San Luis replaces BA as inflation benchmark

Buenos Aires Herald. 30 de marzo de 2016.

President Mauricio Macri’s government is facing renewed criticism over its inflation measurements after it decided to replace the provincial index used as a basis to calculate the CER coefficient, according to which the value of some sovereign bonds is adjusted.

The country’s Official Gazette said yesterday that starting on March 26 and up to April 25, the Buenos Aires city inflation index would no longer be the CER’s basis, and it would instead be replaced by San Luis province’s, whose figures are expected to be lower in the coming months.

In December, Macri’s government had decided that the BA city index would be used from then on. During Cristina Fernández de Kirchner’s administration, CER bonds were adjusted according to INDEC statistics bureau’s national inflation index, which had been widely discredited since 2007, when inflation figures plunged overnight following government intervention in the bureau.

Macri’s decision in December had been broadly praised as a sign of transparency, but eyebrows were raised again yesterday following the move.

While San Luis saw bigger price hikes in December following the devaluation, it is expected to see less inflation than BA city in the coming months. The reason is that the coming hikes to utility tariffs will be much higher in Buenos Aires than in the rest of the country.

After electricity hikes in February, San Luis’ inflation figures were more than 1 percentage point below those of the City.

The Economy Ministry responded to accusations arguing that the BA City index was proving to be unrepresentative of the national reality. “The CER index is a national one and the rate hikes in Buenos Aires City have been three times as high as in the rest of the country,” a spokesman told the La Nación daily.

The use of San Luis’ index is also likely to be temporary, as INDEC’s new authorities are expected to release their reformed inflation estimate in May. Yesterday, INDEC relaunched its construction price index, saying the costs for the sector were up by 2.1 percent in February.

Consequences

With the government planning to concentrate several hikes and subsidy cuts in the coming months, the reform could have significant consequences on the country’s markets.
Sovereign bonds fell yesterday after the news, while country risk rose to 460 basis points. The Discount bond, which is adjusted according to the CER coefficient, lost two percent, while the Cuasipar bond was also down by 2.4 percent.

According to the conservative CEMA think tank’s Alejandro Rodríguez, those holding bonds whose value depends on the CER coefficient could stand to lose 2.9 billion pesos due to the reform.. “This is a new default for Argentina. They are arbitrarily picking one index over the other,” the economist said yesterday.

The decision saw criticism even from some government economic officials, with Eduardo Levy Yeyati of the BICE development bank tweeting out “CER, R.I.P.” shortly after the announcement. “The problem with the continued massaging of the CER index is that it affects the indexation unit for all kind of long-term loans,” Levy Yeyati added.