VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #0635/01 0791703
ZNR UUUUU ZZH
R 201703Z MAR 06 ZDK
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3869
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2117
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000635 
 
SIPDIS 
 
SIPDIS 
 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS 
NSC FOR SUE CRONIN 
AND OCC FOR CARLOS HERNANDEZ 
USDOC FOR ALEXANDER PEACHER 
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY 
USSOUTHCOM FOR POLAD 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for 
the week ending March 17, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- GDP growth was 9.2 percent y-o-y in 2005. 
- The industrial production index rose 8.8 percent y-o- 
y in February. 
- President Kirchner urges Argentines not to buy beef 
if prices continue to rise. 
- The Central Bank (BCRA) increases bank liquidity 
requirements for sight accounts. 
- The BCRA rolls over its maturities by accepting bids 
on longer-term Nobacs. 
- The GOA increases the minimum threshold for paying 
individual income tax. 
- The peso appreciated versus the USD this week, 
closing at 3.09 ARP/USD. 
- Commentary of the Week: "The Dilemma of Financing 
New Infrastructure" 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
GDP up 9.2 percent y-o-y in 2005. 
--------------------------------------------- -------- 
 
¶1.  GDP increased 9.1 percent y-o-y in the fourth 
quarter of 2005 - well above the BCRA consensus 
forecast of 8.4 percent - bringing annual GDP growth 
for 2005 to 9.2 percent.  Growth was mainly driven by 
investment and strong consumer spending.  Investment 
increased 27 percent y-o-y in the fourth quarter, due 
to a 26 percent y-o-y increase in construction and a 
29 percent increase in plant and machinery, while 
private consumption increased 8 percent y-o-y. 
Production of goods grew 9.6 percent y-o-y and 
services were up 8.4 percent y-o-y.  The strong GDP 
performance at the end of 2005 provides a high 4 
percent statistical carryover effect for 2006 GDP 
growth, which currently is forecast to reach 6.9 
percent in the Central Bank (BCRA) consensus survey. 
 
--------------------------------------------- -------- 
February industrial production index up 8.8 percent y- 
o-y. 
--------------------------------------------- -------- 
 
¶2.  The industrial production index rose 8.8 percent y- 
o-y in February, above the BCRA consensus of 7.6 
percent.  During February, the fastest growing sectors 
were car production (up 122 percent), tobacco 
production (up 23.8 percent), and minerals (up 15.3 
percent).  There was a slight decrease in paper and 
cardboard (down 7.3 percent).  The index increased 0.2 
percent m-o-m without seasonal adjustment and 3.1 
percent m-o-m when seasonally adjusted.  The month-on- 
month increase in production is mainly explained by an 
increase in the automobile industry, up 151 percent m- 
o-m after a poor performance in January affected by 
plant retooling.  The BCRA consensus survey forecasts 
6.4 percent industrial production growth for 2006. 
 
¶3.  The industry-wide capacity utilization index 
reached 70.6 percent in February, compared to 69.2 
percent in February 2005.  The sectors showing the 
highest capacity utilization were metal based 
industries (96.5 percent), oil refining (94.5 
percent), textiles (80.2 percent), and printing (76 
percent).  The sectors with the lowest capacity 
utilization were auto production (46.8 percent) and 
minerals (58.4 percent). 
 
--------------------------------------------- -------- 
President Kirchner urges Argentines not to buy beef if 
prices continue to rise 
--------------------------------------------- -------- 
 
¶4.  The GOA suspended beef exports for 180 days 
starting March 14 to increase local supply and avoid 
further increases in domestic beef prices.  Beef is a 
mainstay of the Argentine diet and is a major 
component of the Basic Basket that determines the 
poverty, indigence and inflation rates.  The price of 
beef increased more than 25 percent between November 
2005 and the beginning of March 2006.  On March 13, 
Ministry Miceli said that the suspension could be 
extended an additional 180 days if the price of beef 
did not come down.  On March 14, after a 6 percent 
increase in beef prices in just one day, President 
Kirchner urged people not to buy beef unless prices 
went down, to prevent "extortion" by producers.  He 
added that nobody could believe that price increases 
were solely the result of demand and supply 
interaction.  Beef prices went up an additional 1 
percent in wholesale markets on March 15, and further 
increases are expected due to climatic conditions that 
complicate the transport of cattle. 
 
--------------------------------------------- -------- 
GOA reaches a price-restraint agreement with pork 
producers. 
--------------------------------------------- -------- 
 
¶5.  On March 15, the GOA closed a new price-restraint 
agreement with pork producers to maintain pork prices 
unchanged.  According to GOA officials, the aim of the 
agreement is to encourage the consumers to buy pork 
instead of beef and thus avoid further increases in 
beef prices.  The new accord advances the GOA's 
strategy of curbing inflation through price-restraint 
agreements with producers and retailers. 
 
