MercoPress. South Atlantic News Agency

Grim outlook for Argentine industry according to auto industry and Moody's

Industrial production this year is down 3.1%, while the auto industry was down 16% in the first quarter

An estimated 12.000 workers from the auto industry and auto-parts manufacturing have been sent home on anticipated vacations or because of lesser working days, according to the mechanics union SMATA, a figure consistent with the level of domestic market sales and exports. However the industry leaders and unions have warned that the situation is set to worsen in coming months.

 The big auto manufacturers, Volkswagen, Fiat, Peugeot, Iveco and Renault have temporarily ceased activities or cut working hours which has a direct impact on the suppliers of auto parts.

Automakers are betting on lower interest rates on loans to re-launch the domestic market, as promised by the government of President Cristina Fernandez and on discussions with Brazil, which faces a similar problem, to jointly address the issue by lowering costs and looking for new export markets.

In effect most Argentine cars are exported to Brazil, where sales are down in a slowing economy. Meanwhile, a 23% peso devaluation so far this year puts cars with foreign parts out of reach for many Argentines. New taxes imposed by President Cristina Fernandez have made many cars even more expensive, and there's less credit available due to Argentine banking rules.

However a grim report from Moody's Investors Service on Wednesday shows Argentina's economic woes go beyond the leading automotive industry. Most of the Argentine companies Moody's rates face a high risk of a liquidity crisis, with “significant debt coming due in the next 24 months, limited cash in relation to upcoming debt maturities, sizable negative free cash flow, a lack of access to committed bank credit facilities, or some combination of these factors,” the ratings service said.

Union chief Antonio Calo said Wednesday that he's hoping trade talks between Brazil and Argentina will protect the industry. He spoke out after Fiat's truck-making subsidiary Iveco said it is suspending about 700 workers, and Peugeot-Citroën announced suspensions of 1,000 workers until sales catch up with production. The Peugeot-Citroen workers at the Villa Bosch factory outside the capital will get 65% of their pay until production resumes, the company said.

Union leaders worry that Argentina's General Motors factory may be next, because it exports 79% of its production to Brazil, where currency changes have made Argentine cars more expensive.

Argentina's overall industrial production is down 3.1% this year, and much of the downturn involves the auto industry, whose production is down 16% this quarter compared to the year before, according to a report by the Management & Fit consultancy. Sales numbers are even worse, down 35% compared to April 2013, according to Argentina's automotive sales association.

“Companies that generate a meaningful amount of cash in Argentina and have a significant amount of debt denominated in US dollars are most at risk. Currency weakness also exacerbates Argentina's already high inflation,” the report said. Among those most exposed are Argentine food producer Arcor S.A.I.C.; oil and gas producers YPF S.A., and Petrobras Argentina S.A.; timber producer Alto Parana S.A. and the Cablevision, S.A. media company, Moody's said.

With limited access to affordable credit, many Argentine companies are hoarding cash against the threat of another devaluation, and delaying the kind of longer-term investments needed for economic growth, Moody's concluded.