VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1312/01 1631416
ZNR UUUUU ZZH
R 121416Z JUN 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4852
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2202
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001312 
 
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 June 9, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- Bolivian and Argentine presidents to meet next week 
on price of Bolivian gas exports. 
- Argentina and Mexico sign trade agreement. 
- IMF mission in Argentina for Article IV review. 
- GOA renegotiation of Paris Club debt to take place 
after September. 
- CPI rose 0.5 percent m-o-m in May -- below market 
expectations.  PPI rose 0.3 percent m-o-m. 
- Commentary of the Week: "Lavagna, Moreno, and the 
Felisa Code" 
 
--------------------------------------------- -------- 
Bolivian and Argentine presidents to meet next week on 
price of Bolivian gas exports. 
--------------------------------------------- -------- 
 
¶1.  The presidents of Bolivia and Argentina are 
scheduled to meet next week to reach an agreement on 
the price of Bolivian gas exports to Argentina.  No 
specific date was announced, however.  There have been 
technical level negotiations between the two 
governments, but difficulties in reaching an agreement 
have delayed the meeting between the two presidents. 
Earlier this week, local media reported that the GOA 
presented a counteroffer to the GOB to buy Bolivian 
gas at a price of USD 5 per million cubic meters 
against the Bolivian offer of USD 5.50 per million 
cubic meters.  [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.]  Meanwhile, on June 8, 
the GOB warned that it will not be able to fulfill 
external demand for gas if it does not start exploring 
for new reserves. 
 
--------------------------------------------- -------- 
Argentina and Mexico sign trade agreement. 
--------------------------------------------- -------- 
 
¶2.  On June 8, Argentina and Mexico signed an 
investment agreement to strengthen bilateral trade. 
The agreement seeks to double trade between the two 
countries in the next four years by increasing the 
number of goods given preferential tariffs, as well as 
by paving the way for Mexico to join Mercosur. 
Bilateral trade between Mexico and Argentina increased 
17 percent y-o-y to USD 1.9 billion in 2005. 
Argentina's exports to Mexico reached USD 1.1 billion 
in 2005, while Mexico's exports to Argentina make up 
the remaining USD 800 million. 
 
--------------------------------------------Q ------ 
Minister of Economy denies radical labor reforms. 
--------------------------------------------- -------- 
 
¶3.  On June 7, Minister of Economy Felisa Miceli 
denied that labor reforms that would negatively affect 
businesses will be passed, as some businessmen fear. 
She clarified that only partial amendments to the 
Labor Reforms of the 1990's will be implemented.  In 
her statements to the press, Miceli also recognized 
that GOA expenditures will grow only as long as fiscal 
revenues grow, in an attempt to eliminate concerns 
over the reduction of the GOA primary fiscal surplus 
in recent months. 
 
--------------------------------------------- -------- 
IMF mission in Argentina for Article IV review. 
--------------------------------------------- -------- 
 
¶4.  According to local media, the IMF delegation 
visiting Argentina for the Article IV review raised 
three major concerns on the Argentine economic 
performance: inflation and the GOA strategy to deal 
 
with it (through price restraint agreements); the 
investment climate; and renegotiation of privatized 
utility contracts.  The IMF mission praised GDP growth 
and the fall in the unemployment rate.  Meanwhile, 
Minister of Economy Felisa Miceli and BCRA President 
Martin Redrado called for "intellectual honesty" by 
the IMF in recognizing its own mistakes in 
contributing to Argentina's financial collapse in 2001- 
2002 and later failing to correctly diagnose the 
recovery of the economy. 
 
--------------------------------------------- -------- 
GOA renegotiation of Paris Club debt to take place 
after September. 
--------------------------------------------- -------- 
 
¶5.  On June 7, Secretary of Finance Alfredo Mac 
Laughlin announced that Argentina will delay its Paris 
Club debt renegotiations until September -- after the 
Soccer World Cup and the northern hemisphere's summer 
holidays.  He said that the GOA envisions a 
renegotiation in which the GOA recognizes the 
principal and interest arrears (unlike the GOA debt 
restructuring with private creditors who suffered a 
seventy percent net present value reduction). 
According to the GOA, Argentina's Paris Club debt 
totals USD 6 billion, of which 60% is owned to four 
countries: Japan, Germany, Spain and the Netherlands. 
The Secretary also said that the GOA will discuss its 
renegotiation proposal bilaterally with major 
creditors, and then seek to reach a global agreement 
with the Paris Club as a whole. 
 
