VZCZCXYZ0009
OO RUEHWEB

DE RUEHBU #1623/01 3332143
ZNR UUUUU ZZH
O 282143Z NOV 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2572
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001623 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ELAB EINV AR
SUBJECT: Plan B: Argentina Announces Robust Public Works, Tax 
Incentive Response to Economic Crisis 
 
This cable contains sensitive information - not for internet 
distribution. 
 
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Summary 
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¶1. (SBU) Argentine President Cristina Fernandez de Kirchner 
announced November 25 an ambitious US$21 billion public works plan 
to stimulate the economy, boost employment, and counter the impact 
on Argentina of the global financial crisis.  She also proposed the 
creation of a new Ministry of Production and introduced a package of 
tax incentives to encourage local job creation and the repatriation 
of Argentines' funds from abroad (estimated at over $130 billion). 
While explaining the details of the proposals November 26, Cabinet 
Chief (and reportedly a key plan architect) Sergio Massa 
acknowledged that the economy is contracting so far in fourth 
quarter 2008, but claimed that these measures would result in real 
growth of 4% in 2009.  Industry leaders, who have been most vocal in 
calling for GoA intervention -- including currency devaluation -- to 
maintain competitiveness, applauded the policy package, and a key 
GOA economic advisor characterized them to the Ambassador as "the 
most pro-business measures ever taken by either Kirchner 
government."  However, most analysts reacted cautiously to the 
proposals, preferring to wait for more details to determine the 
potential impact of these initiatives on the economy.  Many are 
skeptical about the potential impact of the tax incentives or 
possibility of attracting repatriated funds, and question how the 
GoA plans to finance the public works program, given that it has no 
access to credit and is facing a rapidly slowing economy and reduced 
commodity prices.   End Summary. 
 
--------------------------------------------- ----- 
Plan B: Stimulus Package to Counter Economic Slide 
--------------------------------------------- ----- 
 
¶2. (SBU) In a widely anticipated move, on Tuesday, November 25, 
Argentine President Cristina Fernandez de Kirchner (CFK) announced 
the GoA's multifaceted attempt to arrest the rapidly slowing economy 
and rising industrial sector unemployment.  In separate speeches to 
industry leaders and construction company representatives, she 
announced the creation of a new Ministry of Production, presented 
her draft bill to the Argentine Congress to establish tax incentives 
aimed at creating jobs and repatriating funds held overseas, and 
announced a US$ 21 billion (roughly 6% of 2008 GDP) public works 
program. 
 
¶3. (SBU) CFK announced this ambitious sounding plan after months of 
official resistance to the need to address the spillover of the 
world economic crisis on Argentina.  During the President's trip to 
New York in September for the UN General Assembly meeting, she had 
even denied that the international financial crisis would really 
affect Argentina, claiming that it was the problem of other 
countries and Argentina had no need of a "Plan B" stimulus program. 
With domestic consumption plunging, economic activity coming to a 
screeching halt, and companies looking to lay off workers, local 
media widely interpreted these announcements as the GoA giving in to 
the need for a Plan B.  Indeed, while commending the success of the 
Kirchner economic model to date, she made it clear that the GoA is 
ready to do whatever it takes to make sure that "those sectors most 
vulnerable [will not] be affected by the crisis." 
 
¶4. (SBU) In her November 25 remarks during a lunch with the 
Argentine Industrial Union, CFK explained the details of the GoA's 
draft tax moratorium bill (sent to Congress the same day).  She 
stated that companies creating new jobs would be given tax breaks 
for bringing on new hires and declaring and regularizing "informal" 
employees.  With regards to the repatriation of funds, which the GoA 
estimates in the range of $130 billion (most of which are undeclared 
to GoA tax authorities), the President noted that companies or 
individuals that declare funds abroad, but do not repatriate them, 
will face an 8% tax rate under the new law.  However, repatriated 
funds placed in the local financial system would pay only a 6% tax 
rate, and would face only a 3% tax rate if invested in government 
bonds or 1% tax rate if invested in new real estate, infrastructure, 
or industrial ventures. 
 
¶5. (SBU) She also announced that the GoA was accelerating the 
process of splitting the current Ministry of Economy and Production 
into two in order to establish a stand alone Ministry of Production. 
 (The GoA established these ministerial changes in a special decree 
sent to Congress November 26.)  The new ministry will focus on the 
promotion of Argentine industrial production and exports, and will 
be headed by the current Minister of Production of Buenos Aires 
Province, Debora Giorgi (who is well-known to Post).  The President 
 
swore in Giorgi as the new GoA Minister of Production November 26. 
 
