VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1769/01 2192037
ZNR UUUUU ZZH
R 072037Z AUG 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5486
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2265
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001769 
 
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 
August 4, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- The GOA sells USD 482 million worth of Boden 2012 bonds to 
Venezuela. 
- CPI rises 0.6 percent m-o-m in July -- below market expectations. 
PPI rises 0.7 percent m-o-m. 
- The Chamber of Deputies approves budget "superpowers". 
- Chilean industrialists denounce Argentina gas delivery cut. 
- IDB approves two credit lines to Argentina provinces. 
- The Minimum, Vital and Mobile Wage Council agrees to increase the 
minimum wage 27 percent. 
- Commentary of the Week: "The Internal Market or Exports?" 
 
--------------------------------------------- -------- 
The GOA sells USD 482 million worth of Boden 2012 bonds to 
Venezuela. 
--------------------------------------------- -------- 
 
¶1.  On July 28, the GOA published a resolution authorizing the 
issuance of USD 482 million worth of Boden 2012 bonds to Venezuela, 
although the bond placement was made secretly on July 17.  With this 
new issuance, Boden 2012 stock has reached USD 15.1 billion, of 
which more than one-quarter was sold directly to the GOV. 
 
--------------------------------------------- -------- 
CPI rises 0.6 percent m-o-m in July -- below market expectations. 
PPI rises 0.7 percent m-o-m. 
--------------------------------------------- -------- 
 
¶2.  The Consumer Price Index (CPI) increased 0.6 percent m-o-m in 
July, below market expectations of 1 percent, and one-tenth of a 
percentage point higher than in the last two months.  The 
better-than-expected result is due mainly to reduced pressure on 
food prices, which make up almost one-third of the index.  Last 
month's increase brought inflation to 5.5 percent for the first 
seven months of the year, compared to a 7.2 percent increase in the 
same period last year.  The seasonal component of the index 
increased 0.3 percent, while the regulated component increased just 
0.1 percent.  The categories with the highest price increases were 
education (+4 percent), recreation (+3.1 percent) and housing (+2.5 
percent).  Meat prices (representing 4.5 percent of the consumer 
basket) decreased 3 percent m-o-m due to price restraint agreements 
between the GOA and the meat sector as well as the partial ban on 
beef exports.  Year-on-year, CPI increased 10.6 percent.  The BCRA 
consensus survey forecasts 11.5 percent inflation in 2006, unchanged 
from last month's forecast.  The 2006 budget projects a 9.1 percent 
inflation rate for 2006, and the Central Bank's inflation target 
range is 8-11 percent. 
 
¶3.  Producer prices increased 0.7 percent m-o-m in June, due to a 
1.3 percent increase in primary goods prices and a 0.5 percent 
increase in the prices of manufactured goods prices and electricity. 
 The price of imported goods increased 0.4 percent.  The PPI index 
increased 11.4 percent y-o-y. 
 
--------------------------------------------- -------- 
The Chamber of Deputies approves budget "superpowers." 
--------------------------------------------- -------- 
 
¶4.  On August 2, the Chamber of Deputies approved the budgetary 
"superpowers" bill sought by the GOA, thus passing the bill into 
law.  The so-called "superpowers" over the national budget will give 
the GOA the power to modify the Budget Law and give the Chief of 
Cabinet the power to reallocate funds irregardless of the provisions 
of the Financial Administration Act or the Fiscal Responsibility 
Law.  The Senate amended the original proposal, adding a clause that 
these "superpowers" will not extend to SIDE (Argentine intelligence 
service) or to confidential funds (the so-called "fondos 
reservados").  While past administrations also have had similar 
"superpowers," this law is different in that the powers granted to 
the Chief of Cabinet will be permanent, rather than temporary. 
 