¶6.  However, in a conversation with the DCM on June 9, 
MacLaughlin said that he was planning to meet with six 
key creditor governments this month.  He also 
clarified that there was nothing being discussed with 
the German government that is different from what 
Argentina will discuss with the other key Paris Club 
creditors. 
 
 
--------------------------------------------- -------- 
GOA financial needs complete for 2006. 
--------------------------------------------- -------- 
 
¶7.  In a press conference on June 7, Secretary of 
Finance Alfredo Mac Laughlin announced that the GOA 
had met its 2006 financial needs with funds from the 
primary fiscal surplus and bond issues during the 
first half of the year.  He recognized that if the GOA 
were to issue the remaining USD 500 million Bonar 
(which the GOA is authorized to issue), it would have 
to accept a yield of more than 9.00 percent -- 
compared to the 8.09 percent achieved in the last GOA 
auction -- due to the recent market instability 
affecting all emerging markets.  However, he did not 
discard the possibility of issuing more Boden 2012 
bonds to Venezuela. 
 
--------------------------------------------- -------- 
The World Bank grants USD 3.3 billion loan to the GOA. 
--------------------------------------------- -------- 
 
¶8.  On June 6, the World Bank (WB) approved a USD 3.3 
billion program to finance investments in Argentina 
for the next three years.  This program which is part 
of the Country Assistance Strategy, which includes 
more than 30 loans for infrastructure, health, 
environmental and education projects.  WB authorities 
stated that loans will only be approved for investment 
purposes.  The first two loans -- already approved -- 
will finance improvement of the water supply and 
prevention of floods.  The WB directors praised 
Argentina's economic recovery, but also asked for a 
better investment environment, a consolidation of the 
fiscal equilibrium, the renegotiation of private 
utility tariffs and a solution to the USD 20 billion 
in debt holdouts (bondholders who didn't participate 
 
in Argentina's debt restructuring). 
 
--------------------------------------------- -------- 
Martin Redrado defends the BCRA's monetary policy. 
--------------------------------------------- -------- 
 
¶9.  On June 5, Central Bank (BCRA) President Martin 
Redrado defended the BCRA's monetary policy and 
assessed it as a success in handling the volatility 
that has affected all international financial markets 
since mid-May.  Redrado explained that the "prudent 
and predictable" BCRA monetary policy of accumulating 
reserves, as well as bank risk management to 
consolidate a strong domestic financial system, 
reduced the negative impact of sudden changes in 
international markets.  According to Redrado, the 
BCRA's reserve accumulation strategy is not adding to 
inflation because the BCRA's peso emissions are being 
sterilized. 
 
--------------------------------------------- -------- 
GOA denies rumors about a ban on corn exports. 
--------------------------------------------- -------- 
 
¶10.  On June 6, Secretary of Agriculture Miguel Campos 
denied that the GOA would implement a ban on corn 
exports.  This statement came in response to rumors 
about limits on corn exports to increase the local 
corn supply in an attempt to maintain domestic prices 
low, and after the GOA tried to lower flour and bread 
prices by "voluntarily" forcing exporters to limit 
wheat exports.  Corn and wheat exports are subject to 
20 percent export taxes.  Argentina is the world's 
second largest corn-exporter and the fifth largest 
wheat-exporter. 
 
--------------------------------------------- -------- 
GOA seeks to create a special prosecutor's office to 
fight against trademark violations. 
--------------------------------------------- -------- 
 
¶11.  The Attorney General's office has proposed a bill 
to create a special prosecutor's office to fight 
against trademark forgery and counterfeiting.  The 
bill seeks to increase fines to discourage forgery, 
which is estimated to generate loss of USD 500 million 
to the owners of trademarks.  Also, Congress is 
considering a bill to give AFIP -- the tax authority - 
- an active role in the criminal process against 
trademark violators. 
 
