VZCZCXYZ0004
RR RUEHWEB

DE RUEHBU #0515/01 0651128
ZNR UUUUU ZZH
R 061128Z MAR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3707
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2099
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000515 
 
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 March 3, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- The peso was unchanged against the USD, closing 
again at 3.08 ARP/USD. 
- The IDB approved a USD 500 million loan to 
Argentina. 
- The GOA is considering reopening the Boden 2015. 
- Banks pay back ARP 2.4 billion to the BCRA for 
rediscount loans. 
- The BCRA is considering increasing bank liquidity 
requirements. 
- Tax revenues rose 27 percent y-o-y to ARP 10.5 
billion in February - in line with market 
expectations. 
- January trade surplus of USD 837 million - in line 
with expectations. 
- Unemployment down 1.0 percent q-o-q to 10.1 percent 
in Q4 2005. 
- Commentary of the Week: "Price Agreements Only 
Provide Short-Term Help" 
 
--------------------------------------------- -------- 
MARKETS 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing again at 3.08 ARP/USD. 
--------------------------------------------- -------- 
 
¶1.  The peso remained flat versus the USD this week, 
closing at 3.08 ARP/USD.  The peso depreciated one 
cent to 3.09 ARP/USD early in the week, after the 
Central Bank (BCRA) purchased USD 29 million in the FX 
market on February 27.  By mid-week, strong investment 
inflows to purchase domestic stocks and bonds, coupled 
with seasonal peso demand (due the "beginning of the 
month" effect) allowed the BCRA to purchase USD 234 
million in the first four days of the week without any 
peso appreciation.  The BCRA has purchased USD 1.7 
billion since the beginning of the year, compared to 
USD 734 million during the same period last year.  The 
peso exchange rate has depreciated 1 percent since the 
beginning of the calendar year. 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
--------------------------------------------- -------- 
The IDB approves a USD 500 million loan to Argentina. 
--------------------------------------------- -------- 
 
¶2.  On March 1, the Inter-American Development Bank 
(IDB) board finally approved the USD 500 million 
public sector financial management adjustment loan to 
Argentina.  The board's decision had been delayed 
since February 22, because Directors wanted more time 
to review it and more details about the purpose of the 
loan.  This loan is the first adjustment loan received 
by the GOA not under the umbrella of an IMF program. 
The loan is to support a sector program to increase 
effectiveness, efficiency and transparency of public 
sector financial management.  The program covers four 
policy areas: macroeconomic environment, strengthening 
of public investment, financial management and public 
debt systems.  The loan is for a 20-year term, with a 
five-year grace period at a variable interest rate, to 
be disbursed in two tranches, the first of USD 150 
million and the second of USD 350 million.  Conditions 
for disbursement consist of a matrix of agreed-upon 
requirements based on maintenance of a stable 
macroeconomic environment and reform measures in each 
of the areas covered by the program. 
 
--------------------------------------------- -------- 
The GOA is considering reopening the Boden 2015. 
--------------------------------------------- -------- 
 
¶3.  On March 2, La Nacion reported that the GOA is 
considering issuing a new USD bond.  During the week, 
Secretary of Finance, Alfredo MacLaughlin met with 
 
SIPDIS 
banks and investors in New York and Chicago to explore 
the possibility of a new issuance.  Reportedly, the 
GOA first envisioned issuing a USD bond under New York 
legislation, but has decided to issue under domestic 
legislation because of the risk of attachment by 
bondholders.  Press reports speculated that the GOA 
will reopen the Boden 2015, a USD-denominated bond 
with a 7 percent coupon, amortizing fully at maturity 
in 2015 and under domestic legislation.  The GOA first 
issued USD 632 million worth of Boden 2015 in October 
¶2005.  According to traders, the Boden 2015 may be 
reopened at a yield of 8.00-8.20 percent. 
 
--------------------------------------------- -------- 
The GOA sells USD 308 million worth of Boden 2012 to 
Venezuela. 
--------------------------------------------- -------- 
 
¶4.  On February 27, the GOA published in the Official 
Gazette a resolution authorizing the issuance of USD 
308 million worth of Boden 2012 bonds to Venezuela. 
This debt sale is Venezuela's third purchase of GOA 
debt this year, and had already been leaked to press. 
The purchase brings Venezuela's 2006 GOA bond 
purchases to USD 929 million (face value) and USD 750 
million market value.  In 2005, the GOV purchased USD 
1.9 billion worth of GOA bonds (USD 1.6 billion market 
value). 
 
