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UNCLAS BUENOS AIRES 001424 
 
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 23, 2006 
 
 
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Weekly Highlights 
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- Argentina, Bolivia, Chile and Brazil argue over Bolivian gas. 
- President Kirchner visits Spain. 
- Spain wants bilateral debt owed by Argentina negotiated outside of 
Paris Club. 
- GDP up 8.6 percent y-o-y in Q1 2006. 
- Buenos Aires Province ran an ARP 28 million primary deficit in the 
first four months. 
- The GOA will set up its own livestock reference price system. 
- Commentary of the Week: "Inflation Under Control or Controls on 
Inflation?" 
 
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Argentina, Bolivia, Chile and Brazil argue over Bolivian gas. 
--------------------------------------------- -------- 
 
¶1.  On June 29, the presidents of Bolivia and Argentina are 
scheduled to announce an agreement on natural gas exports, but 
several new issues have arisen.  Bolivia is standing firm on its 
condition that Argentina cannot re-export gas to Chile (Bolivia 
refuses to sell gas to Chile, seeking to recover its access to the 
Pacific coast lost in the 19-th century War of the Pacific).  Chile, 
on the other hand, is asking Argentina to fulfill its contracts to 
supply Argentine gas to Chile.  Also, Brazil has asked Argentina not 
to agree to a large price increase for Bolivian gas imports, which 
would oblige Brazil to accept a similar price hike.  Brazil is 
Bolivia's largest purchaser of natural gas.  Meanwhile, the Bolivian 
vice-minister of hydrocarbons, Julio Gomez, said June 22 that the 
Government of Bolivia now wants USD 6 per million cubic meters for 
exports to Argentina, instead of the USD 5.5 that was agreed at the 
last meeting.  [Argentina currently imports Bolivian gas 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.] 
 
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President Kirchner visited Spain. 
--------------------------------------------- -------- 
 
¶2.  This week, President Nestor Kirchner visited Spain and met with 
Spanish Prime Minister Jose Luis Rodriguez Zapatero, King Juan 
Carlos, and Spanish companies with investments in Argentina. 
According to press reports, the GOA laid out a plan to repay USD 836 
million in aid that Spain loaned Argentina during its economic 
crisis in 2002 (see following story).  During the meetings with 
Spanish companies, Kirchner announced that the GOA will increase its 
stake in Aerolineas Argentinas (Argentina's largest airline, 
majority owned by Spanish investors).  Kirchner also stated that 
Argentina is not an insecure place to invest, asked for "weeks or 
possibly months" to start increasing utility tariffs and announced 
new investment projects. 
 
--------------------------------------------- -------- 
Spain wants bilateral debt owed by the GOA to be negotiated outside 
the Paris Club. 
--------------------------------------------- -------- 
 
¶3.  On June 23, La Nacion reported that the Spanish government is 
willing to accept a refinancing schedule of stepped up installments 
for the USD 830 million lent to the GOA in 2001.  However, Spain 
maintains its position that this debt should not be included in the 
Paris Club negotiations, arguing that the loan was made in support 
of, and under the same terms as, an IMF loan, and is thus 
multilateral in nature, while the Paris deals with bilateral 
agreements.   In conversations prior to this trip, GOA officials 
have said that the debt to Spain would be included in Paris Club 
negotiations. 
 
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GDP up 8.6 percent y-o-y in Q1 2006. 
--------------------------------------------- -------- 
 
¶4.  The GOA announced that GDP jumped 8.6 percent y-o-y in the first 
quarter of 2006 -- slightly below the BCRA consensus forecast of 8.8 
percent.  Growth is mainly coming from stronger domestic demand -- 
increased investment and higher private and public consumption -- 
 
aided by a 6.4 percent increase in exports.  During the quarter, 
investment increased 22.8 percent y-o-y -- with increases of 23 
percent y-o-y in construction and 22.6 percent y-o-y in plant and 
machinery investment.  Private consumption increased 8.8 percent 
y-o-y, and public consumption rose 8.3 percent y-o-y.  Goods 
production and services increased 8.8 percent and 8.4 percent y-o-y, 
respectively.  The BCRA forecasts for GDP growth stand at 7.8 
percent for 2006 and 5.9 percent for 2007. 
 
