VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1481/01 1841347
ZNR UUUUU ZZH
R 031347Z JUL 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5100
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2227
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001481 
 
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 
June 30, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- Argentina and Bolivia agree to increase price of Bolivian gas 
imports by 56.25 percent. 
- President Kirchner announces that unemployment fell to 9.8 percent 
in May. 
- Provincial finances deteriorate. 
- June Government Confidence Index up 8 percent m-o-m -- after two 
consecutive decreases. 
- Argentina and Brazil sign new automobile trade agreement. 
- Commentary of the Week: "Growth is Going to Depend More and More 
on Productive  Investment" 
 
--------------------------------------------- -------- 
Argentina and Bolivia reach a 56.25 percent rise on gas price 
agreement. 
--------------------------------------------- -------- 
 
¶1.  On June 29, Argentina and Bolivia finally reached an agreement 
on Bolivian gas exports to Argentina.  The agreement was signed by 
Argentine President Nestor Kirchner and Bolivian President Evo 
Morales, and provides for an increase in the volume of gas exported 
to Argentina.  The price will increase on July 15 from USD 3.20 to 
USD 5 per million cubic meters through the end of 2006, a 56.25 
percent increase, and a new price will be renegotiated before the 
end of the year.  Argentina will not be able to re-export Bolivian 
gas to other countries, a reference to the contracts Argentina has 
signed to supply gas to Chile.  Bolivia and Chile severed diplomatic 
relations in 1978 and Bolivia wants to recover its access to the 
Pacific coast lost in the 19-th century War of the Pacific. 
 
--------------------------------------------- -------- 
President Kirchner announces that unemployment decreased to 9.8 
percent in May. 
--------------------------------------------- -------- 
 
¶2.  On June 29, President Kirchner announced that preliminary 
figures indicate the unemployment rate decreased to 9.8 percent in 
May -- compared to 11.4 percent in the first quarter of 2006 and 
10.1 percent in the fourth quarter of 2005.  This would be the first 
time the rate has fallen to single-digit levels in 13 years, but 
these figures exclude participants in the Head-of-Household income 
supplement plan.  Their inclusion would increase the unemployment 
rate by at least two percentage points.  However, this represents a 
remarkable recovery from 2002 when unemployment reached one quarter 
of the labor force.  The BCRA consensus survey forecasts that 
unemployment will fall to 9.3 percent by the end of 2006.  The 
National Bureau of Statistics (INDEC) will publish the official 
figures in August. 
 
--------------------------------------------- -------- 
Provincial public accounts deteriorate. 
--------------------------------------------- -------- 
 
¶3.  According to private consultants, the overall provincial fiscal 
surplus may be close to zero in 2006.  Without savings, the 
provinces will need an additional ARP 7 billion to make provincial 
debt payments.  The financing needed to close provincial accounts 
probably will come from the GOA, although the consultants do not 
discard the possibility of provinces delaying payments to suppliers. 
 This year, the GOA will restructure ARP 4 billion of provincial 
debt, half of which is owed by Buenos Aires province.  In 2006, the 
provincial primary fiscal surplus is estimated to reach ARP 2.0 
billion compared to ARP 2.9 billion last year (down 31 percent). 
This deterioration of provincial accounts is mainly the result of 
the increased rate of expenditure, particularly for salaries (which 
account for 49 percent of total provincial expenditures).  Also, 
interest payments are rising because half of the provincial debt is 
indexed by CER (a CPI-linked index).  Many provinces claim that the 
solution to the fragile provincial fiscal situation will come only 
through an integral restructuring of the provincial debt owed to the 
GOA. 
 
--------------------------------------------- -------- 
Government Confidence Index up 8 percent m-o-m in June -- after two 
consecutive decreases. 
--------------------------------------------- -------- 
 
 
¶4.  The Government Confidence Index increased 8 percent m-o-m in 
June to 2.69 points, 0.10 above the average during the Kirchner 
administration and well above the 1.2-point reading in May 2003 when 
President Kirchner took office.  Confidence in the GOA's ability to 
solve citizens' problems is still the factor generating the most 
confidence; it increased 1 percent m-o-m.  Public opinion of the 
GOA's general performance, honesty of GOA officials and efficiency 
of public spending increased 10 percent, 16 percent and 12 percent 
m-o-m, respectively.  The index rose 16 percent y-o-y.  [The 
Government Confidence Index is a survey-based index prepared by Di 
Tella University.  It varies from zero to five points and seeks to 
measure public opinion of GOA's general performance, efficiency of 
pubic spending, honesty of GOA officials and the government's 
ability to solve problems.] 
 
