VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1088/01 1321937
ZNR UUUUU ZZH
R 121937Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4515
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2171
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001088 
 
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 12, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- GOA raises the minimum pension by 21 percent and all 
other pensions by 11 percent. 
- GOA to meet next week with Bolivia to agree on price 
of gas exports to Argentina. 
- GOA reportedly will repurchase the GDP-linked 
warrants from the debt restructuring. 
- GOA unblocks beef shipments exempt from the export 
ban and presents a ARP 860 million cattle sector 
development program. 
- Commentary of the Week: "Sanitary Conditions and 
Poverty in the Beef Sector" 
 
--------------------------------------------- -------- 
GOA raises the minimum pension by 21 percent and all 
other pensions by 11 percent. 
--------------------------------------------- -------- 
 
¶1.  In a press conference on May 9, Minister of Labor 
Carlos Tomada and Minister of Economy Felisa Miceli 
announced that the GOA will increase the minimum 
pension from ARP 390 per month to ARP 470, a 21 
percent increase.  This will be the Kirchner 
Administration's eighth increase in the minimum 
pension, an accumulated increase of 213 percent.  The 
GOA also announced an 11 percent increase for all 
other pensions, the first in fourteen years.  These 
two measures will benefit 3.3 million pensioners and 
will have a fiscal cost of ARP 2.1 billion in 2006 
(the increases will be effective in June) and of ARP 
3.5 billion in 2007.  The increase in pension will be 
financed by Anses -- National Administration of Social 
Security --using its revenues resulting from the 
increase in formal employment. 
 
--------------------------------------------- -------- 
GOA to meet with Bolivia next week to agree on the 
price of gas exports to Argentina. 
--------------------------------------------- -------- 
 
¶2.  GOA Ministry of Planning Julio De Vido is 
scheduled to meet on May 16 with Jorge Alvarado, the 
President of YPFB, the Bolivian state oil company, to 
negotiate the price at which Bolivia will export gas 
to Argentina.  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.  According to reports, the 
Bolivian government wants a 65 percent increase to 
more than USD 5 per million cubic meters the price of 
gas. 
 
--------------------------------------------- -------- 
GOA reportedly will repurchase GDP-linked warrants 
from the debt restructuring. 
--------------------------------------------- -------- 
 
¶3.  On May 8, local media reported that the GOA is 
considering repurchasing the GDP-linked warrants that 
were attached to GOA restructured debt as an incentive 
to participate in the 2004 restructuring.  The GOA 
repurchases are expected to take place in the second 
half of the year and aim to reduce the cost the GOA 
must pay as a result of the continued strong GDP 
growth.  According to the report, the GOA will have to 
pay USD 390 million in December 2006 to the holders of 
the warrants because Argentine GDP growth is above the 
GDP baseline set in the warrants.  The GOA issued 
62,000 warrants as a result of the exchange and the 
total stock of warrants (including ARP, EUR and USD 
instruments) is currently valued at USD 5.5 billion at 
current market prices.  According to financial 
analysts, the expected value of the warrants ranges 
from as low as USD 10 per warrant (the current market 
price) to as high as USD 20 per warrant, depending on 
 
the assumptions for future GDP growth rates. 
 
--------------------------------------------- -------- 
GOA counter-cyclical fund may have accumulated ARP 2.6 
billion in the first four months of 2006. 
--------------------------------------------- -------- 
 
¶4.  On May 8, Cronista Comercial reported that 
Minister of Economy Miceli will soon announce that the 
GOA's counter-cyclical fiscal fund reached ARP 2.6 
billion in the first four months of the year -- 45 
percent above the budgeted amount.  Former Economy 
Minister Lavagna announced the creation of the counter- 
cyclical fund in late 2005, to be funded by the excess 
of actual tax collections over the budgeted amount, 
but the GOA has never provided any details on its 
implementation.  Some government officials oppose any 
public announcement on the counter-cyclical fund due 
to concerns that it may generate claims from different 
sectors of the economy.  Others advocate transparency 
about the fund as a way to help the GOA in its crusade 
against inflation.  According to analysts, the counter- 
cyclical fund may reach ARP 5.9-6.7 billion (or 1 
percent of GDP) in 2006. 
 
