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DE RUEHBU #0273/01 0371508
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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3315
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2061
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000273 
 
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 February 3, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- The peso depreciated 0.3 percent against the USD, 
closing at 3.08 ARP/USD. 
- Argentina and Brazil agree on a safeguard system to 
protect domestic industries. 
- GOA creates registry for beef exports; 
implementation delays paralyze exports. 
- GOA reached price-restraint agreements with leading 
supermarket chains. 
- Provincial finances becoming more dependant on GOA 
transfers. 
- Tax revenue rose 27 percent y-o-y to ARP 11.2 
billion in January - above expectations. 
- GoA runs an ARP 24 million primary fiscal surplus in 
December - worse than expected. 
- December trade surplus of USD 1 billion brings 2005 
trade surplus to USD 11.3 billion. 
- Commentary of the Week: "Possible Ways to Develop a 
Long-Term Bond Market" 
 
--------------------------------------------- -------- 
MARKETS 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
The peso depreciated 0.3 percent against the USD 
during the week to close at 3.08 ARP/USD. 
--------------------------------------------- -------- 
 
¶1.  The peso depreciated 0.3 percent versus the USD 
this week, closing at 3.08 ARP/USD - one cent lower 
than last Friday's close.  This week's depreciation is 
mainly attributed to higher dollar demand by banks and 
Central Bank (BCRA) intervention in the FX market, and 
comes in spite of higher USD inflows from investors to 
purchase stocks and GOA bonds.  The BCRA purchased USD 
139 million and EUR 11 million in the first four days 
of the week.  The peso exchange rate has depreciated 1 
percent since the beginning of year. 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
Argentina and Brazil agree on safeguard system to 
protect domestic industries. 
--------------------------------------------- -------- 
 
¶2.  On February 1, Minister of Economy Miceli 
announced that the GOA had reached agreement with 
Brazil on an agreement to allow temporary import 
restrictions in order to protect some industrial 
sectors.  Under the agreement, either country can 
limit imports of a product from the other country if 
it can demonstrate that surging imports are damaging 
their domestic industry.  A bi-national committee will 
analyze complaints from industry groups and allow 
import restrictions for a period of three years, with 
the option of a one-year extension.  Argentina trade 
deficit with Brazil reached USD 3.7 billion as 
Argentine exports to Brazil increased 12 percent, 
while Argentine imports from Brazil jumped 35 percent. 
 
--------------------------------------------- -------- 
GOA creates registry for beef exports; implementation 
delays paralyze export shipments. 
--------------------------------------------- -------- 
 
¶3.  On February 2, the GOA created an Exports Registry 
to issue permits for beef exports.  Beef producers now 
have to request a permit for all exports, while the 
GOA determines the cuts to be shipped and the markets. 
The GOA is attempting to reduce beef exports in order 
to increase local supply and avoid beef prices 
increases, following the failure to reach a price- 
restraint agreement between the GOA and the sector. 
Meanwhile, beef exports scheduled for this week have 
been paralyzed while exporters wait for permits.  The 
GOA's focus is on cheaper cuts of meat that are 
included in the basket of goods that make up the CPI 
index, and not on more expensive cuts. 
 
--------------------------------------------- -------- 
GOA reached price-restraint agreements with leading 
supermarket chains. 
--------------------------------------------- -------- 
 
¶4.  On February 1, the GOA closed a new agreement with 
the country's seven leading supermarket chains. These 
new price-restraint agreements aim to maintain prices 
on 223 basic goods unchanged for one year, but also 
are subject to bi-monthly monitoring of any changes in 
the economic environment.  This agreement is similar 
to the agreement the GOA signed with supermarkets in 
December that lasted until January 31, but also 
includes supermarket suppliers, meaning that the 
supermarkets will not bear the entire burden of these 
price freezes. These agreements advance the GOA's 
strategy of curbing inflation through price-restraint 
agreements with producers and retailers.  (According 
to local media, January's CPI is expected to increase 
1.3 percent m-o-m.  The Ministry of Economy and 
President Kirchner plan to continue working on new 
price-restraint agreements.) 
 
--------------------------------------------- -------- 
GOA orders execution of ARP 38 million guarantees from 
Aguas Argentinas due to unpaid fines. 
--------------------------------------------- -------- 
 
¶5.  On January 30, the GOA ordered the execution of 
ARP 38 million in guarantees from the water company 
Aguas Argentinas (AA) due to unpaid fines.  The 
execution against the guarantees is provided for in 
AA's concession contract and is a first step towards 
rescission of its contract, following the same 
procedures that Santa Fe Province used in rescinding 
its contract with Aguas de Santa Fe (both AA and Aguas 
de Santa Fe are controlled by Suez of France).  AA 
stockholders will meet on February 8, when Suez may 
announce its plans to withdraw from the contract. 
 