--------------------------------------------- -------- 
Argentina and Brazil signed a new automobile trade agreement. 
--------------------------------------------- -------- 
 
¶5.  On June 26, Argentina and Brazil signed an agreement to regulate 
automobile trade between the countries for the next two years. 
Argentina's car exports to Brazil (its main trading partner), rose 
more than 30 percent in the first five months of 2006, while 
Brazil's exports to Argentina rose 15.8 percent in the same period. 
The signed agreement reduces the amount of automotive products that 
each country may import tariff-free from the other from USD 2.6 to 
USD 1.95 for every USD 1 of auto-sector products it exports to the 
other. 
 
--------------------------------------------- -------- 
GOA veto power over Aerolineas Argentinas rejected by Interinvest 
associates. 
--------------------------------------------- -------- 
 
¶6.  Gerardo Diaz Ferran and Gonzalo Pascual of Interinvest (the 
group that controls Aerolineas Argentinas) have rejected the 
document signed on June 20 in Madrid by Aerolineas President Horacio 
Fargosi and GOA Ministers Julio de Vido and Felisa Miceli. 
Interinvest objects to the provisions in the agreement that 
establish a GOA veto power after it raises its stake in Aerolineas 
from 5 percent to 20 percent.  The agreement gives the GOA the right 
to veto strategic decisions such as reductions or elimination of 
flight frequencies. 
 
--------------------------------------------- -------- 
The GOA meets with food companies to discuss adjustments to price 
restraint agreements. 
--------------------------------------------- -------- 
 
¶7.  Secretary of Internal Commerce Guillermo Moreno met this week 
with several food companies that want to translate their costs 
increases over the last two months into price increases.  The goal 
of the meetings was to reach an understanding in which the companies 
can regain their profitability without compromising the GOA's 
inflation target for the year.  Moreno stated that starting July 3, 
the companies must present a detailed report of their cost structure 
for every product and the increases they are planning to make.  The 
evaluation may take up to one month. 
 
--------------------------------------------- -------- 
President Kirchner praises the Argentinean economic situation. 
--------------------------------------------- -------- 
 
¶8.  In a speech on June 27, Argentine President Nestor Kirchner, 
praised the "permanent growth of the people and of their purchasing 
power, that gives to the economy a permanent reactivation," and 
defended the GOA's action to generate investments in infrastructure 
and housing.  The President's remark followed the improvement in 
several economic indicators -- construction and consumption -- 
published by the National Bureau of Statistics (INDEC).  Consumption 
rose mainly in response to lower food prices.  However, private 
consultants doubt the sustainability of price controls if 
consumption continues to grow. 
 
--------------------------------------------- -------- 
The GOA to promote pension funds' investment in the energy sector. 
--------------------------------------------- -------- 
 
¶9.  The GOA is seeking to promote private pension fund (AFJP) 
investments in the expansion of the energy sector by offering funds 
a 7 percent annual return.  The GOA and pension fund managers are 
reportedly negotiating on a capital adjustment index and the 
long-term return.  According to Minister of Planning Julio de Vido, 
the offered return is "more than interesting."  President Kirchner 
recently said that pension funds should play a stronger role in 
capital investment instead of worrying about how to increase 
returns. 
 
--------------------------------------------- -------- 
Brazilian BNDES to lend USD 689 million to expand gas network in 
Argentina. 
--------------------------------------------- -------- 
 
¶10.  Undersecretary for Fuels Cristian Folgar announced that the 
Brazilian National Bank of Development (BNDES) approved a 10-year 
loan for USD 689 million at the Libor rate plus 2.6 percent to 
expand the gas transportation network during 2006-2008.  This credit 
will finance the gas network expansion of the Northern Gas Transport 
(TGN) and Southern Gas Transport (TGS) pipelines, which will expand 
their capacity by 13 million cubic meters a day.  Eight million 
cubic meters will be destined to the electric sector and the rest to 
the industrial sector. 
 
--------------------------------------------- -------- 
Joint South Korean mission visits Argentina to discuss natural 
resource development. 
--------------------------------------------- -------- 
 
¶11.  The South Korean government has dispatched a joint 
government-private sector mission to Argentina to discuss ways to 
develop natural resources.  Kim Shing-Jong, deputy minister of 
energy and resources policy, led the delegation, which included 
officials from the state-run investment promotion agency Kotra, 
Daewoo International, Korea National Oil Corporation and the Korea 
Energy Economics Institute.  The ministry said that the GOA had 
promised to support Korean consortia interested in taking part in 
copper mining projects in Agua Rica and El Pachon and that it will 
continue to help Korean firms taking part in oil field development 
in Argentina. 
 
--------------------------------------------- -------- 
Banks to offer time deposit adjusted by Badlar rate with a 
guaranteed return. 
--------------------------------------------- -------- 
 
¶12.  The BCRA will allow banks to offer a Badlar rate (variable 
rate) time deposit with a guaranteed return. Banks will offer a 
fixed or variable interest rate, with the obligation of repaying the 
higher one to the investor.  These time deposits will have a minimum 
term of 120 to 180 days.  The BCRA did not detail whether there will 
be a minimum amount, nor the currency for these deposits.  With this 
measure, the BCRA aims to extend the term of time deposits as well 
as lower the bank's liquidity risk. 
 