--------------------------------------------- -------- 
April monthly economic activity index up 6.4 percent y-o-y - weaker 
than expected. 
--------------------------------------------- -------- 
 
¶5.  The monthly economic activity index increased 6.4 percent y-o-y 
in April -- well below the BCRA market survey forecast of 7.8 
percent.  This was the weakest growth rate in the past eight months, 
and represents a continuation of the downward tendency following the 
8.3 percent increase of March.  However, slower performance in April 
and March is distorted by the Easter seasonal effect.  The growth in 
the index came mainly from an increase in industry, communications 
and transportation and services.  The index increased 0.7 percent 
m-o-m.  The latest BCRA consensus survey estimates 7.7 percent 
economic activity growth for 2006, a slightly upward revision from 
its previous forecast of 7.6 percent.  The monthly economic activity 
index is viewed as a reliable leading indicator of GDP. 
 
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Buenos Aires province ran a ARP 28 million primary deficit in the 
first four months of 2006. 
--------------------------------------------- -------- 
 
¶6.  The government of Buenos Aires province announced a primary 
deficit of ARP 28 million for the first four months of 2006; 
including interest (without taking into account the ARP 603 million 
paid on public debt capital amortization in that period), the 
deficit reached ARP 280 million,.  This is an accounting deficit and 
not a budgetary one, but Governor Felipe Sola warned that the 
province could fall into a budgetary deficit this year and argued 
that the province is not receiving sufficient transfers from the GOA 
based on its population.  To avoid going into deficit, the province 
needs an additional ARP 800 million from the GOA. 
 
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The GOA will set up its own livestock reference price system. 
--------------------------------------------- -------- 
 
¶7.  The GOA plans to set up its own reference pricing system for 
livestock trading.  The system aims to set a nationwide reference 
price for cattle trading.  However it will not replace the existing 
Liniers reference price, which is set at the Liniers Market in 
Buenos Aires, the country's leading livestock market, with 20 
percent of the total volume of cattle.  Government officials have 
long complained that prices at Liniers have too much influence over 
the setting of prices in all of Argentina, and that those prices are 
subject to "collusive trade practices."  The beef sector believes 
that the new system will be ineffective and complicated. 
 
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BCRA increases active repo rates by 0.5 percent. 
--------------------------------------------- -------- 
 
¶8.  The BCRA announced a 0.5 percent increase in its active repo 
rates (the rates at which the BCRA offers financing and adds 
liquidity to the system), bringing its active rate to 8 percent for 
seven days.  This is the third increase in active repo rates this 
year, and it follows a 0.5 percent increase in May.  Passive repo 
rates were increased on June 13 to 5.25 percent for one day and 5.75 
percent for seven days.  According to private consultants, this 
decision is in line with the BCRA strategy of increasing its 
reserves. 
 
--------------------------------------------- -------- 
Petrobras sells its 50 percent stake in Transener to Eton Park 
Capital Management. 
--------------------------------------------- -------- 
 
¶9.  On June 14, Petrobras Energy announced it will sell its 50 
percent stake in the Argentine power transmission company Transener 
 
to the U.S. hedge fund Eton Park Capital Management for USD 54 
million.  Petrobras held its stake in Transener through its holding 
company Citilec.  Transener currently is controlled by the Dolphin 
Group, an Argentine investment fund that has made several large 
investments in the energy sector. 
 
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The GOA signs agreement with bread producers to freeze prices. 
--------------------------------------------- -------- 
 
¶10.  On June 15, the GOA announced an agreement with bread producers 
to freeze bread prices at ARP 2.5 per kg.  The freeze will be in 
force until the end of the 2006, and continues the GOA's strategy of 
trying to control inflation through voluntary price agreements 
negotiated with various sectors. 
 
