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DE RUEHBU #0654/01 1551920
ZNR UUUUU ZZH
O 041920Z JUN 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3823
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS IMMEDIATE
RUEHSO/AMCONSUL SAO PAULO IMMEDIATE 3930
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 03 BUENOS AIRES 000654 
 
SENSITIVE 
SIPDIS 
 
WHA/EX FOR J.ROBERTSON AND J.SEALE 
HR/OE/CMP - SALLY CINTRON 
 
E.O. 12958: N/A 
TAGS: EFIN AMGT AFSN APER ECON AR
SUBJECT: ARGENTINA: ARGENTINA: LES WAGE LEVELS CONTINUE TO 
ERODE AS INFLATION PERSISTS 
 
REF: BUENOS AIRES 160 
 
¶1. (U) This document is sensitive but unclassified.  It 
should not be disseminated outside of USG channels or in any 
public forum without the written concurrence of the 
originator.  It should not be posted on the internet. 
 
------- 
Summary 
------- 
 
¶2. (SBU) With the Argentine economy slowing rapidly and most 
local analysts predicting a 2-3 percentage point contraction 
in 2009, expectations have been that inflation levels would 
also decelerate significantly.  While "true" inflation is off 
its mid-2008 annualized peak of roughly 25%, it has remained 
stubbornly high and there are few signs of further decline in 
the near future.  Although official GoA statistics show 
year-on-year inflation in the range of 6%, private analysts 
say it is about three times that level: in the range of 
15-20%.  Public and private salaries have been increasing at 
a similar rate, with the GoA recently announcing a 15% public 
sector wage increase.  As a result, Argentina is likely 
looking at several years of stagflation, with the cost of 
living facing Argentines and Embassy personnel staying high. 
As a result, despite four salary increases in the past twelve 
months, Embassy Buenos Aires locally engaged staff (LES) 
salaries continue to lag behind local comparable salary 
levels.  End Summary. 
 
--------------------------------------------- --------- 
Rapid Economic Deterioration Fails to Dampen Inflation 
--------------------------------------------- --------- 
 
¶3. (SBU) The cost of living in Argentina continues to rise, 
despite the general consensus among economists and financial 
analysts in late 2008 that inflationary pressures would 
subside in response to the sharp deceleration of domestic 
economic activity, tighter monetary policy, and higher 
interest rates.  Reflecting this shared belief, late last 
year analysts forecast that 2009 inflation would be at the 
lower end of the 15-20% range, and many of Post's contacts 
were predicting inflation would even fall into the 10-15% 
y-o-y range by the end of 2009. 
 
¶4. (SBU) There are certainly forces at play that are slowing 
the rate of inflation, which has fallen from a peak mid-2008 
level of 25% y-o-y.  Real growth, which averaged 8.5% per 
year between 2003 and 2008, has fallen off a cliff in 2009, 
with most economists estimating a recession in 2009 of about 
2-3%, as well as much lower capacity utilization and a major 
contraction in domestic demand.  Central Bank monetary 
policies have also been increasingly contractionary in recent 
years, contributing to higher local interest rates (still 
negative in real terms, albeit less negative than in previous 
years).  Financial uncertainty over the last year, which led 
to huge increases in yields on all Argentine government debt 
issuances and provoked major capital outflows ($23 billion in 
2008 and almost $6 billion in the first quarter of 2009), 
also pushed up local interest rates and brought bank lending 
almost to a halt.  Finally, lower commodity prices and the 
government's elimination of many subsidies on utilities and 
transportation have reduced fiscal spending and curtailed 
consumption of such goods. 
 
¶5. (SBU) The combined result is that many factors that pushed 
unsustainably high growth in domestic consumption and led to 
the overheating of the Argentine economy in recent years have 
diminished in importance in 2009.  Nevertheless, the 
relatively high private sector estimates for inflation so far 
in 2009 have brought into question the accepted wisdom that 
inflation will subside significantly in the future.  In fact, 
many analysts are now reporting that they see no signs that 
true inflation levels will continue to fall further from 
current levels. 
 
--------------------------------------------- ----- 
Contrary to Official Stats, CPI Continues to Climb 
--------------------------------------------- ----- 
 
¶6. (SBU) Consumer prices, as reported by Argentina's national 
statistics agency, INDEC, rose by a much lower than expected 
0.3% month-over-month rate in April, down from 0.6% m-o-m in 
March.  The y-o-y official headline inflation figure improved 
 
BUENOS AIR 00000654  002 OF 003 
 
 
to 5.7% in April from 6.3% in March.  Year to date INDEC 
reports that consumer prices have risen by only 1.9%. 
 
¶7. (SBU) However, as Post has reported on numerous occasions 
(reftel), virtually all private sector economists and 
analysts take as a given that INDEC is manipulating inflation 
statistics.  (This, in turn, distorts and understates 
measures of unemployment and poverty levels.  There are also 
strong suspicions that INDEC manipulation has now extended to 
the national accounts).  Actual or "true" y-o-y inflation, 
estimated by numerous independent private sector analysts, is 
instead in the range of 15%-20%, or nearly three times higher 
than the officially reported figures. 
 
¶8. (SBU) Goldman Sachs reports a "consensus estimate" for 
actual or "true" inflation in April exceeding 1% m-o-m. 
Noted local consulting group Evaluadora Latinoamericana, 
which is one of the few private organizations to conduct its 
own consumer price survey, estimates May inflation at 15.6% 
y-o-y.  Another well-known firm, Fundacion Mediterranea, uses 
San Luis Province's data on price changes, since San Luis is 
one of the more independent provincial governments.  For 
April, San Luis reported 15.5% y-o-y.  Other noted Argentine 
economists have higher estimates, including Miguel Kiguel, 
who argues that inflation is stuck at around 17% with minimal 
chance of falling significantly further this year. 
 