--------------------------------------------- -------- 
Balance of payments:  Current account surplus of USD 1.2 billion and 
net capital outflows of USD 8.1 million due to GOA debt prepayment 
to the IMF in Q1 of 2006. 
--------------------------------------------- -------- 
 
¶13.  The GOA announced that its balance of payments results for the 
first quarter of 2006 show a current account surplus of USD 1.2 
billion -- compared to USD 185 million in the first quarter of 2005 
and above the market forecast of USD 985 million.  The current 
account increase was driven mainly by lower interest payments 
following the the GOA debt exchange.  Interest payments fell from 
USD 1.6 billion in Q1 2005 to USD 380 million in Q1 2006.  The GOA 
reported accrued interest on debt in 2005 even though it was not 
paid, but the report shows no accrued interests in 2006 because the 
debt exchange has been finalized (and unpaid interest is no longer 
reflected in the interest account of the balance of payments). 
Meanwhile, the trade surplus reached USD 2.7 billion, close to the 
level of the Q1 2005 surplus. 
 
¶14.  The capital and financial account showed net capital outflows 
of USD 8.1 billion -- compared to net capital inflows of USD 137 
million in Q1 2005.  Outflow were mainly from the non-financial 
 
public sector and the BCRA (USD 9 billion), which were partially 
offset by non-financial private sector inflows (USD 610 million) and 
by banking sector inflows (USD 299 million).  The decrease in 
capital inflows -- compared to the same quarter last year -- is 
mainly the result of the GOA payment to the IMF.  Without the debt 
prepayment to the IMF, the financial account would have had a 
surplus of USD 1.4 billion and reserves would have increased by USD 
2.9 billion, according to GOA calculations. 
 
--------------------------------------------- -------- 
BALANCE OF PAYMENTS        2006     2005   Difference 
(USD in M)                  Q1       Q1 
--------------------------------------------- -------- 
(A) CURRENT ACCOUNT        1,180      184        996  1 TRADE 
BALANCE             2,714    2,746       -32 
2 SERVICES                  -376     -406         30 
3 INVESTMENT SERVICES & DIVIDENDS 
                          -1,321   -2,303        982 
4 TRANSFERS                  163      147         16 
--------------------------------------------- -------- 
(B) CAPITAL AND FINANCIAL ACCOUNT 
                          -8,134      184     -8,318 
1 CAPITAL ACCOUNT             11       47        -36 
2 FINANCIAL ACCOUNT       -8,145      137     -8,282 
--------------------------------------------- -------- 
(C) ERRORS AND OMMISSIONS    320      482       -162 
--------------------------------------------- -------- 
(D) INTERNATIONAL RESERVES 6,633     -851      7,484 
--------------------------------------------- -------- 
OVERALL BALANCE (A)+(B)+(C)-(D)1        1          0 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
May construction activity index increased 23.9 percent y-o-y without 
seasonal adjustment. 
--------------------------------------------- -------- 
 
¶15.  The National Bureau of Statistics (INDEC) released its May 
construction activity index showing an increase of 23.9 percent 
y-o-y and of 26.9 percent after seasonal adjustment.  Construction 
activity, which is an important component of gross fixed investment, 
grew 2 percent m-o-m seasonally adjusted and and 7.9 percent without 
seasonal adjustment.  During the first five months of the year, 
construction activity rose 20.3 percent against the same period in 
2005, taking the index to record highs. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  The BCRA extends the average life 
of its portfolio. 
--------------------------------------------- -------- 
 
¶16.  The BCRA received ARP 1.1 billion in bids at its June 27 Lebac 
and Nobac auction, compared to ARP 333 million in Lebacs that came 
due during the week.  It accepted ARP 802 million in Lebac bids and 
ARP 214 million in Nobac bids.  The yield on the 77-day Lebac and 
the 175-day Lebac remained in 7.35 percent and 8.60 percent, and the 
yield on the 259-day Lebac decreased from 10.27 percent to 10.20 
percent.  The yield on the longest term instrument, the 343-day 
Lebac, remained at 12 percent.  Lebacs for maturities of more than 
350 days were withdrawn due to lack of interest.  The spread on the 
one-year Nobac decreased from 2.05 percent to 2.03 percent and from 
3.78 percent to 3.72 percent for the two-year Nobac.  The Badlar 
rate (the base rate for Nobacs) is currently at 9.1 percent.  Since 
December of 2005 to the present, the BCRA has extended the average 
life of its portfolio (from 247 days to 353 days) by 43 percent, 
mostly due to larger Nobacs issuance. 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, closing at 3.10 
ARP/USD. 
--------------------------------------------- -------- 
 
