VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #0706/01 0861435
ZNR UUUUU ZZH
R 271435Z MAR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3943
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2122
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000706 
 
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 23, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- GOA runs an ARP 1.9 billion primary fiscal surplus 
in February - better than expected. 
- January monthly economic activity index up 9.1 
percent y-o-y - stronger than expected. 
- GOA rescinds Aguas Argentina's concession contract 
and creates state water company. 
- The poverty rate dropped 5.1 percentage points to 
33.8 percent in the second half of 2005. 
- The beef export ban will cost the GOA only ARP 184 
million in lost tax revenue. 
- GOA reaches a price-restraint agreement with fish 
producers. 
- GOA issues USD 500 million of the new "Bonar V" 
bond. 
- Investors concentrated more than 88 percent of their 
bids in BCRA Nobacs. 
- Attorney General says Argentina "will respect" ICSID 
arbitration claims. 
- Commentary of the Week:  "The Economy Grew 30 
percent in Three Years (But It's Not a Record)" 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
--------------------------------------------- -------- 
GOA runs an ARP 1.9 billion primary fiscal surplus in 
February - better than expected. 
--------------------------------------------- -------- 
 
¶1.  The GOA announced a primary fiscal surplus of ARP 
1.9 billion in February, above market expectations of 
ARP 1.6 billion.  This brings the accumulated fiscal 
surplus for the first two months of 2006 to ARP 3.5 
billion.  This better-than-expected February result is 
mainly the result of strong revenue collection.  In 
February, revenues increased 29.4 percent y-o-y to ARP 
12.8 billion, while expenditures rose 28.2 percent y-o- 
y to ARP 10.9 billion.  The primary fiscal surplus 
increased 37 percent y-o-y.  The BCRA consensus 
forecasts an ARP 22.3 billion primary fiscal surplus 
for 2006. 
 
--------------------------------------------- -------- 
January monthly economic activity index up 9.1 
percent y-o-y - stronger than expected. 
--------------------------------------------- -------- 
 
¶2.  The monthly economic activity index increased a 
strong 9.1 percent y-o-y in January, well above the 
BCRA market survey forecast of 8.1 percent.  The 
index remained flat m-o-m due to technical problems 
that halted some production in the industrial sector. 
The BCRA consensus survey estimates 7 percent 
economic activity growth for 2006.  However, some 
private analysts predict growth as high as 8 percent. 
The monthly economic activity index is viewed as a 
reliable leading indicator of GDP. 
 
--------------------------------------------- -------- 
The poverty rate dropped 5.1 percentage points to 33.8 
percent in the second half of 2005. 
--------------------------------------------- -------- 
 
¶3.  On March 21, the GOA announced that the poverty 
rate fell to 33.8 percent in the second half of 2005 
from 38.9 percent in the first half of the year, and 
down from 40.2 percent in the second half of 2004. 
The 33.8 percent poverty rate represents 7.9 million 
people.  The GOA also said that the destitution rate 
fell from 13.8 percent to 12.2 percent in the second 
half of 2005, the latter representing 2.8 million 
people.  The poverty and destitution rates are 
measured by a survey conducted in the twenty-eight 
largest urban areas of Argentina. 
 
--------------------------------------------- -------- 
GOA rescinds Aguas Argentina's concession contract and 
creates a new state-owned water company. 
--------------------------------------------- -------- 
 
¶4.  On March 22, the GOA published a decree rescinding 
Aguas Argentinas's concession contract and creating a 
state-owned water company to provide water and sewage 
services in Greater Buenos Aires.  Minister of 
Planning Julio De Vido said that the main reason for 
rescinding the concession contract was the detection 
of high level of nitrates in the water provided by 
Aguas Argentinas (controlled by the French Suez 
company).  The new state-owned water company, AYSA 
(Agua y Saneamientos Argentinos SA), will be 90 
percent federal government-owned and the remaining 10 
percent will be held by workers.  According to GOA 
officials, tariffs will remain unchanged.  Suez has 
filed an arbitration claim against Argentina in the 
World Bank's International Centre for Settlement of 
Investment Disputes (ICSID) for USD 1.7 billion in 
losses allegedly caused by the freezing of tariffs in 
2002 
 
--------------------------------------------- -------- 
The 180-day beef export ban will cost the GOA ARP 184 
million in lost fiscal revenue. 
--------------------------------------------- -------- 
 
¶5.  According to Embassy estimates, the 180-day beef 
export ban will cost the GOA around ARP 184 million in 
lost export tax collections, not a significant loss 
compared to monthly revenues of ARP 12.9 billion. 
 
--------------------------------------------- -------- 
GOA reaches a price-restraint agreement with fish 
producers. 
--------------------------------------------- -------- 
 
¶6.  On March 20, the GOA closed a new price-restraint 
agreement with fish producers, freezing the price of 
two fish species until the end of the year.  The new 
agreement seeks to encourage consumers to buy beef 
substitutes and thus indirectly avoid further 
increases in beef prices.  According to GOA officials, 
the accord was signed with seven fishing chambers, and 
it is subject to bi-monthly monitoring of any changes 
in costs. 
 