--------------------------------------------- -------- 
Tax revenues increase 19 percent y-o-y to ARP 14.3 
billion in May, and reach a record high. 
--------------------------------------------- -------- 
 
¶12.  May federal tax revenues increased 19 percent y-o- 
y to ARP 14.3 billion -- slightly below market 
expectations of ARP 14.5 billion -- but still set a 
new record high.  Labor contributions rose 48 percent 
y-o-y due to increases in formal job creation and 
salary increases, while VAT revenues increased 19 
percent y-o-y mainly due to the increase in economic 
activity.  Income tax and export tax revenues 
increased 14 percent y-o-y and 10 percent y-o-y, 
respectively.  In real terms, revenues increased 8 
percent y-o-y.  May tax revenues reached ARP 56.4 
billion in the first five months of the year (a 21 
percent y-o-y increase), reaching 39 percent of the 
BCRA consensus survey forecast of ARP 143.1 billion 
for 2006. 
 
--------------------------------------------- -------- 
CPI rises 0.5 percent m-o-m in May -- below market 
expectations.  PPI rises 0.3 percent m-o-m. 
--------------------------------------------- -------- 
 
¶13.  The Consumer Price Index (CPI) increased 0.5 
percent m-o-m in May, below market expectations of 0.7 
 
 
percent, and following a 1.0 percent m-o-m increase in 
April.  The better-than-expected result is due mainly 
to decreases in food prices, which represent almost 
one-third of the Index.  Last month's increase brought 
inflation to 4.4 percent in the first five months of 
the year, compared to a 5.2 percent increase in the 
same period last year.  CPI core inflation was up 0.7 
percent, while the seasonal component of the index 
decreased 0.6 percent and the regulated component 
increased 0.2 percent.  The categories with the 
highest price increases were housing (+2.2 percent), 
clothing (+2.1 percent) and education (+1.3 percent). 
Meat prices (representing 4.5 percent of the consumer 
basket) decreased 2.4 percent m-o-m due to price 
restraint agreements between the GOA and the meat 
sector and the partial ban on beef exports.  Year-on- 
year, the CPI rose 11.5 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. 
The basic food basket -- used to measure poverty and 
indigence -- decreased 1.5 percent mom in May, the 
largest decrease since May 2003. 
 
¶14.  Producer prices increased 0.3 percent m-o-m in 
May, due to a 1.6 percent decrease in primary goods 
prices and a 0.9 percent rise in manufactured goods 
prices.  The price of electricity remained unchanged, 
while the price of imported goods increased 1.7 
percent.  The PPI index increased 11.4 percent y-o-y. 
 
¶15.  In a press release from June 2, Indec -- the 
National Bureau of Statistics responsible for 
calculating the CPI -- defended itself from criticisms 
from consumer defense associations complaining that 
the CPI does not reflect the inflation suffered by the 
population, saying that the CPI's calculation follows 
specific norms and internationally regulated 
standards. 
 
--------------------------------------------- -------- 
May labor demand index down 5.56 percent m-o-m. 
--------------------------------------------- -------- 
 
¶16.  The May labor demand index calculated by Di Tella 
University decreased 5.56 percent m-o-m to 105.35 
points, the index's fifth fall in six months after a 
1.0 percent increase in April. Labor demand has 
decreased 7.65 percent so far during 2006.  The 
decrease is mainly due to a fall in the demand for 
professionals (-15.39 percent) followed by technical 
employees (-14.98 percent) and commercial personnel (- 
4.69 percent).  The index is up 3.1 percent y-o-y. 
[The index is based on comparisons of job vacancy 
announcements printed in the two largest newspapers of 
the country.] 
 
¶17.  Separately, Indec announced the results of its 
unsatisfied labor demand index which attempts to 
measure the difficulties that companies have finding 
skilled employees. According to the survey, 40 percent 
of companies looked for employees in the first quarter 
of 2006, out of which 12 percent could not fill their 
open positions.  The unmet demand is composed of 39 
percent technical employees, 33 percent professionals 
and 28 percent operational employees. 
 