--------------------------------------------- -------- 
AES suspends its ICSID arbitration claim against the 
GOA. 
--------------------------------------------- -------- 
 
¶6.  The American company AES - the owner of power 
distributor Edelap - suspended its arbitration claim 
against the GOA before the International Center for 
the Settlement of Investment Disputes (ICSID).  AES 
filed its claim in 2002 and sought USD 1.8-2.0 billion 
from the GOA.  According to the ICSID registry, the 
claim is suspended - not withdrawn - and the company 
could activate the arbitration process again if the 
GOA does not comply with an agreement that calls for 
tariff renegotiations in 2006, as well as investment 
by AES.  AES received a one-time 28 percent tariff 
increase in 2005. 
 
--------------------------------------------- -------- 
BCRA maintains Lebac interest rates and extends Nobac 
maturities to 9 months. 
--------------------------------------------- -------- 
 
¶7.  The BCRA received bids of ARP 1.7 billion in its 
January 31 Lebac auction, well above the ARP 1.1 
billion announced amount and the ARP 1.3 billion in 
Lebacs that came due during the week. This allowed the 
BCRA to roll over its maturities for the first time in 
several weeks, accepting bids for ARP 1.5 billion. 
The yield on the 77-day Lebac rose 4 basic points to 
6.99 percent, while the yield on the 98-day and the 
182-day Lebacs reached 7.25 percent and 7.90 percent, 
 
respectively.  Lebacs for other maturities were 
withdrawn due to lack of interest.  Unlike previous 
auctions, investors concentrated 50 percent of their 
bids in Nobacs of more than 9 months, which enabled 
the BCRA to roll over its maturities and extend the 
maturity profile of its debt.  The BCRA accepted ARP 
768 million of Nobacs (50 percent of the accepted 
amount in the auction) at a yield of 11.04 percent - 
18 basis points below the previous auction. 
 
--------------------------------------------- -------- 
Banks pay back ARP 1.6 billion in rediscount loans to 
the BCRA. 
--------------------------------------------- -------- 
 
¶8.  On February 2, two banks - Banco Galicia and GOA- 
owned Banco Nacion - pre-paid ARP 1.6 billion in 
discount borrowing to the BCRA.  This prepayment, plus 
the banks' payment of a ARP 70.5 million installment 
of the matching system (under which banks repay the 
BCRA for financial assistance received during the 2001 
financial crisis) will generate a monetary base 
contraction of ARP 1.7 billion.  Following these pre- 
payments, only four banks - out of twenty-four at the 
beginning of the crisis - will have outstanding 
discount borrowing from the BCRA, totaling ARP 9.8 
billion. 
 
--------------------------------------------- -------- 
Provincial finances become more dependent of GOA 
transfers. 
--------------------------------------------- -------- 
 
¶9.  Abeceb Consulting estimates that the provincial 
primary fiscal surplus will fall to 0.4 percent of GDP 
(ARP 2.6 billion) in 2006, from 0.8 percent of GDP 
(ARP 1.4 billion) in 2005 and 1.4 percent of GDP (ARP 
6.4 billion) in 2004.  The decrease in the provincial 
surplus is attributed to salary increases for 
provincial employees, revenue growth deceleration 
(both provincial revenue and GOA transfers are slowing 
down), and the implementation of the new Education 
Financing Law, which obligates provinces to set aside 
additional funds for education.  The worsening of 
provincial finances, and the GOA being the provinces' 
main creditor, is making provinces more dependent on 
the Kirchner administration, which controls both the 
amount of discretionary federal funds transferred to 
provinces each year and the rate of repayment of their 
debts to the GOA.  Provincial debt totals ARP 75.2 
billion, 70 percent of which (or ARP 52.7 billion) is 
owed to the GOA. 
 
--------------------------------------------- -------- 
Tax revenue rose 27 percent y-o-y to ARP 11.2 billion 
in January - above expectations. 
--------------------------------------------- -------- 
 
¶10.  January federal tax revenue increased 27 percent 
y-o-y to ARP 11.2 billion - above market expectations 
of ARP 10.6 billion. The results reflect strong 
economic activity, the positive effects of inflation 
on revenues and improved compliance.  Labor 
contributions jumped 45.6 percent y-o-y due to 
increases in job creation and salary increases, income 
tax revenues rose 39.3 percent y-o-y, and VAT and 
trade tax revenues increased 22 percent and 16.5 
percent y-o-y, respectively.  According to the GOA, 
the increase in tax collection is due to income tax 
revenue, VAT and labor contributions which provided 70 
percent of January tax revenue.  In real terms, 
revenues increased 13 percent y-o-y.  The BCRA 
consensus survey forecasts 2006 tax revenue at ARP 135 
billion. 
 