--------------------------------------------- -------- 
GOA issues USD 500 million of the new "Bonar V" bond. 
--------------------------------------------- -------- 
 
¶7.  On March 22, the GOA announced the issuance of USD 
500 million worth of the new USD-denominated bond, 
known as the "Bonar V," maturing in 2011.  The yield 
on the new bond was 8.36 percent, in line with 
domestic interest rates.  Bids -mainly from foreign 
banks and local pension funds (AFJPs) - reached USD 
726 million, enough to fill the USD 500 million 
auction amount.  The Bonar V will amortize principal 
at maturity while paying interest every six months. 
The interest coupon was fixed at 7 percent per year in 
US dollars, paying 3.50 percent of nominal value. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  Investors 
concentrated more than 88 percent of their bids in 
Nobacs. 
--------------------------------------------- -------- 
 
¶8.  The BCRA received ARP 234 million in bids at its 
March 21 Lebac auction, less than the 1.2 billion in 
Lebacs that came due during the week.  However, the 
BCRA received ARP 1.8 billion in bids in its Nobac 
auction. [Nobacs are longer term instruments than 
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 
able to roll over its maturities by accepting bids for 
ARP 1.2 billion (ARP 234 million in Lebacs and ARP 994 
million in Nobacs).  The yield on the 35-day Lebac and 
the 70-day Lebac remained unchanged at 6.7 percent and 
6.95 percent, respectively.  The yield on the 98-day 
Lebac dropped seven basis points from 7.35 percent to 
7.28 percent, while the yield on the 168-day Lebac 
reached 8.35 percent.  Lebacs for other maturities 
were withdrawn due to lack of interest.  Investors 
concentrated more than 88 percent of their bids in 
Nobacs of more than 9 months and the BCRA accepted 
bids for ARP 994 million of Nobacs (81 percent of the 
accepted bids in the auction).  The spread on the nine- 
month Nobac decreased seven basis points, from 3.07 
percent to 3.0 percent, while the spread on the two- 
year Nobac dropped twenty basis points from 5.02 
percent to 4.82 percent.  Investors continue 
increasing their bids in Nobacs, since these 
instruments have a variable rate and provide a higher 
yield. 
 
--------------------------------------------- -------- 
Attorney General says Argentina "will respect" ICSID 
arbitration awards 
--------------------------------------------- -------- 
 
¶9.  On March 22, Attorney General for the Treasury 
Osvaldo Guglielmino told a press conference that 
Argentina "will respect" ICSID arbitration awards 
against it, even as he criticized the ICSID process 
for encouraging "overvalued" claims because it does 
not charge fees based on the amount of the claim (as 
Argentina does in litigation).  He said that ICSID 
claims against Argentina are overvalued by 1000 
percent. 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing at 3.09 ARP/USD. 
--------------------------------------------- -------- 
 
¶10.  The peso remained flat versus the USD this week, 
closing at 3.09 ARP/USD.  The BCRA purchased USD 102 
million in the first four days of the week without any 
peso appreciation.  The BCRA also purchased EUR 26 
million in the FX market in the first two days of the 
week.  The BCRA has purchased USD 2.1 billion since 
the beginning of the year, compared to USD 794 million 
during the same period last year.  The peso exchange 
rate has depreciated 1.3 percent since the beginning 
of the calendar year. 
 
--------------------------------------------- -------- 
Commentary of the Week:  "The Economy Grew 30 percent 
in Three Years (But It's Not a Record)".  By Abel 
Viglione.  [Note: Translated and used with permission 
of the author, from an article published February 21 
in Ambito Financiero.  End Note.] 
--------------------------------------------- -------- 
 
 
¶11.  The data published by INDEC about GDP growth for 
2005 is very good (9.1 percent, according to the EMAE) 
and confirms the strong recovery of the past three 
years, which has resulted in an increase in national 
wealth of 29.4 percent. 
 
¶12.  Given that the population grew at a 1 percent 
annual rate, the recovery in per capita GDP has been 
surprisingly high.  While it has not reached the 
previous high (1998), it is very close, only 2 percent 
below it.  Of course, measured in constant pesos, or 
measured in dollars, it is still far below its peak. 
 