--------------------------------------------- -------- 
April wage index increased 1.62 percent m-o-m 
--------------------------------------------- -------- 
 
¶18.  The GOA announced that the wage index increased 
1.62 percent m-o-m in April.  This index defines wages 
as a price, without considering hours effectively 
worked or special payments for productivity gains. 
This index surveys the formal and informal private 
sector and the public sector, which increased 1.99 
percent, 2.31 percent and 0.16 percent, respectively. 
 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities and shifts its issuance 
policy to short-term Lebacs. 
--------------------------------------------- -------- 
 
¶19.  The BCRA received ARP 1.6 billion in bids at its 
June 6 Lebac and Nobac auction, compared to the ARP 
841 million in Lebacs that came due during the week. 
It accepted Lebac bids totaling ARP 1.2 billion, 
representing 98 percent of the total, with Nobac bids 
accepted for the remaining 2 percent.  The yield on 
the 91-day Lebac was 7.25 percent, while the yield on 
the 168-day Lebac remained at 8.36 percent and the 
yield on the 259-day Lebac decreased 16 basis points 
from 10.38 percent to 10.22 percent.  The yield on the 
longest term Lebac, the 357-day Lebac, remained 11.90 
percent.  Lebacs with maturities of more than 357 days 
were withdrawn due to lack of interest.  The spread on 
the one-year Nobac decreased from 2.28 percent to 2.13 
percent and from 3.35 percent to 3.10 percent for the 
two-year Nobac.  The Badlar rate (the base rate for 
Nobacs) is currently at 9.1 percent. 
 
¶20.  During May, the BCRA changed its monetary policy, 
shifting from long-term instruments with variable 
rates (Nobacs composed 33 percent of the month's total 
issuance) to shorter-term instruments with a fixed 
rate (Lebacs made up the remaining 67 percent of May's 
total issuance).  The share of new Badlar issuance 
increased from 24 percent in January to as high as 73 
percent in April, and fell again to 33 percent in May. 
Also in May, the BCRA again started issuing 1-year 
Lebacs -- the longest maturity available for these 
instruments. 
 
--------------------------------------------- -------- 
BCRA's financial result reached ARP 2.6 billion in 
¶2005. 
--------------------------------------------- -------- 
 
¶21.  The BCRA's financial result (the difference 
between financial income and outflows) reached ARP 2.6 
billion in 2005, more than double the 2004 result of 
ARP 1.3 billion. The net financial result (which also 
includes operational expenditures and valuation 
differences due to exchange rate changes) stood at ARP 
5.0 billion (up 45 percent y-o-y). 
 
¶22.  According to some private analysts, last year's 
strong balance obviates concerns about a BCRA quasi- 
fiscal deficit for 2006.  Fears of a quasi-fiscal 
deficit arose because of the difference between the 
interest rate earned on reserves (BCRA assets) and the 
interest paid on Lebacs and Nobacs (BCRA liabilities), 
as well as the reduction in the BCRA's discount 
lending stock due to bank prepayments. (Discount 
lending is one of the best performing BCRA assets, as 
it earns 3.5 percent plus CER -- a CPI-linked index.) 
Analysts project an ARP 1.5 billion financial result 
for 2006, a significant drop from 2005 due to the drop 
in income from BCRA discount lending mentioned above, 
as well as from the expected increased interest that 
the BCRA will pay on Lebacs and Nobacs due to higher 
sterilization requirements (assuming that the BCRA 
maintains its current reserve accumulation policy and 
that discount loan prepayments will not be able to 
help the BCRA sterilize its FX intervention as much as 
it did last year. 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing at 3.10 ARP/USD. 
--------------------------------------------- -------- 
 
¶23.  The peso remained flat versus the USD this week, 
closing at 3.10 ARP/USD.  At mid-week, the peso had 
appreciated slightly to 3.09 ARP/USD but then lost the 
recovered ground.  The BCRA's intervention in the 
 
foreign exchange market this week prevented the peso 
from appreciating despite large dollar sales by 
exporters.  In the first four days of the week, the 
BCRA purchased USD 216 million.  The peso exchange 
rate has depreciated 1.6 percent since the beginning 
of the calendar year.  The BCRA's reserves stood at 
USD 24.3 billion as of June 6, and have increased USD 
5.7 billion, or 31 percent, since the GOA prepaid its 
entire IMF debt on January 2. 
 