--------------------------------------------- -------- 
BCRA increases bank liquidity requirements for sight 
accounts. 
--------------------------------------------- -------- 
 
¶6.  The BCRA issued a circular on March 13, raising 
bank liquidity requirements for sight accounts 
(current and savings accounts) by 2 percentage points 
to 17 percent, and eliminating the 2.55 percent annual 
return rate that the BCRA pays banks for their minimum 
reserves.  The measure will go into effect at the 
beginning of April.  The BCRA expects the measure to 
absorb ARP 1.9 billion from the financial system, 
assuming that private and public sector deposits total 
ARP 63.9 billion.  The aim of this move is to boost 
productive investment and savings by encouraging banks 
to pay a higher interest rate for time deposits and, 
at the same time, take more pesos out of circulation. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities by accepting bids on 
longer-term Nobacs. 
--------------------------------------------- -------- 
 
¶7.  The BCRA received ARP 749 million in bids in its 
March 14 Lebac auction, less than the ARP 1.7 billion 
in Lebacs that came due during the week.  However, the 
BCRA received ARP 1.3 billion in bids in its Nobac 
auction.  [Nobacs are longer term instruments than 
Lebacs and pay a variable rate composed of base rate 
called Badlar -- the interest rate for deposits of 
more than ARP 1 million, currently at 7 percent -- 
plus a spread.  The BCRA auctions the spread on its 
Nobacs, while the Badlar is determined by market 
conditions.]   As in previous auctions, the BCRA was 
able to roll over its maturities by accepting bids for 
ARP 1.7 billion (ARP 749 million in Lebacs and ARP 965 
million in Nobacs).  The yield on the 35-day Lebac 
decreased from 6.75 percent to 6.70 percent, while the 
yield on the 63-day Lebac dropped from 6.95 percent to 
6.85 percent.  The yield on the 91-day Lebac remained 
unchanged at 7.25 percent.  Lebacs for other 
maturities were withdrawn due to lack of interest. 
Investors concentrated more than 63 percent of their 
bids in Nobacs of more than 9 months and the BCRA 
accepted bids for ARP 965 million of Nobacs (56 
percent of the accepted bids in the auction).  The 
spread on the nine-month Nobac decreased two basis 
points, from 3.09 percent to 3.07 percent, while the 
spread on the two-year Nobac dropped nine basis points 
from 5.11 percent to 5.02 percent.  Investors are 
increasing their bids in Nobacs, since these 
instruments have a variable rate and provide a higher 
yield (10.9 percent and 12.9 percent for the 9-month 
and 2-year Nobac, respectively). 
 
--------------------------------------------- -------- 
GOA increases the minimum threshold for the income 
tax. 
--------------------------------------------- -------- 
 
¶8.  On March 15, Minister of Economy Felisa Miceli 
announced that the GOA had decided to raise the 
minimum threshold for the income tax for both salaried 
employees and the self-employed.  The minimum 
threshold for the income tax will be increased from 
ARP 1,835 to ARP 2,400 per month for single salaried 
employees, and from ARP 2,235 to ARP 3,000 per month 
for married salaried employees.  The minimum threshold 
also will be also from ARP 835 to ARP 1,000 for single 
self-employed people, and from ARP 1,235 to ARP 1,800 
for married self-employed people.  Taxes are paid on 
income earned that is above this minimum threshold. 
According to official estimates, this measure will 
have an annual fiscal cost of ARP 1.5 billion. 
 
--------------------------------------------- -------- 
The peso appreciated versus the USD this week, closing 
at 3.09 ARP/USD. 
--------------------------------------------- -------- 
 
¶9.  The peso appreciated versus the USD this week, 
closing at 3.09 ARP/USD, after reaching its lowest 
value in three years last week.  The peso's 
appreciation early in the week is mainly explained by 
lower dollar demand by banks, and by the Central 
Bank's (BCRA) intervention in the FX market on Monday 
and Tuesday, when it sold dollars to counteract the 
effect of its recent large purchases.  However, the 
BCRA purchased USD 57.5 million and EUR 141.5 million 
in the last three days of the week.  The peso exchange 
rate has depreciated 1.3 percent since the beginning 
of the calendar year. 
 
