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DE RUEHBU #0601/01 0741412
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R 151412Z MAR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3822
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UNCLAS BUENOS AIRES 000601 
 
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 10, 2006 
 
 
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Weekly Highlights 
--------------------------------------------- -------- 
 
- The peso depreciated against the USD, closing again 
at 3.10 ARP/USD, reaching its lowest value in three 
years. 
- World Bank will consider USD 3.1 billion loan to 
Argentina. 
- Telecom agrees to suspend its ICSID arbitration 
claim against the GOA. 
- GOA suspends beef export for 180 days 
- CPI up only 0.4 percent m-o-m in February - well 
below market expectations of 1 percent.  PPI up 1.4 
percent m-o-m. 
- March Consumer Confidence Index up 6.5 percent m-o-m 
and reaches an all-time high. 
- Commentary of the Week: "INDEC's Estimates: a 
Methodological Obstacle?" 
 
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MARKETS 
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The peso depreciated versus the USD this week, closing 
at 3.10 ARP/USD - its lowest value in three years. 
--------------------------------------------- -------- 
 
¶1.  The peso depreciated versus the USD this week, 
closing at 3.10 ARP/USD, reaching its lowest value in 
three years.  The peso's fall this week resulted from 
higher dollar demand by banks, who want to dollarize 
their portfolios in expectation of higher U.S. 
interest rates, and the Central Bank's (BCRA) 
intervention in the FX market, where it purchased USD 
169 million and EUR 17.5 million in the first four 
days of the week.  The BCRA has purchased USD 2 
billion since the beginning of the year, compared to 
USD 750 million during the same period last year.  The 
peso exchange rate has depreciated 1.6 percent since 
the beginning of the calendar year. 
 
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Multilateral real exchange rate appreciates 1.7 
percent m-o-m in February. 
--------------------------------------------- -------- 
 
¶2.  The BCRA's multilateral real exchange rate index - 
- measuring the real exchange rate between the peso 
and a trade-weighted basket of currencies -- 
appreciated 1.7 percent m-o-m in February.  The real 
appreciation is mainly explained by the appreciation 
of the Brazilian real and dollar against the peso, 
partially offset by a depreciation of the Euro against 
the peso.  The index is 2.7 percent above the level of 
the last twelve months and 97.8 percent above its 
average value during convertibility.  [The BCRA's 
multilateral real exchange rate index weights the 
domestic prices and exchange rates of Argentina's main 
trading partners according to their share of 
Argentina's exports and imports.] 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
World Bank to consider USD 3.1 billion loan to 
Argentina. 
--------------------------------------------- -------- 
 
¶3.  After her meeting with the Minister of Economy 
Felisa Miceli on March 7, World Bank Vice-President 
for Latin America Pamela Cox said that the Bank's 
board will discuss the approval of a USD 3.1 billion 
loan to Argentina at its April meeting.  This loan 
would fund improvements in infrastructure and social 
development.  If approved, the loan will be disbursed 
over the next three years. 
 
--------------------------------------------- -------- 
Telecom agrees to suspend its ICSID arbitration claim 
against the GOA. 
--------------------------------------------- -------- 
 
¶4.  The GOA and Telecom Argentina signed a Letter of 
understanding on March 6 in which France Telecom 
agreed to suspend its USD 297 million arbitration 
claim against the GOA.  The claim is pending before 
the International Center for the Settlement of 
Investment Disputes (ICSID), an independent division 
of the World Bank.  The agreement does not include any 
direct increase in tariffs.  Like the agreement that 
Telefonica signed with the GOA in February, Telecom's 
agreement will allow it to extend for one hour the 
period in which it charges the highest tariff, and to 
triple the rates for incoming international calls. 
Telecom Argentina President Amadeo Vazquez also 
announced ARP 3 billion in investments in Argentina 
during the next three years.  This is the twenty-fifth 
agreement that the GOA has closed with privatized 
utility companies. 
 
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GOA suspends beef export for 180 days 
--------------------------------------------- -------- 
 
¶5.  On March 8, Ministry of Economy Felisa Miceli 
announced that the GOA would suspend beef exports for 
180 days and raise export taxes on boned cuts and heat- 
processed beef from 5 percent to 15 percent.  The aim 
of these measures is to increase local supply and 
avoid further increases in domestic beef prices. 
According to GOA officials, around 600,000 tons of 
beef should enter the domestic market as a result of 
this move.  Beef prices constitute 4.5 percent of the 
basket of goods used to measure consumer prices, and 
the beef sector has resisted the GOA's demands for 
voluntary price restraints as part of the GOA's anti- 
inflation effort.  Beef exports to the European Union 
under the Hilton quota program as well as bilateral 
beef-import agreements with Argentina are exempt from 
the suspension. 
 
¶6.  On March 9, the Argentine Rural Society (SRA) 
stated that the beef export ban will cost the GOA USD 
600 million in lost exports.  The SRA expects that 
Brazil and other beef producing countries will fill 
the gap left by Argentina, which will lose its markets 
in Russia, Israel, Italy, the UK, the Netherlands, 
Algeria, Spain and Ukraine, among others.  The SRA 
also said that the ban will force many exporters and 
meatpackers into bankruptcy and result in the loss of 
thousands of jobs in the beef industry. 
 
