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RR RUEHWEB

DE RUEHBU #1279/01 1581314
ZNR UUUUU ZZH
R 071314Z JUN 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4803
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2194
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001279 
 
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 two-week period ending June 2, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- Technical agreement reached on price of Bolivian gas 
exports to Argentina. 
- GOA eases meat export ban. 
- IMF mission in Argentina for Article IV review. 
- April trade surplus of USD 1.3 billion -- above 
expectations. 
- President Kirchner announces that unemployment 
decreased to 10.8 percent in April. 
- Argentine provinces at risk of running fiscal 
deficit. 
- Natural gas supply to industrial customers cut due 
to colder weather. 
- Commentary of the Week:  "The Need for Anti-Cyclical 
Policies" 
 
--------------------------------------------- -------- 
Technical agreement on price of Bolivian gas imports 
to Argentina. 
--------------------------------------------- -------- 
 
¶1.  After numerous delays, the GOA and GOB technical 
delegations reached a preliminary agreement on a gas 
price range of USD 4.5-5.5 per million cubic meters 
imported to Argentina.  The presidents of both 
countries are scheduled to meet the second week of 
June to agree on the final price, which will be 
adjustable according to the prices of gas substitutes. 
Still, many final details of the agreement need to be 
determined, such as the "the basic price" used for 
making price adjustments.  [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 between 
USD 2.00 and USD 8.00 per million cubic meters.] 
 
--------------------------------------------- -------- 
GOA eases beef export ban. 
--------------------------------------------- -------- 
 
¶2.  On May 29, the GOA issued a resolution (N 397) 
allowing beef exporters to export 40 percent of the 
total exports volume between June and November of 
2005, which represents 14,000 tons.  The GOA measure 
eases the complete ban on beef export ban for six 
months that was implemented last March and signals 
that the GOA will attempt to lift the export ban by 
gradually increasing the quantity allowed to be 
exported.  The quota will be distributed between 80 
wholesalers in proportion to their sales during the 
mentioned period and is estimated to generate exports 
revenues of USD 260 million, according to private 
consultants. 
 
--------------------------------------------- -------- 
IMF mission in Argentina for Article IV review. 
--------------------------------------------- -------- 
 
¶3.  On May 29, an IMF mission arrived to Buenos Aires 
for the Article IV review of Argentina.  The mission 
will mainly review the country's economic, fiscal and 
financial policy, as well as inflation and state 
control over the economy.  This is the first mission 
to visit Buenos Aires since the GOA paid its entire 
debt to the IMF in January.  The IMF mission also met 
with congressmen to express its concerns over money 
laundering and terrorism finance, and presented a 
draft of a terrorism finance bill. 
 
--------------------------------------------- -------- 
April trade surplus of USD 1.3 billion -- above 
expectations. 
--------------------------------------------- -------- 
 
¶4.  The April trade surplus reached USD 1.3 billion, 
above market expectations of USD 1 billion. Growth of 
 
both exports and imports decelerated.  Exports 
increased 8 percent y-o-y to USD 3.8 billion, 
following 16 percent y-o-y growth in March, with 
increases in both price (+4 percent) and quantity (+4 
percent).  The stronger-than-expected result came in 
spite of the GOA meat export ban -- which is estimated 
to have reduced exports by USD 70 million, according 
to private consultants -- and smaller corn and wheat 
crops.  Exports were driven by an increase in fuel and 
energy (+9 percent y-o-y), agro-industrial products 
(+8 percent y-o-y), industrial goods (+11 percent y-o- 
y) and primary goods (+3 percent y-o-y).  Imports 
increased 7 percent y-o-y to USD 2.5 billion, 
decelerating after March's 24 percent y-o-y increase, 
with increases in both quantity (+5 percent) and price 
(+2 percent).  Imports were driven by increases in 
accessories for capital goods (+8 percent), passenger 
vehicles (+47 percent), consumer goods (+22 percent) 
and capital goods (+24 percent), and decreases in fuel 
and oil (-28 percent) and in intermediate goods (-5 
percent).  According to the BCRA consensus survey, the 
trade surplus is expected to narrow to USD 8.9 billion 
in 2006 compared to USD 11.3 billion in 2005. 
 