¶17.  The peso remained flat versus the USD this week, closing at 
3.10 ARP/USD.  On Wednesday, the peso depreciated slightly to 3.11 
ARP/USD -- the lowest level since March of 2003.  The BCRA then made 
clear that 3.10 ARP/USD level is a ceiling by selling USD 5 million. 
 In the first four days of the week, the BCRA purchased USD 91 
million.  The peso exchange rate has depreciated 1.6 percent since 
the beginning of the calendar year.  The BCRA's reserves stood at 
 
USD 25.3 billion as of June 27, and have increased USD 6.5 billion, 
or 35 percent, since the GOA prepaid its entire IMF debt on January 
¶2. 
 
--------------------------------------------- -------- 
Commentary of the week: "Growth is going to depend more and more on 
productive investment", by Miguel A. Kiguel from an article 
published Cronista Comercial on June 14. 
--------------------------------------------- -------- 
 
¶18.  Once again, world stock markets are slumping, interest rates 
for emerging markets are rising, gold and silver prices are falling 
and questions are re-emerging as to whether we are on the edge of an 
international financial crisis and what impact this situation could 
have on Argentina. 
 
The recent declines in world stock markets seem to be in part a 
technical correction following a significant increase in the price 
of financial stocks during the first months of the year, and in part 
a result of a change in expectations regarding the strong, worldwide 
growth that has been observed in recent years. 
 
¶19.  The repeated increases in the Federal Reserve's interest rates, 
which taken the Federal Funds Rate from 1  percent to 5  percent 
over the past two years, finally had an impact on the price of 
financial stocks and certainly will bring about an economic slowdown 
in the United States.  The relevant question isn't why the increase 
in interest rates impacts emerging markets, but rather why it took 
so much time for the policy of the Fed to affect them. 
 
¶20.  In the past, changes in interest rates set by the Fed affected 
the risk premium of emerging market bonds.  An increase in rates 
from 3 percent to 6 percent was the main trigger of the Tequila 
crisis in 1994 and of devaluations in many countries in the region. 
The fall in rates since 2001 and the great liquidity that it 
generated from then on brought about financial euphoria in emerging 
markets with strong increases in stock markets and large drops in 
the risk premiums on the emerging market sovereign bond index 
(EMBI). 
 
¶21.  Despite the recent fall in markets and the rise in the EMBI, 
one cannot speak of crisis (at least for now).  In truth, the 
decreases imply primarily a "re-pricing" (or a readjustment of 
prices) and suggest that in countries like Brazil, Chile and 
Argentina, the stock market indexes are returning to their levels at 
the beginning of the year, while the EMBI still remains at 
relatively low levels compared with historic figures. 
 
¶22.  The impact of this turbulence on emerging economies should not 
be as great as during the Tequila crisis or the crisis at the end of 
the 1990s.  Most emerging markets today show surpluses in their 
current account of the Balance of Payments and have elevated levels 
of international reserves.  Furthermore, with very few exceptions, 
countries no longer have fixed exchange rates, so there does not 
appear to be a risk of a balance of payments crisis.  Certainly this 
is the case in Latin American countries where the export sector is 
strong, with international reserves of more than USD 230 billion and 
current account surpluses of USD 12 billion. 
 
¶23.  Meanwhile, there are no significant fiscal problems in the 
region, and countries depend less and less on international markets 
to satisfy their financial programs, so it doesn't seem that we are 
in the waiting room of a new debt crisis. 
 
¶24.  In our country, the impact up until now principally has fallen 
on the value of stocks.  The turbulence of markets had an important 
effect on the price of stocks and of long term bonds; however, it 
had a relatively small effect on the foreign exchange market, where 
the Central Bank continued buying reserves in the exchange market, 
at the same time that short-term interest rates in pesos remained 
very stable.  In reality, there is still great liquidity in the 
financial market, and there are no pressures on the dollar or on 
interest rates as was the case in the past. 
 
¶25.  This time it appears that the effect will be different, less on 
the financial sector and more on the real sector of the economy. 
Argentina is not isolated from the world and therefore if the world 
economy slows down as a result of the new international scenario, 
without a doubt it will result in lower prices for our exports, 
 
lower international demand and greater financial costs for 
businesses.  This situation will surely affect our economic cycle 
and could bring about a drop in the growth rate. 
 
¶26.  The turbulence in international markets does not seem such that 
it could cause a new financial earthquake in our economy.  However 
it is warning sign, with an international scenario driven by the 
increase in the Fed's interest rates, higher market volatility and 
price decreases for some commodities.  It appears that growth is 
going to be increasingly less aided by luck and is going to depend 
more and more on productive investment.  (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.) 
 
 
GUTIERREZ