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The GOA sells USD 307 million of Boden 2012 bonds to 
Venezuela. 
--------------------------------------------- -------- 
 
¶7.  On March 6, the GOA published in the Official 
Gazette a resolution authorizing the issuance of 
another USD 307 million worth of Boden 2012 bonds to 
Venezuela.  This transaction is Venezuela's fourth 
purchase this year.  The purchase brings the GOV's 
2006 bond purchases to USD 1.2 billion at face value 
(USD 1 billion at market value). 
 
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BCRA rolls over its maturities by accepting bids on 
longer-term Nobacs. 
--------------------------------------------- -------- 
 
¶8.  The BCRA received ARP 1 billion in bids in its 
March 7 Lebac auction, less than the ARP 1.5 billion 
in Lebacs that came due during the week.  However, the 
BCRA received ARP 1.2 billion in bids 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 previous auctions, the 
BCRA was more than able to roll over its maturities by 
accepting bids for ARP 2.0 billion (ARP 1 billion in 
Lebacs and ARP 966 million in Nobacs).  The yield on 
the 42-day Lebac and the 98-day Lebac remained 
unchanged at 6.75 percent and 7.25 percent, 
respectively.  The yield on the 70-day Lebac decreased 
slightly from 6.97 percent to 6.95 percent, while the 
yield on the 182-day Lebac reached 8.25 percent. 
Lebacs for other maturities were withdrawn due to lack 
of interest.  Investors concentrated more than 53 
percent of their bids in Nobacs of more than 9 months 
and the BCRA accepted bids for ARP 966 million of 
Nobacs (48 percent of the accepted amount in the 
auction).  The spread on the nine-month Nobac 
decreased three basis points, from 3.12 percent to 
3.09 percent, while the spread on the two-year Nobac 
dropped 29 basis points from 5.40 percent to 5.11 
percent.  Investors are increasing their bids in 
Nobacs, since these instruments have a variable rate 
and provide a higher yield (10.9 percent and 12.9 
percent for the 9-month and 2-year Nobac, 
respectively).  In the first two auctions this month, 
the BCRA was able to roll over more than half of the 
ARP 5.7 billion maturities coming due in March. 
 
--------------------------------------------- -------- 
GOA closes a price-restraint agreement with the CNG 
sector. 
--------------------------------------------- -------- 
 
¶9.  As anticipated in last week's Financial Weekly, 
the GOA signed an agreement with the Compressed 
Natural Gas (CNG) retail sector on March 8.  This new 
price-restraint agreement aims to freeze the price of 
CNG until the end of the year.  However, the accord is 
subject to bi-monthly monitoring of any changes in 
costs. 
 
--------------------------------------------- -------- 
CPI up only 0.4 percent m-o-m in February - well below 
market expectations of 1 percent.  PPI up 1.4 percent 
m-o-m. 
--------------------------------------------- -------- 
 
¶10.  The CPI increased 0.4 percent m-o-m in February, 
well below market expectations of 1 percent and far 
below the 1.3 percent m-o-m increase in January.  CPI 
core inflation was 0.5 percent, but was offset by a 
0.1 percent fall in the seasonal component.  The 
monthly rise was driven mainly by an increase in the 
prices of health (+1 percent) and food and beverages 
(+1 percent, despite price-restraint agreements 
between the GOA and many producers and retailers), but 
these increases were offset by a fall in clothing (- 
2.1 percent) and leisure activities (-1.0 percent) 
both of which are due to seasonal factors.  Year-over- 
year, the CPI is up 11.5 percent.  The BCRA consensus 
survey forecasts 12.5 percent inflation in 2006, down 
slightly from 12.7 percent forecast last month, and 
reflecting a slight fall in inflation expectations. 
The GOA has now signed price restrain agreements with 
many sectors of the economy including foods and 
beverages, apparel, school supplies, toiletries, 
physicians fees, and hotels.  The 2006 Budget projects 
9.1 percent inflation rate for 2006 and the Central 
Bank's inflation target range is 8-11 percent. 
 
¶11.  Producer prices increased 1.4 percent m-o-m in 
February, due to a 0.6 percent rise in the prices for 
manufactured goods and electricity and a 3.3 percent 
increase for primary goods prices.  The price of 
electric energy rose 1.1 percent.  Imported goods 
prices increased 1.4 percent.  The PPI index increased 
13.5 percent y-o-y. 
 
--------------------------------------------- -------- 
March Consumer Confidence Index up 6.5 percent m-o-m 
and reaches its all- time high. 
--------------------------------------------- -------- 
 
¶12.  The Consumer Confidence Index -- published by 
Universidad T. Di Tella -- jumped 6.5 percent m-o-m in 
March, reaching its all-time high of 59.9 points.  The 
March increase came in consumer's willingness to 
purchase durable goods and real estate (+7.5 percent m- 
o-m) and consumer's sentiment towards the 
macroeconomic environment (+7.3 percent m-o-m), 
followed by positive expectations on individual's 
personal situation (+4.9 percent m-o-m).  The index 
increased 2.6 percent y-o-y.  The index is based on 
surveys of individual economic sentiment and consumer 
willingness to purchase durable goods, houses and 
cars. 
 