--------------------------------------------- -------- 
President Kirchner announces that unemployment 
 
decreased to 10.8 percent in April. 
--------------------------------------------- -------- 
 
¶5.  On May 31, President Kirchner preliminary 
announced that the unemployment rate decreased to 10.8 
percent in April -- compared to 11.4 percent in the 
first quarter of 2006-- but still higher than the 10.1 
percent reported in the fourth quarter of 2005.  These 
unemployment figures exclude participants in the 
Head-of-Household income supplement plan.  Their 
inclusion would increase the unemployment rate by at 
least 2 percentage points.  The BCRA consensus survey 
forecasts that unemployment will fall to 9.2 percent 
at the end of 2006.  Unemployment peaked at 24 percent 
in May 2003. 
 
--------------------------------------------- -------- 
BCRA to measure core inflation. 
--------------------------------------------- -------- 
 
¶6.  In a press release dated May 22, the BCRA 
announced that it is developing a new index to measure 
core inflation to identify general and persistent 
price changes but exclude price increases of those 
goods that have a volatile price trend.   The BCRA 
inflation index will be used for internally to manage 
monetary policy and will not replace the Indec -- 
National Bureau of Statistics-- CPI index. 
 
--------------------------------------------- -------- 
AySA to announce investments for ARP 9 billion for the 
next five years. 
--------------------------------------------- -------- 
 
¶7.  AySA (Agua y Saneamientos Argentina S.A.) will 
present to the GOA a ARP 9 billion five-year 
investment program for potable water and sewerage 
works in Buenos Aires province and the city of Buenos 
Aires.  Financing sources for this investment are not 
yet defined, but according to an AySA representative, 
alternative financing sources include: the GOA, the 
Buenos Aires provincial government and credits from 
IFIs.  AySA's own capital contribution will be ARP 150 
million. 
 
--------------------------------------------- -------- 
GOA reportedly will delay new bond issuance. 
--------------------------------------------- -------- 
 
¶8.  On May 31, Cronista Comercial reported that the 
GOA will delay the issuance of USD 500 million of the 
Bonar V bond due to recent international financial 
market instability, particularly in emerging markets. 
 
The GOA still needs USD 300-500 million to close this 
year's financial program.  However, the GOA may chose 
to close its financing gap through bond sales to the 
Government of Venezuela (GOV) or the GOA's fiscal 
surplus if international capital markets remains 
unstable.  Although 2006 financial schedule is still 
not closed, the GOA wants to start its 2007 financing 
program soon, since 2007 is an election year. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities maintaining interest 
rates almost unchanged. 
--------------------------------------------- -------- 
 
¶9.  The BCRA received ARP 984 million in bids at its 
May 30 Lebac and Nobac auction, compared to the ARP 
559 million in Lebacs that came due during the week. 
It accepted Lebac bids totaled ARP 401 million 
representing 60 percent of the total, with Nobac bids 
accepted for the remaining 40 percent.  Short-term 
Lebacs were withdrawn since the BCRA was not willing 
to accept the higher interest rates demanded.  The 
yield on the 175-day Lebac increased 11 basis points 
from 8.25 percent to 8.36 percent, while the yield on 
the 266-day Lebac decreased slightly from 10.40 
percent to 10.38 percent.  The yield on the longest 
term Lebac, the 364-day Lebac, was 11.90 percent. 
Lebacs for maturities of more than 364 days were 
withdrawn due to lack of interest.  The spread on the 
one-year Nobac decreased from 2.12 percent to 2.10 
percent and for the two-year Nobac from 3.37 percent 
to 3.35 percent.  The Badlar rate (the base rate for 
Nobacs) is currently at 8.9 percent. 
 
--------------------------------------------- -------- 
Moody's raises its ratings on domestic banks. 
--------------------------------------------- -------- 
 
¶10.  On May 31, Moody's rating agency raised its 
rating on many domestic banks including Macro Bansud, 
Patagonia, Suquia, Ciudad de Buenos Aires, Itau, Rio, 
Frances, Credicoop and Banco de Valores.  The upgrade 
is based on banks' increased incomes, improved quality 
of banks' assets and decreased exposure to the public 
sector. 
 
--------------------------------------------- -------- 
Private sector financing increased to 27 percent of 
GDP in 2005. 
--------------------------------------------- -------- 
 
¶11.  Private sector financing increased from ARP 64 
billion (17 percent of GDP) in 2003 to ARP 146 billion 
(27 percent of GDP) in 2005.  [Financing to the 
private sector reached a peak of 52 percent of GDP in 
1999.]  Bank loans represented 87 percent (of total 
financing) in 2005 compared to 94 percent in 2003. 
Other forms of financing including leasing, fiduciary 
trusts and ADRs increased their participation to the 
remaining 13 percent in 2005.  Private sector 
financing in pesos reached 87 percent in 2005 -- 
compared to 13 percent in 2001.  In tandem, USD 
financing participation decreased from 43 percent of 
the total in 2001 to13 percent in 2005.  The shift in 
currency is mainly explained by GOA pesification in 
2002 and expectations about the evolution of the 
exchange rate, as well as by regulations discouraging 
financing in foreign currencies. 
 