--------------------------------------------- -------- 
GOA unblocks beef shipments exempt from the export ban 
and presents a ARP 860 million cattle sector 
development plan to promote the sector through 2010. 
--------------------------------------------- -------- 
 
¶5.  On May 9, the GOA unblocked beef shipments that 
had been delayed in port for fifteen days even though 
they were exempt from the GOA's temporary ban on beef 
exports.  Some were containers of beef sold to the 
European Union under the Hilton quota, while others 
held products sold before the ban went into effect. 
Also, Minister of Economy Miceli presented a cattle 
sector development program for ARP 860 million over 
the next four years.  The program aims to increase the 
supply of bovine cattle by 1.4 million animals per 
year to help stabilize beef prices 
 
 
¶6.  Meanwhile on May 8, Swift -- the largest beef 
processing plant-- suspended 600 employees at its 
Rosario plant due to the beef export ban.  This 
suspension comes on top of Swift's dismissal of 736 
employees two weeks ago.  According to beef sector 
unions, 8,400 employees already have been suspended 
since the beginning of the GOA export ban. 
 
--------------------------------------------- -------- 
Private utilities companies post losses in the first 
quarter of 2006. 
--------------------------------------------- -------- 
 
¶7.  On May 10, many private utility companies 
announced losses for the first quarter, mainly due to 
their difficulties in paying their dollar-denominated 
debt while their tariff income is in pesos. 
Electrical generator Central Puerto posted losses of 
ARP 107 million, compared to an ARP 11 million profit 
during the same period last year.  Gas distributor 
Metrogas reported losses of ARP 25 million, compared 
to a ARP 29 million profit in the first quarter of 
last year.  Electrical distributor Edesur reported a 
ARP 9 million profit in the first quarter that assumes 
it will receive a retroactive tariff increase that is 
awaiting President Kirchner's approval.  Without 
taking into account this expected tariff increase, 
Edesur would have posted a ARP 19 million loss. 
 
--------------------------------------------- -------- 
Repsol-YPF announces plan to sell 15-20 percent of the 
stock of its Argentine subsidiary. 
--------------------------------------------- -------- 
 
¶8.  On May 11, the President of YPF-Repsol, Antonio 
 
Brufau, announced that the company plans to sell off 
15-20 percent of the stock of YPF (its Argentine 
subsidiary) on the stock exchange.  YPF currently is 
valued at USD 20 billion, so 20 percent of the stock 
would provide USD 5 billion to the company without 
giving up its control over YPF.  Local media also 
reported rumors that President Kirchner wants a 
domestic group to own 15 percent of YPF.  However, a 
Ministry of Planning spokesman denied that that the 
GOA is promoting the purchase by local businessmen. 
 
--------------------------------------------- -------- 
GOA requires retailers to clearly post prices of food 
in attempt to help prices under control. 
--------------------------------------------- -------- 
 
¶9.  On May 8, the GOA published on the Official 
Gazette a resolution requiring retailers to clearly 
post the prices of beef, bread, fish and seafood with 
signs specifying the price of the products by variety 
or by cut (in the case of meat).  The resolution also 
sets penalties for retailers who do not comply with 
the labeling requirement.  According to the Secretary 
for Consumer Protection, Guillermo Moreno, the measure 
is intended to prevent deception of consumers and help 
keep prices under control. 
 
--------------------------------------------- -------- 
BCRA earns USD 500 million on its gold reserves. 
--------------------------------------------- -------- 
 
¶10.  The recent increase in the price of gold has 
translated into a USD 500 million gain for the 
Argentine Central Bank (BCRA).  The BCRA invested USD 
700 million (5.3 percent of its reserves) in gold two 
years ago.  Gold prices have increased 44 percent so 
far in 2006, hitting a 25-year high of USD 722 per 
ounce on May 11. 
 
¶11.  Prices of other metals such as copper, iron, 
nickel and zinc have also jumped this year.  According 
to the Economia & Regiones think tank, the increase in 
metal prices may negatively impact the Argentine 
construction sector due to the increase in 
construction costs. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities and issues one-year 
Lebacs. 
--------------------------------------------- -------- 
 
¶12.  The BCRA received ARP 1.5 billion in bids at its 
May 9 Lebac and Nobac auction, compared to the ARP 1.0 
billion in Lebacs that came due during the week. 
Lebac accepted bids totaled ARP 857 million 
representing 82 percent of the total, while Nobacs 
represented the remaining 18 percent.  The yield on 
the 28-day Lebac decreased 7 basis points from 6.57 
percent to 6.50 percent, while the yield on the 56-day 
Lebac decreased slightly from 6.85 percent to 6.80 
percent and the yield on the 84-day Lebac decreased 
from 7.08 percent to 7 percent.  For the first time 
this year, the BCRA was able to issue ARP 113 million 
in 1-year Lebac in this auction, at a rate of 11.45 
percent.  Lebacs for maturities of more than one-year 
were withdrawn due to lack of interest.  The spread on 
the one-year Nobac decreased from 2.20 percent to 2.16 
percent, while the spread on the two-year Nobac also 
from 3.45 percent to 3.39 percent.  The Badlar rate 
(the base rate for Nobacs) is currently at 9.1 
percent. 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing at 3.06 ARP/USD. 
--------------------------------------------- -------- 
 
