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DE RUEHBU #1028/01 1281511
ZNR UUUUU ZZH
R 081511Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4426
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDCQ
RUEHRC/USDA FAS WASHDC 2165
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001028 
 
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 May 5, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- CPI rose 1.0 percent m-o-m in April - slightly above 
market expectations.  PPI rose 1.5 percent m-o-m. 
- Bolivian President Morales guarantees that Bolivia 
will sell gas at reasonable prices. 
- The GOA successfully auctions off USD 500 million of 
Bonar V bonds. 
- Tax revenues increased only 8 percent y-o-y to ARP 
10.0 billion in April - below expectations. 
- March trade surplus of USD 814 million - in line 
with expectations. 
- Commentary of the Week: "Dollars from Foreign Trade: 
How Long will the Abundance Last?" 
 
--------------------------------------------- -------- 
CPI rose 1.0 percent m-o-m in April - slightly above 
market expectations.  PPI rose 1.5 percent m-o-m. 
--------------------------------------------- -------- 
 
¶1.  The Consumer Price Index (CPI) increased 1.0 
percent m-o-m in April, slightly above market 
expectations of 0.9 percent, following a 1.2 percent m- 
o-m increase in March.  Last month's increase brought 
inflation to 3.9 percent in the first four months of 
the year, compared to a 4.5 percent increase in the 
same period last year.  CPI core inflation was up 0.68 
percent, while the seasonal and regulated components 
of the index increased 0.27 percent and 0.03 percent, 
respectively.  The categories with the highest 
increase in prices were clothing (+5.5 percent), 
leisure activities (1.5 percent - due to the Easter 
holiday break), housing (1 percent) and other goods 
and services (1 percent).  Meat prices (representing 
4.5 percent of the consumer basket) decreased 0.6 
percent m-o-m due to the price restraint agreements 
between the GOA and the meat sector along with the ban 
on beef exports.  Year-on-year, CPI rose 11.6 percent. 
The BCRA consensus survey forecasts 12.0 percent 
inflation in 2006, unchanged from last month's 
forecast.  The 2006 Budget projects a 9.1 percent 
inflation rate for 2006 and the Central Bank's 
inflation target range is 8-11 percent. 
 
¶2.  Producer prices jumped a strong 1.5 percent m-o-m 
in April, due to a 4 percent increase in primary goods 
prices and a 0.7 percent rise in the prices for 
manufactured goods.  The price of electricity remained 
unchanged, while prices for imported goods increased 
0.6 percent.  The PPI index increased 11.0 percent y-o- 
y. 
 
 
--------------------------------------------- -------- 
Bolivian President Morales guarantees that Bolivia 
will sell gas at reasonable prices. 
--------------------------------------------- -------- 
 
¶3.  After meeting for more than two hours on May 4, 
the Presidents of Argentina, Brazil, Bolivia and 
Venezuela agreed on a final document in which they 
supported Bolivian President Morales' decision to 
partially nationalize its energy reserves, and 
committed to renegotiate the price of natural gas 
supplied to Brazil and Argentina.  However, the 
document leaves the actual price -- as well as 
investment decisions -- to be negotiated on a 
bilateral basis.  The statement also highlighted the 
need to preserve and guarantee gas supplies and to 
stimulate a balanced development between producer and 
consumer countries.  [Argentina currently imports 5 
percent of its gas consumption from Bolivia at a 
"solidarity" price of USD 3.20 per million cubic 
meters, while the international price ranges from USD 
2.00 to USD 8.00 per million cubic meters.] 
 
--------------------------------------------- -------- 
 
GOA resolutions on electricity sector fail to 
materialize. 
--------------------------------------------- -------- 
 
¶4.  On May 4, local media reported that the GOA would 
soon publish two resolutions affecting electricity 
consumption and supply.  The first resolution 
reportedly would eliminate the existing reward program 
for users who reduce their electricity consumption 
(compared to their consumption the previous year) and 
replace it with a penalty system for users who 
increase their electricity consumption.  (Low-level 
consumers would be exempted from this program.)  The 
second resolution would try to increase the supply of 
electricity by encouraging self-generating companies 
to add their supply to the wholesale electricity 
market.  However, on May 5, newspapers reported that 
the GOA halted the publication of the resolutions 
(which would bring them into effect) because of their 
likely impact on inflation. 
 