--------------------------------------------- -------- 
Quasi-Par bond to start trading at the stock exchange. 
--------------------------------------------- -------- 
 
¶12.  The Quasi-Par bond -- one of the bonds issued 
during the GOA debt restructuring-- will start trading 
at the stock exchange June 2 (one year after its 
issuance, as established in the debt prospectus). 
[The Quasi-Par is a 42-year bond adjusted by CER (CPI- 
linked index), carrying a coupon of 3.31 percent that 
 
is capitalized until 2013.]  Trading of this bond is 
expected to be reduced since AFJPs (private pension 
funds) hold 90 percent of the issue amount of ARP 24.3 
billion, and they are likely to hold onto the Quasi- 
Pars, as they match their obligation flows. 
Furthermore, AFJPs have Quasi-Par bonds valued at an 
average of ARP 93 -- higher than the expected market 
price of ARP 56-63 -- which would cause funds to 
recognize a loss if they sell them at market prices. 
The expected market price of ARP 56-63 implies a yield 
of 6.5 percent and 7 percent plus CER. 
 
--------------------------------------------- -------- 
Employment index increased 0.6 percent m-o-m in April 
- according to Ministry of Labor survey. 
--------------------------------------------- -------- 
 
¶13.  The Ministry of Labor announced that its 
employment index increased 0.6 percent m-o-m in March. 
The construction sector had the highest job creation 
in March (up 3.1 percent m-o-m), followed by trade and 
services (up 0.6 percent m-o-m), while job creation in 
the manufacturing remained stable.  The index 
increased 8.6 percent y-o-y.  (The index is based on 
surveys from the cities of Buenos Aires, Mendoza, 
Rosario, Cordoba and Tucuman). 
 
--------------------------------------------- -------- 
The World Bank will finance a program to end the Head- 
of-Households Plans. 
--------------------------------------------- -------- 
 
¶14.  The World Bank will finance a USD 3.3 billion 
program designed to gradually end the Head-of- 
Households income supplement plans.  1.5 million 
people now receive benefits under these plans.  The 
program is expected to reduce that to less than a 
million over three years.  The World Bank believes 
that these plans were helpful during the crisis, but 
that they should not be maintained on a permanent 
basis. 
 
--------------------------------------------- -------- 
Argentine provinces at risk of running fiscal deficit. 
--------------------------------------------- -------- 
 
¶15.  The Minister of Economy of Buenos Aires province, 
Gerardo Otero, admitted that the province's fiscal 
balance may turn negative in coming months and 
complained about the disequilibria between GOA 
resources and provincial expenditures.  Private 
consultants estimated that all provinces combined 
primary fiscal surplus may drop 41 percent to ARP 2.6 
million in 2006 -- compared to ARP 4.4 billion in 
¶2005.  Provinces are also seeking to restructure their 
debt, which is owed mainly to the GOA.  [Total 
provincial debt stock currently stands at ARP 60 
billion.] 
 
--------------------------------------------- -------- 
Natural gas distributors cut gas supplies to 
industrial customers due to colder weather. 
--------------------------------------------- -------- 
 
¶16.  Natural gas distributors, Metrogas and Gas 
Natural Ban -- two of the main providers of natural 
gas in the city of Buenos Aires -- started cutting 
compressed natural gas supplies to filling stations, 
industrial clients and power generators (all of which 
had interruptible contracts) this week due to higher 
demand during the colder winter season.  Residential 
users are shielded from restrictions.  Gas 
restrictions and shortages to customers started in 
2004, and since then compressed gas stations and 
industries have been increasingly forced to sign 
interruptible contracts. 
 
--------------------------------------------- -------- 
May Government Confidence Index down 2 percent m-o-m - 
 
 
- second consecutive decrease. 
--------------------------------------------- -------- 
 
¶17.  The Government Confidence Index decreased 2 
percent m-o-m in May to 2.50 points, 0.10 below the 
average during the Kirchner administration, but still 
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, remaining the 
same as in April.  Public opinion of the GOA's general 
performance also remains flat m-o-m, honesty of GOA 
officials and efficiency of public spending decreased 
10 percent and 3 percent m-o-m, respectively.  The 
index rose 5 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's 
general performance, efficiency of pubic spending, 
honesty of GOA officials and the government's ability 
to solve problems.] 
 