--------------------------------------------- -------- 
GoA runs an ARP 24 million primary fiscal surplus in 
December - worse than expected. 
--------------------------------------------- -------- 
 
 
¶11.  The GoA announced a primary fiscal surplus of ARP 
24 million in December, well below market expectations 
of ARP 115 million.  The worse-than-expected result 
was due to the prepayment of end-of-the year bonuses 
to civil servants, and increased transfers to the 
private sector and provinces.  In December, fiscal 
resources increased 34.4 percent y-o-y, while 
expenditures rose 11.8 percent y-o-y.  The primary 
fiscal surplus for 2005 was ARP 19.6 billion (3.7 
percent of GDP) - in line with the BCRA consensus 
forecast - as a result of ARP 126.4 billion in 
revenues and ARP 106.8 billion in expenditures.  The 
2005 provincial primary fiscal surplus is estimated to 
reach ARP 3.7 billion (according to private 
consultants), which would bring the consolidated 
primary fiscal surplus to ARP 23.4 billion (4.5 
percent of GDP, down from the 2004 fiscal surplus of 
5.3 percent of GDP). 
 
--------------------------------------------- -------- 
December trade surplus of USD 1 billion brings 2005 
trade surplus to USD 11.3 billion. 
--------------------------------------------- -------- 
 
¶12.  The December trade surplus reached USD 1 billion, 
above the BCRA consensus forecast of USD 828 million. 
Export revenues increased 19 percent y-o-y to USD 3.5 
billion, with increases in both quantities (+10 
percent) and prices (+9 percent).  Exports were driven 
by an increase in industrial goods (+4 percent y-o-y), 
primary goods (+29 percent y-o-y), fuel and energy 
(+20 percent y-o-y) and agro-industrial products (+29 
percent y-o-y).  Imports increased 18 percent y-o-y on 
the back of a strong domestic demand to USD 2.5 
billion, with increases in both quantities (+12 
percent) and prices (+5 percent).  Imports were driven 
by increases in fuel and oil (+85 percent y-o-y), 
capital goods (+18 percent y-o-y), accessories for 
capital goods (+6 percent y-o-y), consumer goods (+17 
percent y-o-y) and intermediate goods (+14 percent y-o- 
y), and were partially offset by a drop in other goods 
(-27 percent y-o-y).  In 2005, exports increased 16 
percent to USD 40 billion while imports increased 28 
percent to USD 28.7 billion, bringing the trade 
surplus to USD 11.3 billion, slightly above the BCRA 
consensus forecast of USD 11 billion but below 2004's 
USD 12.1 billion trade surplus. 
 
 
--------------------------------------------- -------- 
January Government Confidence Index up 16 percent m-o- 
m. 
--------------------------------------------- -------- 
 
¶13.  The Government Confidence index jumped 16 percent 
m-o-m in January to 2.63 points, and is 0.4 points 
above the average during the Kirchner administration, 
and well above the 1.2 point reading in May 2003 when 
President Kirchner took office. The index increased in 
all five categories measured.  Confidence in the GOA's 
ability to solve citizens' problems is still the 
factor generating the most confidence and increased 8 
percent m-o-m. The index rose 12 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 general performance, efficiency of public 
spending, honesty of GoA officials and the 
government's ability to solve problems.] 
 
--------------------------------------------- -------- 
Employment index increased 9.7 percent y-o-y in 
December 2005, according to Ministry of Labor survey. 
--------------------------------------------- -------- 
 
¶14.  On January 31, the Ministry of Labor announced 
that its December 2005 employment index increased 9.7 
percent y-o-y,  well above the 6.8 percent y-o-y rise 
in December 2004 and the 5.8 percent y-o-y rise in 
December 2003. The index is based on surveys from the 
cities of Buenos Aires, Mendoza, Rosario, Cordoba and 
Tucuman. Although every sector recorded a y-o-y 
increase of more than 6 percent, construction reported 
the largest job creation during 2005 (up 33.2 
percent), followed by financial services (up 11.3 
percent) and manufacturing industry (up 9.1 percent). 
 
--------------------------------------------- -------- 
January labor demand index down 0.11 percent m-o-m. 
--------------------------------------------- -------- 
 
¶15.  The January labor demand index calculated by Di 
Tella University decreased slightly, down 0.11 percent 
m-o-m to 127.12 points. The decrease is mainly due to 
weaker demand for commercial employees (down 2.34 
percent) and administrative personnel (down 2.02 
percent). The index is up 25.7 percent y-o-y. [The 
index is based on comparisons of job vacancy 
announcements printed in the two largest newspapers of 
the country.] 
 