--------------------------------------------- -------- 
Controversial Anti-Money Laundering Law passes Chamber of Deputies. 
--------------------------------------------- -------- 
 
¶11.  On June 15, the Chamber of Deputies approved and sent to the 
Senate a GOA-proposed law that would lift bank and stock market 
secrecy in money laundering investigations by the Argentine 
financial intelligence unit (UIF).  Currently, the UIF needs to get 
a court order to lift bank and stock market secrecy.  The law also 
would revamp the UIF's structure, replacing the current five 
directors with a single, presidentially-appointed President, who 
would have the authority to lift banking and stock market secrecy. 
Opponents say that the law would give too much authority to a single 
official, who will be chosen by the executive branch.  The bill now 
passes to the Senate, where it is expected to be approved. 
 
--------------------------------------------- -------- 
December local saving reached 25.4 percent of GDP -- a new historic 
record. 
--------------------------------------------- -------- 
 
¶12.  In December 2005, local savings -- the difference between the 
Argentines' income and expenses -- reached a new historic record at 
25.4 percent of GDP, a total of ARP 146 billion.  The GOA wants to 
use different incentives to translate this savings into productive 
investments and prevent this money from going into speculative 
activities or leaving the system.  For the first quarter of 2006, 
the ratio between investments and GDP reached 22 percent, and 
according to the GOA a level of 30 percent is necessary to keep 
annual growth at 9 percent. 
 
--------------------------------------------- -------- 
May industrial production index up 7.3 percent y-o-y. 
--------------------------------------------- -------- 
 
¶13.  The industrial production index increased 7.3 percent y-o-y in 
May, almost in line with market expectations of 7.4 percent, and a 
slight deceleration following a 7.7 percent increase in April. 
During May, the fastest growing sectors were non-metallic minerals 
(+19.8 percent), car production (+19.0 percent), tobacco production 
(+15.5 percent) and oil refining (+12.6 percent).  The index 
increased 0.9 percent m-o-m without seasonal adjustment and 2.2 
percent m-o-m seasonally adjusted.  The BCRA consensus survey 
forecasts 6.9 percent industrial production growth for 2006 -- 
slightly above last month's forecast of 6.8 percent. 
 
¶14.  The industry-wide capacity utilization index reached 70.4 
percent in May, down slightly from 70.7 percent in May 2005.  The 
sectors with the highest capacity utilization rates were metal-based 
industries (95.8 percent), oil refining (93.6 percent) and textiles 
(84.3 percent).  The sectors with the lowest capacity utilization 
rates were auto production (46.4 percent), minerals (62.0 percent) 
and rubber and plastic (62.4 percent). 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  Investors concentrate their bids in 
Lebacs. 
--------------------------------------------- -------- 
 
¶15.  The BCRA received ARP 726 million in bids at its June 20 Lebac 
and Nobac auction, and no Lebacs or Nobacs came due during the week. 
 It accepted ARP 420 million in Lebac bids and ARP 198 million in 
Nobac bids.  The yield on the 84-day Lebac increased 10 basis points 
 
 
 
from 7.25 percent to 7.35 percent, while the yield on the 182-day 
Lebac decreased from 8.65 percent to 8.60 percent, and the yield on 
the 266-day Lebac decreased from 10.35 percent to 10.27 percent. 
The yield on the longest term instrument, the 350-day Lebac, 
remained at 12 percent.  Lebacs for maturities of more than 350 days 
were withdrawn due to lack of interest.  The spread on the one-year 
Nobac decreased from 2.11 percent to 2.05 percent and from 3.79 
percent to 3.78 percent for the two-year Nobac.  The Badlar rate 
(the base rate for Nobacs) is currently at 8.8 percent.  Investors 
are losing interest in Nobacs and instead are focusing on fixed-rate 
instruments. 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, closing at 3.10 
ARP/USD. 
--------------------------------------------- -------- 
¶16.  The peso remained flat versus the USD this week, closing at 
3.10 ARP/USD.  The peso exchange rate has depreciated 1.6 percent 
since the beginning of the calendar year.  The BCRA's reserves stood 
at USD 25.14 billion as of June 21, and have increased USD 6.6 
billion, or 35 percent, since the GOA prepaid its entire IMF debt on 
January 2.  During the week, the BCRA purchased USD 194 million. 
 