--------------------------------------------- -------- 
Chilean industrialists denounce Argentina gas delivery cut. 
--------------------------------------------- -------- 
 
¶5.  Several Chilean industrialists denounced the recent reduction in 
 
gas imports from Argentina, which has limited supplies to small 
consumers only.  Argentine energy planners will reduce exports to 
Chile, as well as restrict supplies to domestic companies and gas 
stations.  The reported cut in gas delivery coincided with the 
coldest days in Argentina's winter; such gas restrictions are not 
out of the ordinary when residential users increase demand during 
cold spells.  This criticism exacerbates tensions between Argentina 
and Chile, after GOC officials remarked that Argentina's gas price 
increase was higher than expected. 
 
¶6.  The GOA responded to the GOC's criticisms, justifying the price 
hike as a result of the increased price of gas imported from Bolivia 
to Argentina. 
 
--------------------------------------------- -------- 
IDB approves two credit lines to Argentina provinces. 
--------------------------------------------- -------- 
 
¶7.  The Inter-American Development Bank (IDB) approved two credit 
lines to Argentina provinces.  Cordoba province will receive a USD 
180 million loan for an education, home and hospital development 
program.  The IDB also approved a USD 580 million credit to finance 
a high-tension line to boost energy distribution across the "Great 
North" provinces (Catamarca, Corrientes, Chaco, Formosa, Jujuy, 
Misiones, Tucuman, Salta and Santiago del Estero).  The loans have 
25-year terms and a 4-year grace period for repayment at variable 
interest rates. 
 
--------------------------------------------- -------- 
The Minimum, Vital and Mobile Wage Council agrees to increase the 
minimum wage 27 percent. 
--------------------------------------------- -------- 
 
¶8.  On July 28, the Minimum, Vital and Mobile Wage Council 
participants (union leaders, employers and government employees) 
reached an agreement to gradually increase the minimum wage between 
now and November.  On August 1, the minimum wage increased from ARP 
630 to ARP 760.  It will rise to ARP 780 in September, and finally 
to ARP 800 in November.  Union leaders are still demanding an 
increase in the family allocation from ARP 60 to ARP 75 per child. 
 
--------------------------------------------- -------- 
Tax revenues increase 27 percent y-o-y to ARP 12.7 billion in July 
-- above expectations. 
--------------------------------------------- -------- 
 
¶9.  July federal tax revenues increased 27 percent y-o-y to ARP 12.7 
billion -- above market expectations of ARP 12.2 billion.  Labor 
contributions were up 47 percent y-o-y due to increases in formal 
job creation and salary increases, while VAT revenues rose 26 
percent y-o-y, mainly due to increased economic activity.  Income 
tax and export tax revenues increased 26 percent y-o-y and 15 
percent y-o-y, respectively.  In real terms, revenues increased 14 
percent y-o-y.  July tax revenues reached ARP 83 billion in the 
first seven months of the year (a 22 percent y-o-y increase), 
reaching 58 percent of the BCRA consensus survey forecast of ARP 
143.2 billion for 2006. 
 
--------------------------------------------- -------- 
2007 budget macroeconomic parameters may include 4.5 percent GDP 
growth and 8-11 percent inflation. 
--------------------------------------------- -------- 
 
¶10.  On August 2, El Cronista reported preliminary macroeconomic 
projections that the GOA will likely include in the 2007 budget -- 
which is expected to be sent to Congress on September 15. 
Reportedly, the projections include: 4.5 percent GDP growth, an 8-11 
percent inflation band and a primary fiscal surplus totaling 3 
percent of GDP.  For 2007, the BCRA consensus survey predicts 6 
percent GDP growth, an 11-12 percent inflation band and a primary 
fiscal surplus of 3.2 percent of GDP.  GOA officials said that the 
projections are moderate because Argentine economic history is not a 
certain matter.  The 2007 budget would not include any reference to 
the "hold-out" bondholders problem.  [The "hold-out" bondholders did 
not participate in the 2005 public debt exchange so the GOA has 
outstanding debt with them.] 
 
--------------------------------------------- -------- 
Banks pay USD 125 million in discount borrowing from the BCRA. 
 