--------------------------------------------- -------- 
The GOA successfully auctions off USD 500 million of 
the Bonar V bond. 
--------------------------------------------- -------- 
 
¶5.  On May 3, the GOA announced that it would issue 
another USD 500 million of USD-denominated bonds, 
known as the "Bonar V," maturing in 2011.  In its 
second auction, the GOA received bids for USD 2.4 
billion, almost five times the auctioned amount.  This 
allowed the GOA to set a yield of just 8.09 percent -- 
below the 8.36 percent set at the first Bonar auction 
on March 22 and below the 8.18 percent the bonds yield 
in the secondary market.  [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.]  According to GOA data, Deutsche Bank and JP 
Morgan accounted for 88 percent of the bids, with 
purchases of USD 365 million and USD 73 million, 
respectively.  Reportedly, the strong demand for the 
bond may encourage the GOA to advance a third auction 
of the Bonar for an additional USD 500 million later 
this month, and also to consider issuing a 10-year 
bond later in the year.  With these expected Bonar 
issuances, along with the issuance of Boden 2012's to 
Venezuela and a new international bond issue (under 
U.S. law) for a total of USD 3.5 billion, the GOA will 
not only have met its 2006 financial needs but also 
pre-financed some of its 2007 financial needs, 
estimated at USD 2 billion by analysts. 
 
--------------------------------------------- -------- 
Tax revenues increased only 8 percent y-o-y to ARP 
10.0 billion in April -- below expectations. 
--------------------------------------------- -------- 
 
¶6.  April federal tax revenues increased only 8 
percent y-o-y to ARP 10.0 billion -- well below market 
expectations of ARP 11.5 billion.  The worse-than- 
expected tax revenue is mainly attributed to two 
changes in the tax regime: the increase in income tax 
deductions and the postponement of the income tax- 
collection deadline until May.  Meanwhile, labor 
contributions rose 54 percent y-o-y due to increases 
in formal job creation and salary increases, while VAT 
revenues increased 19 percent y-o-y.  Income tax 
revenues dropped 30 percent y-o-y while trade tax 
revenues decreased 4 percent y-o-y as a result of 
lower grain and energy exports.  In real terms, 
revenues decreased 3 percent y-o-y.  Despite the 
disappointing April result, tax revenues reached ARP 
42.1 billion in the first four months of the year -- 
ARP 2.5 billion above the target (a 21 percent y-o-y 
increase).  The BCRA consensus survey forecasts 2006 
tax revenues at ARP 142.4 billion. 
 
--------------------------------------------- -------- 
 
GOA to renegotiate its Paris Club debt. 
--------------------------------------------- -------- 
 
¶7.  On May 4, Cronista Comercial reported that the GOA 
will engage in negotiations to renegotiate its Paris 
Club debt in the second half of the year.  As of 
December 2005, Paris Club debt stock (including 
arrears) reached USD 6.4 billion.  The GOA reportedly 
will seek refinancing over thirty years, with no 
principal reduction but at interest rates below those 
paid before the GOA default.  The GOA's goal is to 
gain access to new bilateral credit lines to finance 
infrastructure projects. 
 
--------------------------------------------- -------- 
March trade surplus of USD 814 million -- in line with 
expectations. 
--------------------------------------------- -------- 
 
¶8.  The March trade surplus reached USD 814 million, 
in line with market expectations of USD 804 million. 
Exports increased 16 percent y-o-y to USD 3.5 billion, 
maintaining the steady growth of the last two months 
with increases in both price (+6 percent) and quantity 
(10 percent).  Exports were driven by an increase in 
fuel and energy (+21 percent y-o-y), agro-industrial 
products (+21 percent y-o-y), industrial goods (+13 
percent y-o-y) and primary goods (+6 percent y-o-y). 
Imports increased a strong 24 percent y-o-y to USD 2.7 
billion, showing strong domestic demand, with 
increases in both quantity (+18 percent) and price (+5 
percent).  Imports were driven by increases in 
accessories for capital goods (+25 percent), passenger 
vehicles (+58 percent), consumer goods (+31 percent), 
capital goods (+32 percent), fuel and oil (+29 
percent) and intermediate goods (+12 percent). 
According to the BCRA consensus survey, the trade 
surplus is expected to narrow to USD 10.1 billion in 
2006 compared to USD 11.3 billion in 2005. 
 