 
--------------------------------------------- -------- 
Commentary of the Week: "Possible Ways to Develop a 
Long-Term Bond Market".  By Miguel Kiguel.  [Note: 
Translated with permission of the author from an 
editorial published in La Cronista on February 1, 
¶2006.  End Note.] 
--------------------------------------------- -------- 
 
¶16.  The creation of a long-term bond market continues 
to be one of the major challenges that our economy is 
facing.  Among the difficulties in developing this 
market is the lack of stable, predictable 
macroeconomic markers for inflation and interest rates 
over the medium-term. 
 
¶17.  In the past, we tried to resolve these problems 
by issuing financial instruments denominated in 
dollars.  But we have learned from the strong 
oscillations in the exchange rate in our history that 
this type of instrument is only useful for exporters 
or those companies that generate income in dollars. 
It isn't useful for a government that earns most of 
its revenues in pesos. 
 
¶18.  What are the peso-denominated alternatives?  They 
are fixed-rate debt, variable-rate debt, or debt with 
indexation clauses linked to prices that cover the 
risk of unexpected increases in the inflation rate. 
 
¶19.  Fixed-rate instruments only work in countries 
with very low inflation rates.  Last year, Brazil was 
able to issue a 10-year bond at 12 percent per year, 
but this was after a huge effort to lower inflation to 
levels of 5 percent per year, and with an inflation 
targeting regime, which indicates a commitment to 
maintain those levels over the medium term.  Even with 
all of this, Brazil had to pay a real interest rate on 
the on the order of 7 percent per year. 
 
¶20.  The option of emitting a variable-rate bond (for 
example, at the market rate plus a spread) could be an 
attractive option.  In this case, the yield of the 
bond would be connected to the rates set by the 
Central Bank's monetary policy.  This type of 
instrument has not had much success in industrialized 
countries.  Brazil has used the Selic rate.  While 
this has allowed Brazil to place this type of bond 
successfully, it has required increases in interest 
rates to slow inflation, and has generated substantial 
fiscal costs.  Up to now, it has been an expensive 
financing option. 
 
¶21.  The other alternative is to issue indexed bonds. 
This is the path followed by many countries until 
recently, including Chile, Colombia and Mexico, to 
develop their medium- and long-term financial markets. 
It is worth reviewing the pluses and minuses of this 
type of financing, especially for the management of 
public debt. 
 
¶22.  Indexed debt allows the investor to know he is 
protected from the vagaries of inflation, that the 
value of his indexed bonds won't be eroded as a result 
of an unanticipated increase in prices.  In other 
words, it isn't easy to destroy their value. 
 
¶23.  For the issuer, i.e., the government, the nominal 
value of the indexed debt increases as prices 
increase.  In principle, this isn't a problem for 
governments given that nominal GDP also increases with 
prices (and therefore the debt-to-GDP ratio doesn't 
increase) and that taxes also increase with the level 
of prices, meaning that the cost of paying this debt 
doesn't increase. 
 
¶24.  It has been said many times that the cost of 
indexed debt in Argentina is high, based on adding the 
inflation rate (the CER rate) to the spread (which, 
for 5 year bonds, could be 3 points).  For a five year 
bond, with 12 percent inflation, they say that the 
debt is expensive because the "implicit" interest rate 
is 15 percent.  This line of reasoning is erroneous, 
because if the government would have issued fixed-rate 
debt, the interest rate would have been much higher 
due to the uncertainty that exists about future 
inflation. 
 
¶25.  It also isn't certain that indexed debt will 
increase in value in dollar terms.  This probably is 
the case now in Argentina, given that our country has 
an under-valued currency and the dollar is increasing 
less than prices.  But once real exchange rate 
equilibrium is re-established, the dollar's value 
certainly will increase with prices and indexed debt 
therefore will not increase in dollar-value terms. 
 
¶26.  The issuance of indexed debt carries some risks. 
For example, if there would be a strong increase in 
the price level, it could affect the payment capacity 
of companies and of wage-earning workers whose income 
doesn't rise with inflation.  This is what we lived 
through at the beginning of the 1980's.  It also could 
generate greater use of indexing in short-term 
contracts and salaries, which would limit the 
economy's capacity to adjust relative prices, and 
increase inflationary inertia. 
 
¶27.  Indexing is a useful tool for developing long- 
term capital markets, but indexing of short- and 
medium-term contracts should be avoided, and inflation 
should be kept to moderate levels (below 15 percent). 
[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