--------------------------------------------- --------- 
Commentary of the Week: "INDEC's Measurements: A 
Methodological Obstacle?" by SEL Consultores, February 
¶2006. [Note: Translated and used with permission of 
the author.  End Note.] 
--------------------------------------------- -------- 
 
¶13.  The Economy Minister's reaction to an 
announcement by the official statistics bureau (INDEC) 
of increase in the income gap between the richest and 
the poorest during the third quarter of 2005 was to 
claim that INDEC's calculation methodology was 
incomplete.  Felisa Miceli's argument is that INDEC's 
methodology "does not include all the efforts made by 
the Government to improve income distribution; it only 
takes into account monetary income . numbers that show 
monetary inequalities are softened if you take social 
expenditures into account, which have increased 
significantly since May 2003 and continue to rise." 
 
¶14.  The Minister is right when she emphasizes the 
redistributive effect of public social expenditures. 
Free access (that is, access financed by budgetary 
resources) to education, health care, or nutrition 
programs - to name the most relevant - have a 
significant impact on the welfare of low income 
households although, unlike other programs such as 
Heads of Households, they are not recorded as monetary 
income.  Consolidated public expenditures that are 
mainly directed to low income households (elementary 
education, public health care, and public social 
promotion and assistance) totaled more than ARP 26.5 
billon in 2004.  In 2005, they must have reached ARP 
30 billion.  Assuming that what reaches the poor is 
equal to the percentage of all consumers of these 
services that live in the 30 percent of households 
with the lowest per capita family income level, one 
can estimate a gross transfer-in-kind (not counting 
administrative bureaucratic expenditures) of around 
ARP 20.6 billion for 2005.  This suggests an 
unregistered, gross redistributive impact on monetary 
income of around ARP130 per month.  Obviously, if this 
value is imputed, as Minister Miceli suggests it 
should, the gap between the rich and the poor would be 
substantially smaller. 
 
¶15.  Up to this point, Minister Miceli is correct. 
But she is wrong in about two principal issues. 
 
¶16.  Firstly, public expenditure has a redistributive 
effect not only in favor of the poorest, but also in 
favor of those who aren't so poor, and even to the 
richest.  The most obvious case of this is public 
university education.  85 percent of public university 
students belong to households that are above the 
poverty line.  Moreover, the percentage of public 
university students who are from the richest 10 
percent of households (whose income, according to 
INDEC's latest report, is 31 times above the income of 
the poorest 10 percent) is equal to the percentage of 
students coming from all poor households.  The 2005 
budget for public universities was ARP 26 billion; the 
portion of that which benefited students from the 
richest third of the population equals the federal 
government's total expenditures on programs for 
nutritional assistance, maternal-infant healthcare, 
distribution of medicines, social promotion, emergency 
assistance, and compensatory education action.  The 
2005 budget for this last program, which provides 
school supplies, books and scholarships for children 
and youngsters from disadvantaged socio-economic 
conditions, was ARP 268 million; public university 
expenditures that benefited students from the richest 
10 percent households were ARP 382 million. 
 
¶17.  Secondly, social public expenditures on non- 
monetary transfers targeted mainly to low income 
households -- the State's major effort to meet social 
needs -- are still noticeably less than they were 
during the crisis period 1998-2001, and even less than 
the average expenditures during the 1990s.  In 2004 - 
the latest data available - consolidated public 
spending on basic education, public health care, and 
public social assistance and promotion was, in 
constant prices, 20 percent below levels of 1998-2001, 
and 5 percent below the 1991-2001 average.  The source 
for these figures is the Ministry of Economy.  If you 
adjust these figures for the incidence of poverty (it 
was 29 percent in 1991-2001, 5 points less than it is 
now), the in-kind social expenditure gap would be even 
larger.  This suggests that if one were to impute non- 
monetary transfers to the entire statistical series, 
inequality would not diminish, but in fact would 
increase. 
 
¶18.  This is more than a "methodological vice."  The 
cause of persistent high levels of income inequality 
is the segmentation of the labor market, and 
particularly in the disparity in the evolution of 
formal and informal salaries.  The salary gap between 
these segments grew by almost 12 percent in 2005 (it 
had been stable in 2004).  At the same time, job 
creation was cut in half (to 4.5 percent from 8.4 
percent in 2004) and was almost zero in the informal 
sector.  Finally, unemployment in the informal sector 
continues to be very high (around 20 percent) while 
the formal sector is experiencing almost full 
employment.  The combination of these factors has 
caused incomes in the lowest deciles, where informal 
labor mainly is found, to grow more slowly than 
incomes in the medium and high deciles, where formal 
labor is concentrated.  The key to improving 
distributive equity therefore is reducing the dual 
nature of the labor market, as well as re-orienting 
social public spending.  [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.] 
 
¶19.  To see more Buenos Aires reporting, visit our 
classified website at: 
http://www.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