--------------------------------------------- -------- 
April labor demand index up 1.0 percent mom -- first 
increase in five months. 
--------------------------------------------- -------- 
 
¶9.  The April labor demand index calculated by Di 
Tella University increased 1.0 percent mom to 111.54 
points, the index's first increase in five months and 
bringing the index almost back to where it was in 
November.  The increase is mainly due to stronger 
demand for employees in the service sector (up 7 
percent) followed by commercial personnel (up 4 
percent) and technical employees (up 2 percent).  The 
index is up 12 percent y-o-y.  [The index is based on 
comparisons of job vacancy announcements printed in 
the two largest newspapers of the country.] 
 
--------------------------------------------- -------- 
BCRA President sees no risk of an inflation spike and 
praises the BCRA's sterilization policy. 
--------------------------------------------- -------- 
 
¶10.  In his speech at the annual Council of the 
Americas conference on May 3, Central Bank President 
Martin Redrado said that there is no risk of a spike 
in inflation given the solid fiscal and monetary 
policies that anchor prices.  He estimated that 2006 
inflation will be within the 8-11 percent band 
announced by the BCRA in its monetary program.  He 
praised the BCRA's sterilization policy of issuing 
notes ranging from 30-days to 2 years, and of 
encouraging banks to prepay their discount lending to 
the BCRA, which he noted also helps to strengthen 
banks' net worth. 
 
--------------------------------------------- -------- 
Banks pay back ARP 141 million in rediscount loans to 
the BCRA. 
--------------------------------------------- -------- 
 
 
¶11.  On May 3, three banks (Banco Galicia, Banco 
Provincia and Banco Bisel) repaid ARP 141 million in 
discount borrowing to the BCRA.  This prepayment 
repays the BCRA for financial assistance received 
during the 2001 financial crisis.  Following these 
payments, the financial system will have outstanding 
discount borrowing from the BCRA, totaling ARP 6.0 
billion --compared to ARP 21 billion at the beginning 
of the crisis. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities. 
--------------------------------------------- -------- 
 
¶12.  The BCRA received ARP 1.3 billion in bids at its 
May 2 Lebac and Nobac auction, compared to the ARP 629 
million in Lebacs that came due during the week.  The 
yield on the 35-day Lebac decreased slightly from 6.60 
percent to 6.57 percent, while the yield on the 63-day 
Lebac reached 6.85 percent and the yield on the 91-day 
Lebac reached 7.08 percent (the two latter Lebacs were 
not issued last week).  Lebacs for maturities of more 
than one-year were withdrawn due to lack of interest. 
The spread on the one-year Nobac decreased thirty 
basis points from 2.50 percent to 2.20 percent, while 
the spread on the two-year Nobac also dropped thirty 
basis points from 3.70 percent to 3.40 percent.  The 
Badlar rate (the base rate for Nobacs) is currently at 
9.0 percent. 
 
--------------------------------------------- -------- 
Average time deposit increases to 67 days; private 
sector credit maturities increase to 268 days. 
--------------------------------------------- -------- 
 
¶13.  According to BCRA data, the average length of 
time deposits had increased to 67 days in December 
2005, compared to 35 days in June 2003, its lowest 
level following the 2001 financial crisis.  The 
increase in the average life is due to time deposits 
from institutional investors -- mainly pension funds 
(AFJPs) -- and the surge of instruments adjusted by 
CER (CPI-linked index), which by regulation cannot 
have maturities of less than one year.  However, banks 
still face funding problems since time deposits 
maturities are still shorter than the credit 
maturities offered to the private sector.  The average 
maturity of credit to the private sector had increased 
to 268 days in December 2005, compared to 95 days in 
June 2003. 
 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing at 3.06 ARP/USD. 
--------------------------------------------- -------- 
 
¶14.  The peso remained flat versus the USD this week, 
closing at 3.06 ARP/USD.  The BCRA's strong 
intervention in the foreign exchange market this week 
prevented the peso from appreciating due to the large 
dollar sales by exporters from the harvest season. 
The BCRA purchased USD 301 million in the FX market in 
the first four days of the week, with a record high 
purchase of USD 109 million on May 2.  The peso 
exchange rate has depreciated 0.3 percent since the 
beginning of the calendar year. 
 