--------------------------------------------- -------- 
Commentary of the Week: "Inflation under control or controls on 
inflation?", by Esteban Fernndez Medrano from an article published 
in El Cronista on June 20. 
--------------------------------------------- -------- 
 
¶17.  May's consumer price index (IPC) figures were certainly a 
relief for the government.  Although May is not usually a month of 
high inflation, given that it is not subject to seasonal factors, 
the 0.5 percent monthly increase was not only below the previous 
monthly average of around 1 percent and the 0.6 percent increase in 
May last year, but it was also below the expected rate of inflation. 
 This relief is reflected even more strongly in the poverty and 
indigence indexes, two indicators closely followed by the 
government.  But despite the apparent success in controlling 
inflationary pressures, a bitter aftertaste remains when analyzing 
the details of the results.  In fact, doubts persist as to whether 
government is really succeeding in controlling inflation, or if the 
latest figures are the reflection, possibly fleeting, of price 
controls. 
 
¶18.  The progressive incorporation of goods into the list of price 
agreements distorted the typical definition of goods/services 
regulated by the IPC (goods whose variation in price does not 
respond to market factors, but rather to regulations or agreements 
within sectors).  Traditionally, the definition of these regulated 
goods included in the IPC were understood to be public services - 
gas, water, electricity and public transportation - fuel and 
cigarettes (the last one as a result of the heavy tax burden on the 
final price). 
 
¶19.  If we redefine this concept, incorporating into the IPC all the 
sectors that have price agreements, the share of "regulated" goods 
in the IPC rises from approximately 20 percent in December of 2005 
to almost 60 percent in May of 2006.  Although this redefinition is 
more lax than the original, as price agreements generally do not 
include 100 percent of the products in the group but rather "only" 
affect the lead products, any way it reflects the fact that the 
price agreements are widespread throughout the economy.  More than 
the half of the goods and services in the IPC are being affected by 
price regulations imposed by the government. 
 
¶20.  This result becomes even more compelling if one compares the 
annual change in inflation between the regulated and unregulated 
goods/services.  Disaggregating annual inflation into an index of 
regulated goods/services and another of unregulated goods/services 
(starting with the INDEC definition of regulated goods but then 
adding those sectors with price agreements), one observes a marked 
divergence between the two sub-indexes.  While the annual change in 
the regulated index in May was only 1.3 percent, the sub-index of 
unregulated goods/services increased more than 16 percent. 
 
¶21.  So long as the regulated index's inflation remains controlled, 
the annual variation of the IPC as a whole would generally approach 
this figure (due to the greater weight that the regulated sector in 
the IPC has had since the beginning of this year).  The doubt that 
 
remains is, even without direct interferences from the government 
with respect to the methodology of the IPC calculations, how 
representative do the inflation figures end up being?  In other 
words, is the increased price stability attained in May, and which 
is predicted for the coming months, really a reflection of the state 
of the economy?  After all, "unregulated" annual inflation has shown 
practically uninterrupted growth since the beginning of 2004. 
 
¶22.  Considering the glass as half full, one can admit that the new 
controls were applied principally in sectors whose prices, since 
devaluation, had grown more than the rest.  Taking out public 
services from the regulated sub-index, which are in all respects 
behind the rest of goods/services, one observes that this sub-index 
is 13 percent above the unregulated sub-index.  That is, one could 
attempt to argue that price controls are a mechanism to accelerate 
the adjustment of relative prices between tradable y non-tradable 
goods/services, to make sure that the relative adjustment is not 
confused with a general price increase and to prevent producers of 
tradable goods/services from raising their prices (in line with the 
well-known work of Lucas). 
 
¶23.  But it is extremely difficult to anticipate whether this 
government will feel like lifting price agreements when this price 
difference between regulated (net of public services) and 
non-regulated prices closes, nor what would be the subsequent 
response of the affected sectors.  What is certain is that even if 
annual IPC inflation stabilizes in coming months, the sense will 
remain that this is the effect of the controls on inflation more 
than a controlled inflation.  (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