¶13.  Let's forget about dollars and analyze everything 
in local currency.  Argentine history shows five 
significant three-year economic expansions, and the 
expansion of the past three years is in fourth place, 
as you can see from the table below: 
 
--------------------------------------------- -------- 
Argentina during Three-Year Expansions 
(In Percentages     ) 
--------------------------------------------- -------- 
Period   GDP  Consumption Investment Exports Imports 
--------------------------------------------- -------- 
1887-1889 44.5      -        -        -       - 
--------------------------------------------- -------- 
1903-1905 43.2   40.7       145.1    62.7 
--------------------------------------------- -------- 
1918-1920 31.7   21.2       118.9    95.9    52.1 
--------------------------------------------- -------- 
2003-2005 29.4   25.1       121.2    27.4   135.0 
--------------------------------------------- -------- 
1991-1993 28.2   36.8        98.7    -0.1   242.7 
--------------------------------------------- -------- 
 
 
--------------------------------------------- -------- 
Period         GDP growth in           President 
               3 previous years 
--------------------------------------------- -------- 
1887-1889           6.0               Juarez Celman 
--------------------------------------------- -------- 
1903-1905           3.7               Roca/Quintana 
--------------------------------------------- -------- 
1918-1920         -10.3               Yrigoyen 
--------------------------------------------- -------- 
2003-2005         -15.5               Kirchner 
--------------------------------------------- -------- 
1991-1993          -7.9               Menem 
--------------------------------------------- -------- 
 
¶14.  Periods of greater growth than the current period 
occurred during the governments of Juarez Celman (in 
the three year period 1887-89, when the economy grew 
44.5 percent), of Roca and Quintana (1903-05, with a 
GDP increase of 43.2 percent), and that of the first 
period of Yrigoyen (1918-20, with a 31.7 percent 
increase).  The current expansion exceeds by only one 
percentage point the growth during the decade of the 
90's (Menem), when GDP grew 28.2 percent between 1991 
and 1993. 
 
¶15.  What differences can we observe between these 
three-year periods of strong growth? 
 
¶16.  That those at the end of the 19th century and 
beginning of the 20th came after prior periods of 
growth, for which they were "disadvantaged" in 
comparison to the present period; nevertheless, they 
produced higher rates of growth. 
 
¶17.  That in the years prior to the last three great 
expansions, GDP had contracted.  That the largest 
contraction of GDP occurred prior to the currnt 
recovery; the GDP fell 15.5 percent between 2000 and 
2002, for which the current recovery was "advantaged" 
from the outset in comparison with other expansions. 
 
¶18.  That GDP per capita rose in all cases in 
comparison with the three years prior to the 
expansion.  In the expansion of 2003-05, the rise in 
per capita GDP was only 2.6 percent compared to that 
of 2000, while in the other four cases the increase 
was between 22.3 percent and 28.8 percent, a rate 
almost 10 times higher than the current one. 
 
¶19.  That consumption rose during all the expansions, 
and in that of 2003-05, it rose 25.1 percent. 
Nevertheless, consumption per capita remained below (- 
3.2 percent) the level prior to the crisis.  The 
inverse occurred in the other expansions; it always 
increased, and did so by between 14 percent and 32 
 
percent, even though the population increased at a 3.6 
percent rate at the beginning of the 20th century. 
 
¶20.  Given that consumption represents 75 percent of 
demand, it is clear that the variation in GDP will be 
similar to that of consumption.  In two periods, that 
is not what happened: in the expansion of 1918 to 
1920, the drivers were investment and exports.  In 
that of 1991 to 1993, the drivers were consumption (it 
was higher than the increase in GDP, which indicated 
an elevated increase in consumption by Argentine 
society) and investment. 
 
¶21.  The expansion of 2003-05 had as its drivers 
investment and exports.  It is true that investment 
has increased substantially, 121.2 percent, but from 
practically nothing.  It is enough to note that 
investment in 2002 was the lowest in Argentine 
history, not reaching 12 percent of GDP that year. 
 
¶22.  The most relevant point about this last expansion 
has been the strong growth in exports (27.4 percent), 
given that it follows a trend of 8 percent annual 
growth since 1987.  In the decade of the 1990's, this 
didn't happen.  In the other expansions, the growth of 
exports was much higher, which is reasonable given the 
greater openness of the economy to trade during those 
periods. 
 
--------------------------------------------- -------- 
Conclusions 
--------------------------------------------- -------- 
 
¶23.  The current expansion has not been the most 
important of the past 100 years, as has been commented 
in some press reports in recent days. 
 
¶24.  The departure point for this expansion was very 
low.  It is enough to recall that GDP fell 10.9 
percent in 2002, the biggest drop in percentage terms 
in Argentine history along with 1891, the only years 
in which GDP fell by more than 10 percent.  This gave 
it a handicap in comparison with other expansions. 
 
¶25.  It is the only expansion in which per capita 
consumption remained below the year prior to the 
expansion, which indicates that the population as a 
whole consumes less than it did in 2000.  The inverse 
occurred in the 1991-93 expansion, when exports per 
capita were reduced, i.e., we consumed locally a part 
of what had been dedicated to export, which also was 
not wise. 
 
¶26.   Argentina is not an island in regards to 
economic growth.  The majority of the countries of 
Latin America grew in the past three years, producing 
double-digit rates of growth and taking advantage of 
the favorable international situation. 
 
¶27.  In conclusion, the current recovery has been 
excellent and, if we want it to rise in the historical 
rankings, we will need to increase investment in a 
very serious way to maintain GDP growth rates of 5 
percent per year.  It will be necessary for investment 
and exports to increase faster than GDP, which implies 
that consumption will have to grow at lower rate, 
resulting in a drop in the consumption-GDP ratio. 
[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