--------------------------------------------- -------- 
Commentary of the Week: "Dollars from Foreign Trade: 
How Long will the Abundance Last?, by Jorge 
Vaconcelos.  (Note: from an article published on April 
6 in El Cronista Comercial.  End Note.) 
--------------------------------------------- -------- 
 
¶15.  All indications are that during the first 
quarter, aggregate demand will continue driving the 
Argentine economy.  The wage base, driven by 
 
increasing employment and increasing salaries, along 
with the expansion of credit, will provide all the 
fuel needed.  While many observers have noted that 
these trends could push inflation above the official 
estimates -- now at 11 percent for 2006 -- one can 
also outline a "third position," focusing on the 
external sector: that the trade surplus could fall 
unexpectedly rapidly if local supply (which is 
dependent on investment) cannot keep up with the 
increase in demand. 
 
¶16.  Perhaps because the 2005 trade surplus was USD 
11.3 billion, many people believe that the abundance 
of dollars coming into the local market from foreign 
trade is here to stay.   Nevertheless, to consolidate 
this new situation, we will have to deepen the 
"exporter bias" of the economy, given that, as we will 
see, the exchange rate alone will not be sufficient to 
maintain the surplus. 
 
¶17.  At the outset, it is helpful to keep in mind that 
the performance of the Argentine external sector in 
recent years has not been extraordinary: exports have 
followed the worldwide trend, and imports have 
recovered at a good pace after they contracted sharply 
during the 2001-02 crisis. 
 
¶18.  The record exports we experienced in 2005, 
reaching USD 40 billion, occurred in an external 
environment that was particularly favorable to trade. 
From 2000 to 2005, Argentine exports increased 52 
percent.  That sounds impressive at first, but not 
when put in the context of worldwide exports 
increasing 60 percent in the same period.  In fact, 
Argentina's share of world exports decreased slightly 
in the past five years, from 0.41 percent to 0.39 
percent.  Contrast this trajectory with that of 
Brazil, which increased its exports 115 percent in the 
same period, and increased its world market share from 
0.86 percent in 2000 to 1.16 percent in 2005. 
 
¶19.  In addition to looking at this in the context of 
exports, it is useful to disaggregate the trade 
surplus into its principal parts: on the one hand, the 
external balance of the petroleum and fuels sector, 
which totaled USD 5.4 billion in 2005; and on the 
other hand, the trade surplus from manufacturing and 
agriculture, which totaled USD 5.9 billion. 
 
¶20.  Concerning the fuels segment, the current trend 
of a 4 to 5 percent annual decrease in production of 
petroleum indicates a reduction in the trade surplus 
of USD 1 billion per year.  To prevent this reduction 
of the surplus, it would require either that the price 
of a barrel of oil continue rising or that the 
domestic situation changes completely and investment 
in exploration and production doubles.  The latter is 
probable, but we cannot count it until it actually 
starts to happen. 
 
¶21.  In regard to the trade balance for the non- 
petroleum segment, we had a 2005 surplus of USD 5.9 
billion.  An important amount, but lessened by two 
factors: (1) the trend, and (2) its significance in 
comparison to manufacturing and agricultural 
activities. 
 
¶22.  The trend of the trade surplus from the non- 
petroleum sector:  In the first two months of 2006, 
the quantities exported from the non-petroleum sector 
increased 7 percent.  Price increases added another 6 
percent, for a total increase of 13 percent.  Looking 
only at quantities and extrapolating from the first 
two months to the rest of the year, non-petroleum 
exports should reach USD 35.3 billion, and due to 
price factors perhaps they will increase an additional 
USD 1 billion.  What is happening with imports at the 
same time?  In the first two months, purchases from 
abroad (excluding fuels) increased nearly 24 percent, 
 
meaning that if this trend continues until the end of 
2006, imports will reach USD 33.7 billion.  The non- 
petroleum trade surplus would then total just USD 2.5 
billion, after reaching USD 5.9 billion in 2005.  But 
non-petroleum export prices threaten to stall in the 
latest data and, even more importantly, imports could 
surge even more, driven by domestic demand. 
 
¶23.  Foreign trade versus the value added by 
manufacturing and agriculture: non-petroleum exports, 
which last year totaled USD 33 billion, represent 60 
percent of the valued added by industry and 
agriculture, a number that is necessarily limited in a 
relatively small country such as Argentina. 
Furthermore, this percentage has remained the same for 
the past four years.  On the other hand, non-petroleum 
imports represented 50 percent of the value added by 
industry and agriculture.  What is notable is that, 
despite the current exchange rate, the share of 
imports is 5 percent above the share of imports in 
¶1998.  This data could be indicating a tendency for 
manufacturing to specialize, but it also indicates 
that local supply cannot keep up with the growth in 
demand, and that imported products are filling the gap 
(despite the 3-to-1 exchange rate).  (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