 
¶6. (SBU) During a subsequent speech Tuesday evening before the 
Argentine Construction Chamber, CFK announced the launching of a 
more than 71 billion peso (US$21bn) multi-year public works program 
to stimulate the economy and alleviate the impact of the global 
economic crisis on Argentina's economy.  She stated that the details 
of this proposal, which she called the "most ambitious public works 
plan" in recent memory, would be unveiled on December 15. 
Nevertheless, she stated that the goal is to more than double 
employment in the construction sector from the current level of 
360,000 jobs, and also cited investments in schools, road 
infrastructure, and public housing as potential projects under this 
program. 
 
¶7. (SBU) Cabinet Chief Sergio Massa spoke to the press November 26 
to clarify details of CFK's broad proposals.  He said that the rapid 
deceleration of the Argentine economy was the main factor behind the 
economic stimulus package, and acknowledged that economic activity 
had fallen so far in the fourth quarter of 2008.  (In a conversation 
with the Ambassador November 26, Foreign Minister Jorge Taiana 
confirmed that CFK was "extremely concerned" about the economic 
situation, both within Argentina and globally.)  Nevertheless, Massa 
predicted that the fiscal stimulus through tax cuts and increased 
expenditures on public works would enable the country to sustain a 
4% real rate of growth in 2009.  (Comment: This compares to most 
economists' more negative forecasts, with estimates ranging from a 
1-2% recession to growth of 3%.) 
 
¶8. (SBU) He further commented that the new Production Ministry would 
"have as an objective the creation of a structure that defends 
exports, fortifies industrial and agricultural policies, and 
coordinate the different sectors to deepen the process of 
transforming Argentina and guaranteeing [high] levels of growth, 
employment, and economic activity."  Regarding the tax moratorium on 
repatriated funds, he said "the measure will ensure that Argentines' 
savings, kept under mattresses, in safes, or overseas, will serve to 
promote Argentine growth."  He discounted any possibility that it 
could be used to launder illicit funds, stating that the funds would 
have to be repatriated via banks and the GoA have strong controls in 
place to monitor the funds.  (Comment: Numerous Argentine private 
analysts and opposition politicians have raised red flags about this 
measure.  In addition to whitewashing plain vanilla tax evasion -- 
with one newspaper referring to it as "national tax evaders' day" -- 
several experts on money laundering and terrorism finance have 
argued that it could be abused by those looking to launder illicit 
gains.) 
 
--------------------------------------------- ----- 
Reason for Stimulus: Threats to Growth, Employment 
--------------------------------------------- ----- 
 
¶9. (SBU) Argentine industry, under growing pressure to cut back 
formal and informal employment in the face of rapidly declining 
consumer demand, has responded positively to the GoA's stimulus 
package.  Industrial leaders had recently increased their public 
demands for government support, and in particular have been calling 
for the devaluation of the peso in response to the recent 30-40% 
depreciation of the Brazilian Real (Argentina's largest trading 
partner). 
 
¶10. (SBU) Layoffs are anathema to the Kirchner administration 
formula that equates a strong, growing, and protected industrial 
sector with economic development.  However, the GoA and Argentine 
Central Bank have also made it clear that they do not intend to 
allow a rapid depreciation of the peso, which would further 
exacerbate both inflation and the rapid capital outflow from the 
financial system over the last year that accelerated again recently 
following the President's October 21 announcement to nationalize the 
private pension system.  Given this situation, the question under 
debate in the media has been how will companies, labor unions, and 
the GoA divide up the costs of minimizing firings, layoffs and 
suspensions in the face of forecasts of low to flat GDP growth or 
even recession in 2009.  Clearly, the President's announced measures 
are designed to avoid the need for any layoffs. 
 
--------------------------------------------- ------ 
Markets React Positively, but Analysts Urge Caution 
--------------------------------------------- ------ 
 
¶11.  (SBU) The government seems buoyed by the overall positive 
reception that its policy package has received so far.  Beatriz 
Nofal, the head of the government's investment promotion board, told 
the Ambassador at an event late November 26 that CFK's announcement 
 
contained "the most pro-business measures ever taken by either 
Kirchner government" since CFK's husband Nestor Kirchner assumed the 
presidency in 2003.  Commerce Undersecretary Luis Maria Kreckler 
told the Ambassador that 40 Argentine businesspersons had 
accompanied CFK on her trip earlier this month to North Africa, and 
her exposure to them had encouraged her to adopt a more 
business-oriented outlook.  Cabinet Chief Massa, who was reportedly 
the main architect of the measures, was similarly upbeat in his 
conversation with the Ambassador at the same event, asserting that 
"we're doing better." 
 