--------------------------------------------- -------- 
 
¶11.  On August 2, banks canceled another USD 125 million in discount 
borrowing from the BCRA.  The payment is part of the BCRA's 
"matching" program, which matches the terms of bonds held by the 
banks with those of the discount debt.  During the last 19 months, 
banks have repaid 69 percent of their loans and the number of banks 
with outstanding discount debt fell from 24 to 3 (Galicia Bank, 
Provincial Bank of Buenos Aires and Bisel). 
 
--------------------------------------------- -------- 
Mercosur central bank presidents will meet in Uruguay. 
--------------------------------------------- -------- 
 
¶12.  Presidents of the Mercosur countries' central banks will gather 
on August 7-8 in Uruguay.  The agenda includes discussion over the 
creation of a regional Mercosur Bank, a new transaction currency for 
use in commercial transactions between Argentina and Brazil and the 
issuance of a common bond. 
 
--------------------------------------------- -------- 
The GOA wants to control rising rent prices. 
--------------------------------------------- -------- 
 
¶13.  Secretary of Internal Trade Guillermo Moreno is working to 
reach an agreement with the real estate sector on the issue of 
rising rent prices.  According to the National Bureau of Statistics 
(INDEC), rents have increased 7.2 percent in 2006, while the CPI 
increased 4.9 percent.  Moreno hopes to reach a voluntary agreement 
without resorting to a price freeze. 
 
--------------------------------------------- -------- 
Banco Nacion has a new vice-president. 
--------------------------------------------- -------- 
 
¶14.  On July 28, the GOA designated Roberto Jose Feletti as the new 
vice-president of Banco Nacion.  Feletti was secretary of planning 
and infrastructure for the City of Buenos Aires, and before that 
served as president of Banco Ciudad de Buenos Aires.  Felleti's term 
will last until December 2007. 
 
--------------------------------------------- -------- 
July labor demand index down 1.01 percent m-o-m. 
--------------------------------------------- -------- 
 
¶15.  The July labor demand index calculated by Di Tella University 
decreased 1.01 percent m-o-m to 111.77 points, after a 7.18 percent 
increase in June.  Labor demand has decreased 2.02 percent so far 
this year.  The decrease is mainly due to a fall in the demand for 
services (-3.46 percent), as well as for administrative and 
commercial personnel (-2.34 percent and -1.76 percent, 
respectively).  The index is up 6.7 percent y-o-y.  [The index is 
based on comparisons of job vacancy announcements printed in the two 
largest newspapers of the country.] 
 
--------------------------------------------- -------- 
Oil-producing provinces and the GOA agree on a Federal Hydrocarbon 
Law bill. 
--------------------------------------------- -------- 
 
¶16.  Nine out of Argentina's ten oil and gas-producing provinces 
reached an agreement with the GOA on a Federal Hydrocarbon Law bill, 
which will now be sent to Congress for approval.  This law would 
give provinces control over exploration and use of their natural 
resources, including administration of permissions, concessions and 
royalties.  According to the bill, the GOA will remain in charge of 
the nation's energy policy as a whole.  The nine provinces that 
signed are Mendoza, Chubut, Formosa, Jujuy, La Pampa, Rio Negro, 
Salta, Santa Cruz and Tierra del Fuego. All are members of the 
Federal Organization of Hydrocarbon-Producing Provinces (OFEPHI). 
The province of Neuquen, which has withdrawn from OFEPHI, did not 
sign the bill. According to press reports, Neuquen's governor is 
considering a run against President Nestor Kirchner in the 2007 
elections. 
 
--------------------------------------------- -------- 
The GOA will increase employees' pension fund contributions to 11 
percent. 
--------------------------------------------- -------- 
 
 
 
 
¶17.  On July 27, the GOA issued a decree to gradually increase 
employees' required pension fund contributions.  Currently, 
employees must contribute 7 percent of their earnings; in January it 
will rise to 9 percent. A second increase to 11 percent is scheduled 
for June 2007, bringing the contribution rate back to its pre-crisis 
level.  The GOA decreased contributions from 11 percent to 7 percent 
in 2001, in an attempt to reactivate private consumption.  Since 
then, the GOA has discussed increasing the contribution rate on 
several occasions, but it has remained at 7 percent until now. 
 