--------------------------------------------- -------- 
Italian bondholders group says it will file for ICSID 
arbitration against the GOA. 
--------------------------------------------- -------- 
 
¶5.  On March 2, the Italian association of holdout 
bondholders (TFA) stated that it plans to file an 
arbitration claim against the GOA before the World 
Bank' International Centre for Settlement of 
Investment Disputes (ICSID), seeking repayment of its 
members' bonds.  Reportedly, on March 27 the TFA will 
start receiving subscriptions from Italian investors 
to negotiate on their behalf against the GOA.  The 
Italian law firm Grimaldi e Associati and the New York 
firm White & Case will be the legal consultants.  In 
February 2005, the Global Committee of Argentine 
Bondholders (GCAB) had announced that it would file 
for ICSID arbitration against the GOA, but it did not 
follow through, apparently because of the length of 
the expected proceedings. 
 
--------------------------------------------- -------- 
President Kirchner opens the regular Congressional 
session. 
--------------------------------------------- -------- 
 
¶6.  In his speech opening the regular Congressional 
session on March 1, President Kirchner reiterated his 
commitment to fiscal discipline.  He referred to 
inflation as a transitory phenomenon caused by rapid 
economic growth and a rise in export prices, but he 
warned businessmen to behave cautiously to avoid "the 
greed of some that diminishes the people's consumption 
capacity."  He also warned union leaders about their 
claims for salary increases that might generate price 
pressures due to cost increases.  Regarding utility 
companies, President Kirchner said that his "hand will 
not tremble" if it is necessary to nationalize any 
privatized company.  He also said that the GOA will 
not force any company to stay in Argentina if that 
company believes it is losing money. 
 
--------------------------------------------- -------- 
Aguas Argentinas is unlikely to renew guarantee, 
forcing the GOA to rescind its contract. 
--------------------------------------------- -------- 
 
¶7.  On February 28, El Cronista reported that Aguas 
Argentinas (AA) -- controlled by Suez -- will not 
renew an ARP 145 million guarantee.  If AA does not 
renew this guarantee before the end of March, the GOA 
will have the right to rescind the concession 
contract.  Analysts say that Suez's strategy is to 
force the GOA to rescind AA's concession contract. 
Suez used a similar procedure to force the Province of 
Santa Fe to rescind the concession contract with Aguas 
de Santa Fe, which was controlled by Suez. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  Investors 
concentrated more than 65 percent of their bids in 
Nobacs. 
--------------------------------------------- -------- 
 
¶8.  The BCRA received ARP 723 million in bids in its 
February 28 Lebac auction, less than the ARP 850 
million in Lebacs that came due during the week. 
However, the BCRA received bids of ARP 1.4 billion in 
its Nobac auction.  [Nobacs are longer term 
instruments - compared to Lebacs - and pay a variable 
rate composed of base rate called Badlar -- the 
interest rate for deposits of more than ARP 1 million, 
currently at 7 percent -- plus a spread.  The BCRA 
auctions the spread on its Nobacs, while the Badlar is 
determined by market conditions.]   As in the previous 
auctions, the BCRA was more than able to roll over its 
maturities by accepting bids for ARP 1.8 billion (ARP 
723 million in Lebacs and ARP 1.1 billion Nobacs). 
The yield on the 49-day Lebac dropped 8 basis points 
to 6.75 percent.  The yield on the 70-day Lebac 
decreased from 7 percent to 6.97 percent, and the 
yield on the 91-day Lebac reached 7.25 percent. 
Lebacs for other maturities were withdrawn due to lack 
of interest.  Investors concentrated more than 65 
percent of their bids in Nobacs of more than 9 months 
and the BCRA accepted bids for ARP 1.1 billion of 
Nobacs (61 percent of the accepted amount in the 
auction).  The spread on the nine-month Nobac 
decreased one basis point from 3.13 percent to 3.12 
percent, while the spread on the two-year Nobac 
dropped from 5.57 percent to 5.40 percent. Investors 
are increasing their bids in Nobacs, since these 
instruments have a variable rate and provide a higher 
yield (10.2 percent and 12.4 percent for the 9-month 
and 2-year Nobac, respectively). 
 
--------------------------------------------- -------- 
Banks pay back ARP 2.4 billion in rediscount loans to 
the BCRA. 
--------------------------------------------- -------- 
 
¶9.  On March 2, two banks - Banco Galicia and GOA- 
owned Banco Nacion - pre-paid ARP 2.4 billion in 
discount borrowing to the BCRA.  With this payment, 
Banco Nacion has completely repaid its BCRA debt, 
while Banco Galicia still holds 58 percent of its 
original discount borrowing from the BCRA.  This 
prepayment, plus the banks' payment of an ARP 275 
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 2.6 
billion.  Following these pre-payments, only three 
banks - out of twenty-four at the beginning of the 
2002 crisis - will have outstanding discount borrowing 
from the BCRA, totaling ARP 6.7 billion. 
 