--------------------------------------------- -------- 
Consumer Confidence Index up 3.1 percent m-o-m. 
--------------------------------------------- -------- 
 
¶24.  The consumer confidence index -- measured by 
Torcuato Di Tella University -- increased 3.1 percent 
m-o-m in June to 58.5 points, from 56.8 points in May. 
All three index components increased: consumer 
sentiment toward the macroeconomic environment (+6.8 
percent m-o-m), consumer willingness to purchase 
durable goods and real estate (+1.6 percent m-o-m, to 
a new record high) and improvement in personal 
situation (+0.6 percent m-o-m).  The index increased 
15.6 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: "Lavagna, Moreno, and the 
Felisa Code".  By Jorge Oviedo.  (Note: Translated 
from an article published May 26 in La Nacin.  End 
Note) 
--------------------------------------------- -------- 
 
¶25.  The opinions of the general public and of 
business leaders converge on one thing: Nestor 
Kirchner can point to significant economic growth, 
fairly reasonable inflation rates up to now, and the 
maintenance of a fiscal surplus as his achievements. 
But the opinions of those who have business 
responsibilities and of those who do not begin to 
sharply diverge when one goes deeper into other 
issues.  For example, take the inflation control 
policy. 
 
¶26.  To the general public, it seems praiseworthy that 
the government is trying to control prices, although 
it doesn't believe that price controls work. 
Businesses, in many cases, are alarmed by the attitude 
of the Secretary for Technical Coordination, Guillermo 
Moreno.  "I have known him for many years, to the 
point that I can say we have been quite good friends. 
But in my modest opinion, he has always been a little 
crazy," said someone who says that the stances that 
have been attributed to Moreno are alarming, although 
he clarified that they did not surprise him. 
 
¶27.  The divergence between public opinion and that of 
business leaders is the division that Roberto Lavagna 
wants to exploit.  Polls among businessmen show a 
strong deterioration of the government's image since 
the departure of Lavagna, ex-Minister of Economy and 
founder of the consulting company Ecolatina.  "The 
problem that Roberto has is that to be a candidate, he 
is going to have to convince far more than just a 
handful of company owners that everything has gotten 
worse since he left," said one businessman. 
 
¶28.  Outside of the corridors of power, the ex- 
minister's image is one of moderation and rationality, 
but that has not stopped him from being a critic of 
current policies.  However, it is notable that he has 
been very careful not to criticize Kirchner. 
 
¶29.  During the last few days, the surprise has been 
that Minister of the Economy Felisa Miceli has again 
publicly aligned herself with her predecessor and one- 
time promoter: Miceli appeared in public with Lavagna 
during the most recent meeting of the Inter-American 
 
Development Bank, at a time when tensions with Lavagna 
in the Casa Rosada already were high. 
 
¶30.  This week, she met with textile businessmen who 
had a meeting with Moreno not too long ago that, 
according to accounts, had been very tough.  The 
minister didn't receive them in her office, but rather 
visited them at the ProTejer Foundation headquarters. 
She said, very reasonably, that annual 9 percent 
growth rates cannot be expected to continue, and that 
less must be anticipated: "barely" 5 percent annually. 
All this would be nothing more than a demonstration of 
rationality, if one looks at it benevolently, or as an 
excess of optimism, if one wants to be critical. 
 
¶31.  But everything changes when one realizes that, 
according to the business owners he meets with, Moreno 
tells his audiences that he wants to end this year 
being the "Nine Man."  He would earn the title by 
achieving 9 percent growth, 9 percent inflation and 9 
percent unemployment. 
 
¶32.  Very casually, Minister Miceli just said in 
public that 9 percent growth will be difficult to 
achieve.  The agriculture sector is finding it 
difficult this year to increase growth, and the meat 
export ban made things even worse.  Moreno will 
realize that the message in the "Felisa code" was 
intended for him.  The arm-wrestling between the two 
officials seems far from over.  (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.) 
 
 
GUTIERREZ