--------------------------------------------- -------- 
The GOA will issue a new Bonar bond. 
--------------------------------------------- -------- 
 
¶18.  Secretary of Finance Alfredo Mac Laughlin announced 
preparations for a new Bonar issuance are underway, after the GOA 
successfully issued USD 500 million in Bonar V bonds on July 26. 
These dollar-denominated Bonar X bonds will have a ten-year term, 
 
and they could be issued within the first two weeks of August. 
 
--------------------------------------------- -------- 
The BCRA requests USD 700 million from the BIS. 
--------------------------------------------- -------- 
 
¶19.  The BCRA requested a USD 700 million credit from the Bank for 
International Settlements (BIS), which would be used to pay the USD 
2.3 billion owed on Boden 2012 and 2007 capital due without 
diminishing reserves.  The BCRA also asked for funds at the 
beginning of the year to restore its lost reserves after prepaying 
its debt to the IMF. 
 
--------------------------------------------- -------- 
Non-contributing pensioners pressure fiscal accounts. 
--------------------------------------------- -------- 
 
¶20.  A measure that allows people above retirement age to sign up 
for retirement pensions, without ever having contributed to the 
social security system, is pressuring GOA fiscal accounts.  The 
retirement payments for people that take advantage of this measure 
will be financed with public funds from the current pay-as-you-go 
retirement system.  Private consultants estimate that if all 2.2 
million eligible persons take advantage, it will cost approximately 
ARP 11.4 billion.  This problem is perceived as one of the major 
consequences of the Argentina's high rate of informal employment 
(estimated at 45 percent). 
 
--------------------------------------------- -------- 
The IMF asks Argentina to reopen debt exchange. 
--------------------------------------------- -------- 
 
¶21.  At their July 28 meeting, IMF members discussed the future of 
the "Argentine case."  The IMF emphasized the importance of 
reopening the debt exchange, though its argument that new financing 
would be impossible was weaker after Argentina's successful bond 
issuance last week.  Other recommended policies were revaluation of 
the peso exchange rate, restrictions on peso emissions, and 
reductions in government expenditures.  Argentina has three 
outstanding debts: it owes money to "hold-out" bondholders and to 
the Paris Club, as well as accumulated interests with the European 
Investment Bank.  This week, the GOA will decide if will allow 
publication of the IMF's report, which includes comments from 
Economic Minister Felisa Miceli and BCRA President Martin Redrado. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities and decreases rates for Lebacs and 
Nobacs. 
--------------------------------------------- -------- 
 
¶22.  The BCRA received ARP 1.4 billion in bids at its August 1 Lebac 
and Nobac auction, compared to ARP 707 million in Lebacs that came 
due during the week.  It accepted ARP 453 million in Lebac bids and 
ARP 436 million in Nobac bids.  The yield on the 175-day Lebac 
decreased from 8.80 percent to 8.50 percent and on the 259-day Lebac 
decreased from 10.70 percent to 10.30 percent.  The yield on the 
longest term instrument, the 343-day Lebac, decreased from 12.05 
percent to 11.90 percent.  Lebacs for maturities of more than 343 
days were withdrawn due to lack of interest.  The spread on the 
one-year Nobac decreased from 2.08 percent to 1.93 percent and the 
 
two-year Nobac from 3.74 percent to 3.64 percent.  The Badlar rate 
(the base rate for Nobacs) is currently at 9.5 percent.  The BCRA 
changed its policy, accepting almost all Lebac bids and rejecting 
most Nobac bids, achieving a reduction of rates. 
 
