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Due to the devaluation, the cost of producing in Argentina decreased

October 31, 2018 - By Joseph Taylor

As a result of the devaluation, which since December last year up to now climbed more than 110%, the cost of production for local companies continues to fall. According to an Index that relieves the Argentine University of Business (UADE), in August, the decline reached 12.2% in real terms, with respect to the same month of 2017.

This result was the consequence of the fact that most of the components of this Index of the Argentine Cost of Production (ICAP) had a lower increase than wholesale inflation, which in that period amounted to 51.2%.

If the comparison is made with respect to the previous month, the indicator showed a real monthly drop of 1% compared to the month of July “that is, on average the increase in the cost of the main inputs was slightly lower than that of wholesale inflation, which in August was 4.9% compared to July, “the report explained.

The objective of the indicator is to periodically monitor the cost trend based on the monitoring of variables related to productive inputs and the business climate. To elaborate it, in addition to the wholesale costs, the university also analyzes other variables, such as tax pressure, energy costs, raw materials costs and also, private sector salaries.

Among the twelve components of the indicator, three showed an inter-monthly increase, in August: the interest rate, country risk and social conflict. The rest of the indicators had a downward dynamic, in real terms, with respect to the previous month.

With these results accumulated this year, the indicator of productive costs showed a reduction of 10.8% driven, largely by the decrease in wage costs and the reduction in the price of capital goods and raw materials.

In the agricultural sector, in particular, “labor costs (which include personnel, fuel, repairs, depreciation, etc.) and freight rates are lower by 25/35% measured in dollars,” explains Pablo Ginestet, deputy secretary of CARBAP, one of the entities in the sector. But he warns that “this improvement in costs will be lost, in a few months if the dollar is stagnant.”

In addition, according to the leader, “much of that improvement in cost, today is being lost with the increased cost of financing.” “Rates of more than 70% kill any activity,” he said.

As for the incidence of labor costs, in particular, another study by the consultancy Abeceb, showed, recently, that in the country, it was reduced by 52% since the devaluation. As also happened in Brazil, the main trading partner of Argentina, where it fell by 20% due to the depreciation of the real, in a year.

“In any case, both Argentina and Brazil continue to be countries with a high cost structure and, at the same time, unproductive, even though labor costs have decreased 50% in dollars compared to last year’s average,” explained Alberto Schuster, director of the Competitiveness Unit of ABECEB.

The work of the UADE highlights that “in recent months there has been a strong increase in labor unrest, a sensitive indicator, whose monitoring becomes especially relevant in recessive periods,” he warned.

This indicator was placed, in August, around 91.8 points, based on 100 the beginning of the measurement, in January 2016. The highest level of the index -in the period relieved- was recorded in April 2017 , when it reached 105.6 points.

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