--------------------------------------------- -------- 
The BCRA is considering increasing bank liquidity 
requirements. 
--------------------------------------------- -------- 
 
¶10.  The BCRA is considering increasing bank liquidity 
requirements for sight accounts (current and savings 
accounts).  According to the local media, the BCRA is 
considering a 3 percentage point increase in bank 
liquidity requirements from their current level of 15 
percent.  If the measure is implemented, ARP 1.9 
billion would be absorbed from the financial system, 
assuming that private and public sector deposits total 
ARP 63.9 billion.  The BCRA is considering the 
increase as a way to withdraw money from the market in 
order to curb inflation. 
 
--------------------------------------------- -------- 
GOA closes new price-restraint agreements. 
--------------------------------------------- -------- 
 
¶11.  On February 27, the GOA reached a verbal 
agreement with the Compressed Natural Gas (CNG) retail 
sector to freeze the price of CNG until the end of the 
year.  This new price-restraint agreement is expected 
to be formalized next week, because the GOA has to 
reach an accord with the leading CNG producers in 
advance.  Reaching an agreement with the CNG sector, 
which is being used increasingly as a vehicle fuel in 
Argentina, is key to the GOA's anti-inflation effort. 
Separately on February 28, the GOA closed a new price- 
restraint agreement with representatives of the 
Pharmaceutical Chamber.  The agreement aims to 
introduce a 10 percent discount on 216 basic medicines 
for a period of 2 months. 
 
--------------------------------------------- -------- 
Tax revenue rose 27 percent y-o-y to ARP 10.5 billion 
in February - in line with market expectations. 
--------------------------------------------- -------- 
 
¶12.  February federal tax revenue increased 27 percent 
y-o-y to ARP 10.5 billion - in line with market 
expectations of ARP 10.4 billion.   The results 
reflect strong economic activity.  Labor contributions 
jumped 44 percent y-o-y due to increases in formal job 
creation, salary increases and the inclusion of past 
increases into the base salary used to compute 
benefits.  VAT revenues rose 31 percent y-o-y.  Income 
tax and trade tax revenues increased 24 percent and 20 
percent y-o-y, respectively.  According to the GOA, 
the increase in tax collection is due to VAT, income 
tax revenues and labor contributions, which together 
provided 73.2 percent of February tax collection.  In 
real terms, revenues increased 13 percent y-o-y.  The 
BCRA consensus survey forecasts 2006 tax revenues at 
ARP 137 billion. 
 
--------------------------------------------- -------- 
January trade surplus of USD 837 million - in line 
with expectations. 
--------------------------------------------- -------- 
 
¶13.  The January trade surplus reached USD 837 
million, in line with the BCRA consensus forecast of 
USD 823 million and similar to last January's surplus 
of USD 872 million.  Export revenues increased 14 
percent y-o-y (decelerating slightly from 2005 average 
growth rate of 16 percent) to USD 3.2 billion, with 
increases in both prices (+10 percent) and quantities 
(+4 percent).  Exports were driven by an increase in 
agro-industrial products (+24 percent y-o-y), fuel and 
energy (+17 percent y-o-y), primary goods (+12 percent 
y-o-y) and industrial goods (+2 percent y-o-y). 
Imports increased 22 percent y-o-y to USD 2.3 billion, 
with increases in both quantities (+18 percent) and 
prices (+3 percent).  Imports were driven by increases 
in vehicles for passengers (+ 121 percent), capital 
goods (+26 percent), consumer goods (+25 percent), 
intermediate goods, fuel and oil (+15 percent) and 
accessories for capital goods (+12 percent), but were 
partially offset by a drop in other goods (-18 
percent).  According to the BCRA consensus survey, the 
trade surplus is expected to narrow to USD 10 billion 
in 2006 compared to USD 11.3 billion in 2005. 
 
--------------------------------------------- -------- 
Unemployment down 1.0 percentage points q-o-q to 10.1 
percent in Q4 2005. 
--------------------------------------------- -------- 
 
¶14.  The GOA announced that the unemployment rate 
dropped 1.0 percent q-o-q to 10.1 percent in the 
fourth quarter of 2005, reflecting the strong economic 
growth during the period.  According to the GOA 
survey, a total of 1.1 million people are unemployed 
out of a workforce of 10.8 million. Unemployment 
decreased 2.0 percentage points y-o-y.  Excluding Head 
of Households Plan participants, the unemployment rate 
stood at 12.7 percent, versus 16.2 percent in Q4 2004. 
 