-------------------------------- 
CPI Expectations Refuse to Budge 
-------------------------------- 
 
¶9. (SBU) In tandem with high CPI readings, consumer inflation 
expectations have come down significantly from their peak 
mid-2008 levels (of about 30%), but remain stubbornly high. 
The median of Di Tella University's 12-month inflation 
expectations index, remains unchanged at 20% since March. 
 
------------------- 
Wage Hikes Continue 
------------------- 
 
¶10. (SBU) According to a recent survey by SEL Consultores, a 
think tank specializing in labor issues, despite the slowing 
economy, companies still expect unions to demand wage 
increases of about 20% (on average), in line with 2009 
inflation estimates.  The GoA set the stage with its recent 
announcement of a 15% two-stage public sector wage increase 
for 2009.  The Banking Association has agreed to 19% wage 
increases, the construction industry has agreed to 15% 
increases, and many other sectors of the economy have 
reported wage increases in the same range or higher.  These 
increases are lower than those of previous years.  For 
example, INDEC reports that salaries rose by an average of 
22.4% in 2008, and increased an average 50% for the combined 
period 2007-2008. 
 
------------------------------------- 
Embassy Salaries Still Lagging Behind 
------------------------------------- 
 
¶11. (SBU) In spite of Post and the Department's best efforts 
-- four salary increases over the last year ) Embassy salary 
levels continue to lag the market.  The gap is further 
exacerbated by the recent wave of GoA and private sector wage 
increases in the range of 15-20%.  In sharp contrast to the 
50% 2007-2008 average wage increase in the country, Post 
implemented a 5-6% wage increase in 2007 and a 13% wage 
increase in 2008.  To place this in a longer-term context, 
INDEC reports that from December 2001 - December 2008, 
salaries increased on average 189%, compared to the Embassy 
average accumulated increase of only 71%. 
 
¶12. (SBU) Depressed Embassy salaries are negatively affecting 
recruitment and retention, as demonstrated by several recent 
lost opportunities to hire qualified personnel for key 
positions.  For example, the well-qualified candidate we 
selected for our Security Assistant position was considering 
leaving his 16-year government career to come work for us. 
Unfortunately, we were unable to lure him away.  Despite the 
fact that his government salary compares poorly with current 
local private sector equivalents, it still paid him twice as 
much as what the Embassy could offer.  In fact, the previous 
incumbent in that position left the Embassy for a job that 
paid twice as much as he had earned at the Embassy. 
 
BUENOS AIR 00000654  003 OF 003 
 
 
 
¶13. (SBU) Similarly, Post has struggled to attract qualified 
applicants for the Facilities Maintenance foreman position at 
the advertised salary.  We had to lower the requirements of 
the position and re-advertise.  In the end, post was unable 
to attract a qualified candidate from outside and hired from 
within.  We found from an informal market analysis that the 
British Embassy pays their foreman 20% more than we do.  (We 
expect that disparities similar to these will be recorded on 
the next comparator survey, which should be completed by 
Birches Group in July/August 2009.) 
 
------------------------------ 
Next Steps on Embassy Salaries 
------------------------------ 
 
¶14. (SBU) The large accumulated difference between Embassy 
salaries and average salaries in the economy will be 
exacerbated in 2009 as the price-salary spiral continues.  In 
September 2008, HR/OE gave Post authorization to raise wages 
between 12.60% and 30.59%, depending on the grade of the 
position.  To date, Post has been able to increase salaries 
by a cumulative 11% in FY09.  Given the rate of inflation and 
the difficulties recruiting and retaining staff at this 
Mission, it is clear that we need to carry out another salary 
increase to remain competitive.  Post intends to fully 
utilize the authorization granted and implement another 
salary increase as soon we receive confirmation of exchange 
rate gains from WHA/EX. 
 
------------------------------- 
Comment: LES Hit by Stagflation 
------------------------------- 
 
¶15. (SBU) Many analysts started this year expecting inflation 
to moderate on the back of lower global commodity prices and 
a contraction in domestic demand.  However, the continuation 
of high domestic wage increases, a significant increase in 
utility and transportation prices due to cutbacks in GoA 
subsidies, still high fiscal spending ahead of June 28 
mid-term legislative elections, and the steady depreciation 
of the peso have all combined to keep actual inflation well 
into double digits.  In past cables, Post has argued that the 
decisive factors that would determine whether deflationary or 
inflationary forces won out would be wage increases and peso 
depreciation.  So far in 2009, it looks like both will 
support higher consumer price increases and higher 
inflationary expectations in the medium term.  This could 
worsen after the elections, assuming the consensus view is 
correct that the Argentine Central Bank will allow the peso 
to depreciate at a faster rate and end the year in the 4-4.20 
pesos/dollar range (from the current level of 3.75).  With 
negative growth expected this year and low growth expected in 
2010, and inflation remaining stubbornly high, Argentina is 
likely facing several difficult years of stagflation amidst 
an environment of dangerous financial uncertainty and 
volatility. 
 
¶16. (SBU) In this environment, it is essential for Post to 
have the flexibility to increase LES wages to a comparable 
level with those of the private sector.  Otherwise, our 
employees' standards of living will continue to deteriorate 
and Post's ability to compete for top talent ) still highly 
sought in the competitive Argentine labor market ) will 
continue to diminish. 
 
WAYNE