¶13.  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 despite large 
dollar sales by agricultural exporters as a result of 
the harvest.  The BCRA purchased USD 423 million in 
the FX market in the first four days of the week, a 
daily average of USD 103 million so far this month, 
compared to a daily average of USD 62 million during 
the same period last year.  The peso exchange rate has 
depreciated 0.3 percent since the beginning of the 
calendar year.  The BCRA's reserves now stand at USD 
23.5 billion, and have increased USD 4.5 billion, or 
27%, since the GOA prepaid all of its IMF debt on 
January 2. 
 
 
--------------------------------------------- -------- 
Commentary of the Week: "Sanitary Conditions and 
Poverty in the Beef Sector", by Julio Nogues.  (Note: 
Translated and edited from an article published in 
Cronista Comercial on May 8.  End Note.) 
--------------------------------------------- -------- 
 
¶14.  It is possible, but not certain, that a reduction 
in the price of beef will reduce poverty. ... For 
example, ... in the case of a 10 percent price cut, 
the number of people that effectively will rise out of 
poverty due to the reduction in the cost of the Basic 
Basket of Goods is only a fraction (approximately 15 
percent) of the number of people who are employed in 
the beef production chain and who potentially will see 
their incomes reduced as a consequence of this policy. 
 
¶15.  The beef production chain employs people with 
relatively low levels of qualifications, both in the 
production side and in the processing.  Thus, a 
reduction of their incomes, whether it is in the form 
of layoffs, as we are already seeing, or a reduction 
in real salaries due to the drop in the sector's 
profitability, could create as much or more poverty 
than the number of people who effectively escape that 
condition as a consequence of the price reduction. 
 
¶16.  There is significant uncertainty about the impact 
of the GOA's beef policy, so it is also possible that 
poverty would be reduced by letting prices adjust to 
supply and demand.  This could occur as a result of 
greater investment and production in the beef 
production chain that, as I noted already, is labor 
intensive and employs mainly people with low 
qualifications.  On whose side has GOA economic policy 
been, historically?  Without any doubt, on average 
over the last 50 years, Argentine economic policies 
have been intensely anti-beef producers.  From the 
1960's to the end of the 1980's, Argentine trade 
policies imposed prices on beef producers that were 
between 30 percent and 50 percent below international 
prices.  This was the period with the greatest state 
intervention. 
 
¶17.  Trade policies have not been the only source of 
discrimination.  It also is relevant to recall that as 
a result of the historic failure to eradicate hoof-and- 
mouth disease, Argentina cannot export to markets such 
as Japan and South Korea, which in value terms 
represent more than 60 percent of world imports of 
beef.  These countries only import from countries that 
are free of hoof-and-mouth disease without 
vaccination.  As a consequence, according to FAO data, 
in 2004, our unit export price was USD 1,738 per ton 
while that of Australia, which is a country free of 
hoof-and-mouth without vaccination, was USD 2,733 per 
ton, or 57 percent higher. 
 
¶18.  Things have been getting worse for the beef 
sector since 2000.  As is well known, that was the 
year in which Argentina suffered an outbreak of hoof- 
and-mouth and tried to hide it from the international 
community.  Markets were closed as a result of this 
outbreak, and Argentina lost international credibility 
 
as a consequence of the attempt to conceal it.  How 
relevant is the concept of credibility?  Let us see. 
 
¶19.  In addition to Argentina, the 2000 outbreak 
affected Brazil and Uruguay.  However, the subsequent 
treatment of the affected countries by the 
international community was not equal  For example, 
while in 2003 the United States and Canada, who are 
important importers of beef, re-opened their markets 
to Uruguayan beef, they have not yet reopened with 
Argentina.  .... Until the hoof-and-mouth outbreak, in 
most years since 1998, importing countries paid more 
per kilo for Argentine beef than for Uruguayan due to 
the international reputation of our beef.  If that is 
so, our reputation was damaged in 2000 and has not yet 
recovered, and the price difference has moved in favor 
of Uruguay.  On average since they reopened their 
markets, importing countries have paid 32 percent more 
for Uruguayan beef. 
 
¶20.  To recap, as a consequence of trade policies and 
its sanitary status, Argentina has the lowest beef 
prices among the efficient producer countries.  It is 
possible that this also has reduced poverty, but it 
also is possible that it has increased it.  The second 
conclusion is that as opposed to trade policies of a 
single company -- which could be changed from one day 
to another -- the loss of a country's credibility has 
long-term, negative economic consequences.  (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