¶12. (SBU) Local markets reacted positively on November 26 and 27 to 
the announcements.  On average, Argentine bond prices increased 
5-10% and the Buenos Aires Stock Market (MERVAL) jumped over 5%, and 
the peso depreciated only two cents, to close November 27 at 3.37 
pesos/dollars. (Comment: Given the lack of detail provided so far 
about the President's proposals, it may be that investors are still 
digesting the news and that the price increases in Argentine assets 
actually reflect the recent rebound in global -- especially emerging 
--  markets.) 
 
¶13. (SBU) Local and foreign analysts have reacted cautiously, 
preferring to wait for more details before making a final 
assessment.  One of Post's closest banker contacts commented that 
CFK came across as "much more realistic and less arrogant" than in 
most of her speeches.  Nevertheless, they have raised numerous 
questions about the potential positive impact of these various 
measures, with many arguing that it is unlikely the stimulus 
measures will actually arrest declining economic activity. 
 
¶14. (SBU) With regards to the tax incentives to create jobs, 
analysts are skeptical that they will be sufficient to counteract 
the precipitous fall in demand and production.  Regarding the 
incentives for repatriating funds, most analysts consulted by Post 
believe that investors hold deep concerns about the direction of the 
Argentine economy and the safety of investments in Argentine assets 
(following the recent example of the expropriation of private 
pension assets).  Given that capital flight from Argentina is 
estimated in the range of $22-24 billion for 2008, and over $4 
billion just in October, the prevailing trend is going the opposite 
way.  Nevertheless, some analysts have pointed out that many 
Argentines might take advantage of the opportunity to bring back 
funds legally that they likely never paid on taxes in order to 
invest in real estate. 
 
¶15. (SBU) With regards to the public works program, most analysts 
believe it is too early to determine the impact.  Still unclear is 
what the GoA will implement during 2009 and what it plans to 
implement over several years, and also unclear is whether the plan 
will incorporate all new projects, representing a true fiscal 
stimulus, or whether some of the public works projects may already 
be included in the 2009 budget.  Finally, the most frequently heard 
question relates to how the GoA will pay for the program.  Given 
that it has no access to credit and is facing the prospect of 
lower-than-expected revenues in 2009 due to the slowing economy and 
much-reduced international commodity prices for Argentina's 
agricultural exports, analysts note that the announcement of such an 
ambitious fiscal stimulus program has the potential to further 
destabilize Argentine markets that are already pricing GoA bonds at 
default levels. 
 
-------------------------- 
Comment:  Paying the Piper 
-------------------------- 
 
16 (SBU) In comparison with her sometimes combative rhetoric in the 
past, the President took a more realistic approach in these 
speeches, particularly in demonstrating her growing understanding of 
the need to work in collaboration with the private sector to address 
the tough economic times confronting the country.  Nevertheless, he 
Kirchner Administration's base motivation for presenting these 
proposals is to save jobs in high-profile industrial sectors via a 
pump-priming recipe of tax credits and state-funded infrastructure 
development.  Beyond attempting to staunch the immediate pain of a 
rapidly softening economy, these targeted measures also speak to the 
Kirchner administration's need to shore up its political base in 
advance of 2009 mid-term elections. 
 
¶17. (SBU) However, given that a slowing economy and low 
international commodity prices for Argentina's agricultural exports 
will substantially reduce federal tax revenues in the coming year, 
analysts are right to ask from whence the billions to pay for this 
program will come.  At a November 25 lunch the Ambassador held, a 
group of leading businesspersons and economists predicted the GoA 
would scrape together enough funds to meet 2009 spending and debt 
 
payment needs.  But the GoA certainly will not get funding from 
international capital markets, which remain largely closed for 
Argentine risk.  And not from GoA bond purchases by domestic 
institutional investors, whose species has been exterminated by the 
nationalization of the private pension fund system. 
 
¶18. (SBU) The likely GoA alternative is to use newly available 
resources captured from nationalized pension funds, along with 
recently augmented access to borrowing from Argentina's Central Bank 
and the largest state-owned bank, Banco Nacion.  But it is as yet 
unclear that these additional resources will really suffice to 
finance both a large pre-2009 election spending pinata as well as 
meet GoA spiking debt obligations coming due in 2009 and 2010.  If 
investors suspect that the GoA's spending plans will jeopardize its 
ability to service its debts, negative market reactions could 
overwhelm any positive stimulus effects, leaving companies, workers, 
and the government fiscal balance in an even more delicate state. 
 
WAYNE