--------------------------------------------- -------- 
Tourism increased 63 percent y-o-y in the first quater 
of 2006. 
--------------------------------------------- -------- 
 
¶18.  The National Bureau of Statistics (INDEC) 
announced that net tourism (incoming minus outgoing 
tourists) increased 63 percent y-o-y to 265,000 in the 
first quarter of 2006, as a result of the number of 
incoming tourists increasing to 560,000 (up 22 percent 
q-o-q) while the number of outgoing tourists remaining 
nearly unchanged at 295,000.  The increase in incoming 
tourism is mainly explained by a 38 percent increase 
in individuals coming to spend their holidays (68 
percent of the total).  Preferred destinations include 
the city of Buenos Aires, the Atlantic cost and 
Cordoba Province, chosen by 42 percent, 8 percent and 
6 percent of tourists, respectively.  Visiting 
tourists were mainly from the European Union (32 
percent), followed by U.S. and Canada (19 percent) and 
the rest of Latin America (14 percent). 
 
--------------------------------------------- -------- 
Construction sector incentives signal continuous 
growth in the sector. 
--------------------------------------------- -------- 
 
¶19.  The Q ratio -- measuring the average price of new 
properties over the construction cost -- calculated by 
UADE (Universidad Argentina de la Empresa) increased 
0.4 points q-o-q to 2.9 points in the first quarter of 
¶2006.  This means that the average value of the new 
properties is nearly three times the cost of 
construction, creating large incentives to invest in 
the construction sector.  Buildings construction 
increased 13 percent q-o-q and square meters permits 
(for new construction) increased 75 percent q-o-q in 
Q1 2006.  The construction sector index has grown for 
thirteen consecutives quarters since the beginning of 
¶2003. 
 
--------------------------------------------- -------- 
Banks have excess liquidity to lend. 
--------------------------------------------- -------- 
 
¶20.  Banks have nearly ARP 9 billion available to 
lend, according to private consultants.  However, 
credit demand cannot be fulfilled due to customers' 
failure to meet credit rating requirements.  The 
financial system liquidity ratio -- cash in banks, 
banks' deposits at the BCRA and engaged in repo 
transactions with the BCRA -- is 22.5 percent compared 
to 21 percent one month ago, and it has increased 3.4 
percent so far in 2006. 
 
--------------------------------------------- -------- 
The peso depreciated 1 percent against the USD in the 
 
last two weeks, closing at 3.10 ARP/USD. 
--------------------------------------------- -------- 
 
¶21.  The peso depreciated 1 percent versus the USD 
during the last two weeks, closing at 3.10 ARP/USD. 
The peso's depreciation is attributed to higher 
private investors' demand for dollars as a result of 
the contagion effect from international markets.  The 
BCRA even sold dollars in the FX market to avoid a 
larger depreciation of the peso.  However, the BCRA 
intervention during the last two weeks reached net 
purchases of USD 77 million.  The peso exchange rate 
has depreciated 1.6 percent since the beginning of the 
calendar year. 
 
--------------------------------------------- -------- 
Commentary of the Week: "The Need for Anti-Cyclical 
Policies", by Martn Redrado,  President of the 
Central Bank of Argentina.  (Note: Translated from an 
article published May 11 in La Nacin.  End Note.) 
--------------------------------------------- -------- 
 
¶22.  The financial world - as much in the academic 
sphere as in the professional - dedicates much of its 
time to trying to identify the origin of the next 
crisis. The global economy shows a growth that is more 
balanced geographically, with inflationary pressures 
that appear to be contained in the short term.  In 
this framework, Latin America - which today is more 
sensitive to China, India, or Russia's demand for raw 
materials than to changes in international interest 
rates - finds itself in a solid financial position 
with sustained growth and twin surpluses (fiscal and 
trade) strengthened by consistent and prudent monetary 
policies.  In the midst of this opportunity, we don't 
appear on the radar as an epicenter of an eventual 
global collapse. 
 
¶23.  Even though the focus of uncertainty is 
constrained today, demand pressures on available 
capacity have already begun to appear. The greatest 
risks are concentrated in structural vulnerabilities, 
such as the growing global inequalities between the 
United States, the Asian-Pacific region and 
continental Europe. In this respect, the likelihood 
that less favorable conditions will materialize 
requires that countries like Argentina implement anti- 
cyclical macroeconomic policies -- including the 
accumuation of international reserves, fiscal 
savings, and a regulatory environment that permits the 
establishment of solid financial systems -- that are 
capable of lessening the potential impacts on internal 
variables and of preserving sustainable growth. 
 