--------------------------------------------- -------- 
Commentary of the Week: "The Dilemma of Financing New 
Infrastructure".  By Daniel Montamat.  [Note: 
Translated and used with permission of the author, 
from an article published March 7 in El Cronista 
Comercial.  End Note.] 
--------------------------------------------- -------- 
 
¶10.  With sustained annual GDP growth of between 3 and 
5 percent, we will need to invest between USD 1.5 
billion and USD 3.5 billion in the energy sector 
alone.  A CEPAL study projecting investment in 
infrastructure to 2010 found that at a growth rate of 
3 percent per year, we will need to invest USD 6 
billion in infrastructure (part of that in maintenance 
and replacement, the rest in new investments). 
Neither public investment nor international financial 
institution financing will be sufficient.  There must 
be private investment and financing.  Because of the 
intrinsic business risk and the Argentine uncertainty 
factor, new investment will be either expensive or 
insufficient. 
 
¶11.  Transport, energy and telecommunications 
infrastructures have high fixed capital costs.  As 
long as capacity exists in the system, the cost of 
providing additional units is low in relation to the 
total cost.  The problem comes when networks are 
saturated or the capacity of infrastructure reaches 
 
its limit and one has to face new and high fixed 
costs.  Who will invest in these durable capital 
goods?  How will they be financed, and at what cost? 
And who will pay for these works? 
 
¶12.  To resolve these questions, it is important to 
distinguish between the concept of accounting cost and 
economic cost.  An accountant works with variable and 
fixed costs from a historical point of view; an 
economist talking about economic costs is thinking of 
present alternative uses for the resources used 
(opportunity cost).  Ronald Coase used a simple 
example to make clear the difference between an 
accounting view of costs and the economist's concept: 
An accountant would say that the cost of a machine is 
its depreciation; the economist would say that it is 
the income that could have been obtained by using the 
machine for another purpose.  If the machine has no 
alternative use, the economic cost is zero.  Because 
of this, John Hicks, another Nobel Prize-winning 
economist, maintained that when an enterprise invests 
in fixed capital, it "makes itself a hostage to the 
future."  Its capital is sunk because usually there 
are no alternative uses for fixed capital goods.  In 
turn, while capacity exists in the system, the cost of 
producing an additional unit is low.  This is why, 
when there is a need to expand or create new 
infrastructure, investors think not only about the 
cost of the work, but also the time during which they 
will be held hostage while recovering his investment. 
If they lack confidence in the future, they will 
discount fixed capital investments at high rates to 
shorten the time needed to recover his investment. 
High discount rates make public works projects -- and, 
as well, the mechanism of repayment -- expensive.  If 
the resulting public service tariffs are expensive for 
the average consumer's budget, the project won't be 
built, or the State will have to build it with tax 
revenues that also are taken from the public.  But 
public resources are not sufficient to pay for all the 
needed investments in infrastructure. 
 
¶13.  Accounting was born as a commercial tool when 
trade did not require large investments in fixed 
capital.  The original principles of accounting did 
not include amortization of capital expenses.  The 
focus was on variable costs and these old accounting 
practices were decisive for crystallizing the concept 
of marginal costs in economics.  Accounting principles 
had to be revised to take capital depreciation into 
account after the railroad crisis in the United States 
in the 19th century (until then, accounting rules 
produced profits that ignored the need to renew fixed 
assets and resulted in tariff rates that did not even 
recover marginal costs).  When the importance of fixed 
capital in new manufacturing processes became clear, 
it became accepted in accounting practice to include 
their relative weight in total costs.  But economic 
theory continues to cling to the marginal cost 
paradigm.  If a machine can't be put to some 
alternative use and has the capacity of producing one 
additional unit, we use it as long as it lasts.  Both 
orthodox and heterodox economists, for different 
reasons, subscribe to this short-term logic, which is 
disruptive for long-term capital investments, and 
which plays into the hand of demagogic politicians. 
 
¶14.  Argentina's infrastructure suffers from the lack 
of a long-term development strategy and is entangled 
in a short-term viewpoint that drives away investors 
and raises costs.  The State has taken over some 
infrastructure works that would never have been 
completed on "auto-pilot" (the Federal Plan for 
Electricity Transport), and has to create ad hoc rules 
to force investment with high costs when private 
companies invest (expansion of gas pipelines).  But 
there is a growing gap between the investment needed 
and what is being completed and infrastructure is 
becoming a barrier to sustaining the economic 
 
expansion.  What is urgently needed is to establish 
mechanisms that stimulate investments in 
infrastructure.  [Note: We reproduce selected articles 
by local experts for the benefit of our readers.  The 
opinions expressed are those of the authors, not of 
the Embassy.  End Note.] 
 
¶15.  To see more Buenos Aires reporting, visit our 
classified website at: 
http://www.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