--------------------------------------------- -------- 
February labor demand index down 2.81 percent m-o-m. 
--------------------------------------------- -------- 
 
¶15.  The February labor demand index calculated by Di 
Tella University decreased 2.81 percent m-o-m to 
123.55 points.  The decrease is mainly due to weaker 
demand for commercial employees (down 5.24 percent), 
service sector employees (down 4.23 percent) and 
professional employees (down 3.11 percent).  The index 
is increased 26.2 percent y-o-y.  [The index is based 
on comparisons of job vacancy announcements printed in 
the two largest newspapers of the country.] 
 
--------------------------------------------- -------- 
February Government Confidence Index down 0.4 percent 
m-o-m. 
--------------------------------------------- -------- 
 
¶16.  The Government Confidence Index decreased 0.4 
percent m-o-m in February to 2.62 points, but is still 
3 points 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 and it increased 1 percent m-o-m.  Public 
opinion of GOA general performance and efficiency of 
public spending decreased 3 percent and 1 percent m-o- 
m, respectively.  The index rose 10 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 
pubic spending, honesty of GOA officials and the 
government's ability to solve problems.] 
 
--------------------------------------------- -------- 
Commentary of the Week: "Price Agreements Only Provide 
Short-Term Help".  By Ernesto Gaba.  [Note: Translated 
and used with permission of the author, from an 
article published January 31 in El Cronista Comercial. 
End Note.] 
--------------------------------------------- -------- 
 
¶17.  The country's economic recovery continues at full 
speed: in 2005 GDP will show 9 percent growth while in 
2006 we expect growth to reach 7 percent.  Salaries 
will continue to grow and spur private-sector 
consumption in 2006, but with a slowing in employment 
growth and in real salaries. 
 
¶18.  Among economic sectors, the strongly cyclical 
activity in construction will continue to be a leader 
in growth.  Despite cost increases, cQstruction 
remains an attractive investment opportunity because 
of high real estate asset values in dollar terms. 
During 2005, the growth differential between goods and 
services decreased, with service costs being propped 
up by the increase in financial intermediation for the 
first time in four years.  The gradual normalization 
of the financial system has fostered a recovery of 
profitability and solvency among banks, although 
banks' net worth in real terms remain lower than they 
were pre-crisis. 
 
 
¶19.  The dynamism of exports in 2005 is supporting the 
recovery for the first time since the abandonment of 
convertibility in 2002.  The lag -- relative to Brazil 
-- that Argentina's exports have experienced in 
responding to a relatively cheap peso was likely due 
to the economic disruption that followed the 
devaluation, in addition to climatic and technological 
factors affecting primary goods. 
 
¶20.  The new Minister of Economy, Felisa Miceli, will 
maintain the fiscal surplus and depreciated peso 
policies, since these have the backing of President 
Nestor Kirchner.  It is possible that in this new 
stage, there will be less reliance on adjustments via 
market mechanisms than on price agreements in the 
fight against inflation.  Such a policy of price 
agreements can help contain inflation in the short 
run, but it is not a substitute for a combination of 
monetary and fiscal policies geared toward 
stabilization in the medium term. 
 
¶21.  President Kirchner's announcement that Argentina 
would prepay its IMF debt of approximately USD10 
billion with Central Bank reserves came as a surprise. 
The goal of this decision was to increase the GOA's 
flexibility in its political and economic decision- 
making, which traditional IMF conditionality limits as 
part of its financial assistance programs.  Paying the 
Fund has no economic implications in a static sense, 
since the consolidated public sector net external 
assets (Treasury + Central Bank) do not change when 
debt is reduced at the same time that Central Bank 
reserves are reduced.  Moreover, after the IMF payout, 
Central Bank reserves have continued supporting the 
monetary base (defined as money in circulation + 
banks' deposits in the Central Bank) at the exchange 
rate of 3.00 ARP/USD. 
 
¶22.  Nevertheless, in a dynamic sense, the IMF payout 
could create two weaknesses, under certain 
circumstances.  First, if Argentina were to need 
liquidity because of an external shock, there would be 
questions about its ability to turn again to the IMF, 
while market financing would come at a much higher 
cost.  Second, the Central Bank acquired reserves in 
recent years by issuing debt (repo agreements and 
LEBACs).  As a consequence, the Central Bank's 
reserves/liabilities ratio could be adversely affected 
by the IMF payout.  In this new environment, it is 
possible for the market to discount a relatively cheap 
peso as well as higher inflation and higher domestic 
interest rates.  [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