled with an improvement on the fiscal front and the effort made to regularize the public debt is what accounts for the new and swift increase in the value of government bonds, which returned as soon as it was possible to come our of the international financial crisis unleashed by Greece’s potential default.

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