¶24.  The Central Bank provides real anti-crisis 
security through its policy of increasing reserves, 
which acts as a guarantee in the face of our recurrent 
vulnerability to external events.  More than ever, we 
live in a world that is experimenting with a change of 
focus in international financial rules, one in which 
the old paradigm is being strongly questioned.  Given 
the absence of a lender of last resort and the still 
incomplete redefining of the global financial 
architecture, international reserves should be thought 
of as a real guarantee against these risks.  In other 
words: in the modern world, there is no good 
substitute for a healthy policy of internal liquidity, 
and self-insurance is the only way to achieve this. 
One asks, then, does this anti-cyclical policy have an 
expansionary impact on monetary stability?  Simply 
put, no.  This impact does not occur because the 
"other face" of reserve accumulation is the absorption 
of the money supply that exceeds the demand for money 
in the economy.  This sterilization program consists 
of three elements: a financial system that pays off 
its debts early, a public sector that saves, and a 
Central Bank with a strong balance sheet.  These 
factors reflect the depth and, above all, the unusual 
quality of the sterilization strategy: there is no 
 
expansion of internal credit through monetization of 
the fiscal deficit or assistance to the financial 
system as in past decades. 
 
¶25.  We implement a strong restrictive policy of 
monetary absorption through a battery of instruments 
such as the placement of bonds in the market, the 
cancellation of discount window lending, repurchase 
agreement operations and open market operations with a 
portfolio of public securities. In effect, the 
anticipated repayment of discount window lending that 
was granted during the crisis was one of the principal 
factors in the contraction of the money supply during 
the past twelve months.  Since the beginning of last 
year, we have created new instruments for the pre- 
payment of this liquidity assistance.  These healthy 
and unique operations represent repayments on the 
order of ARP 9.5 billion in 2005 and ARP 5.7 billion 
so far in 2006, reflecting the improvement in the 
balance sheets of financial entities and the monetary 
authority's concern for banks' balance sheets 
 
¶26.  At the same time, we have eliminated the 
possibility of excessive monetary supply through the 
net issuance of market securities that established 
reference interest rates, and the issuance of Notes 
and Bills at fixed and variable rates, that have 
produced a lengthening of the maturity of the Central 
Bank liabilities.  This policy of absorption has been 
possible thanks to a renovated financial system and 
the strength of the Central Bank's balance sheet, 
which show earnings greater than ARP 2 billion. 
 
¶27.  This policy of sterilization has permitted us to 
keep the money supply under strict control, which has 
been reflected in the fulfillment, quarter after 
quarter, of our self-imposed targets for the growth of 
monetary aggregates.  In our Monetary Program - 
presented every year to the Senate - we make 
projections based on the different factors that 
determine money supply.  Based on the interaction 
between supply and demand for money, we project the 
need for sterilization, as required for the expected 
development of the main instruments of monetary 
regulation. 
 
¶28.  Further, the Central Bank is building a monetary- 
financial system that, for the first time in decades, 
will be independent of the financial needs of the 
public sector.  To do this, we have set guidelines 
that determine the specific limits for the exposure of 
the financial system to the national, provincial and 
municipal public sectors.  First, maximum limits have 
been established depending on the capital of each 
financial entity and on the type of debt (e.g. from 
national, provincial or municipal government) held in 
the portfolio.  Second, we have set a total maximum 
limit of 40 percent of banks' total assets, which went 
into effect at the beginning of this year.  In this 
way, we are reversing at an accelerated pace the 
crowding out of private credit in favor of public 
sector financing that occurred in past decades.  In 
the last twelve months, public debt's share in banks' 
portfolios decreased ten percentage points, reaching a 
level of 28 percent. Credits to businesses and 
families, on the other hand, grew nearly 38 percent 
during the same period.  This trend has been 
significant in terms of giving additional degrees of 
freedom for monetary policy and the financial system. 
This factor is crucial, in Argentina as well as in 
Latin America, where excessive financing of the 
government historically has been ignored when 
evaluating the independence of central banks. 
 
¶29.  The challenge lies, then, in consolidating the 
continuation of these policies, given that their depth 
and quality is as relevant as their stability over 
time.  The challenges that we face are not sequential 
but simultaneous: to grow and create lasting policies 
 
that guarantee sustained economic growth with social 
inclusion in a framework of permanent monetary and 
financial stability.  (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