--------------------------------------------- -------- 
The peso appreciated against the USD this week, closing at 3.09 
ARP/USD. 
--------------------------------------------- -------- 
 
¶23.  The peso appreciated versus the USD this week, closing at 3.09 
ARP/USD.  The BCRA is not reporting daily transactions in the dollar 
market until August 3, but the absence of reporting and a high 
dollar supply in the market pushed the peso exchange rate down 
against the USD.  The peso exchange rate has depreciated 1.3 percent 
since the beginning of the calendar year.  The BCRA's reserves stood 
at USD 26.2 billion as of July 21, and have increased USD 7.6 
billion, or 41 percent, since the GOA prepaid its entire IMF debt on 
January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week: "The Internal Market or Exports?" by Manuel 
Alvarado Ledesma, Director of the Agro-economic Consultancy (CAE), 
from an article published in La Nacion on July 22. 
--------------------------------------------- -------- 
 
¶24.  Economics is the science of choices in conditions of scarcity. 
No matter what the choices are, not choosing is not an option.  It 
is not possible to be both doctor and patient at the same time. 
This truism has become a nail in the heel of the current leaders. 
Obviously, this applies to some more than others.  What does this 
reflection mean to us?  The sudden devaluation - and its subsequent 
micro-devaluations - was permitted as a form of improving the 
competitiveness of our economy abroad.  Of clear mercantilist roots, 
the strategy, adopted as much by this government as by previous 
post-devaluation authorities, was clearly pro-exportation.  The 
devaluation would improve the balance of trade and increase official 
resources, but it simultaneously would impoverish the internal 
market, affecting mainly the middle class and the most modest 
sectors, at least in the short term.  On making this choice, the 
successive authorities should have known that internal prices would 
be extremely affected.  However, it is as if they were surprised by 
the consequences; they decided to neutralize part of their negative 
effects on the internal market through the implementation of 
exportation laws on some products.  Among these, those of the 
agriculture sector stand out. 
 
¶25.  The contradiction is clear.  With the modification of the 
exchange rate, the price of food and of extractive activities rise, 
but the values of other products follow right behind - although to a 
different extent.  Of course, the government applies export taxes to 
the first goods to rise, so that their prices are lower in the 
internal market and so that fiscal resources increase at the same 
time.  And if such taxes do not produce all the effects desired, 
then the fiscal authority takes new measures to influence 
production. 
 
¶26.  The current absurdity is in wanting to stay in good terms with 
the internal market and at the same time trying to maintain a high 
dollar to encourage export activity, thus generating higher tax 
revenue.  The strategy has the political logic of providing 
resources to the executive branch, but it implies the economic 
contradiction of trying to be in two places at the same time. 
 
¶27.  The government does not demonstrate clearly a calling for 
economic principles.  Still, a central task remains incomplete: to 
define well what is, to the government's understanding, the nature 
and extent of state intervention in the economy.  As it is today, 
the borders between the state and the market are blurred. 
Furthermore, they are unstable.  In this context, there is no 
predictability, and therefore investment is scarce and will surely 
follow a path of short-term gains. 
 
¶28.  If one aims for economic stability and export growth, what is 
needed is a central bank, independent of political power, that is 
dedicated to maintaining the currency's value, a high grade of 
economic liberalization that places the country in the global 
economy, and a public expenditure that is as crystal clear as it is 
efficient.  All this should be within a framework of enormous 
 
 
respect for private property and institutions, with clear and fixed 
regulations, that create a predictable horizon.  The dollar matters, 
but the institutions that determine the transaction costs, and 
therefore productivity, matter much more. 
 
¶29.  On the contrary, the Central Bank is paradoxically promoting 
future inflation and sectoral struggle to increase sectoral incomes. 
 In this way, it will surely unleash an internal struggle where each 
soldier will only succeed if his is able to give up what his 
opponent wants.  In place of soldiers of production, we will instead 
have soldiers of the zero-sum game. 
 
¶30.  In summary: in its contradiction, economic policy is hurting 
the main link of the entire agro-industrial chain.  And this is no 
small matter, as it makes up more than 35 percent of GDP.  (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.) 
 
MATERA 
2