VZCZCXYZ0022
RR RUEHWEB

DE RUEHBU #1605/01 2001920
ZNR UUUUU ZZH
R 191920Z JUL 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5281
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2243
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001605 
 
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 
July 14, 2006 
 
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Weekly Highlights 
--------------------------------------------- -------- 
 
- Argentina and Chile to set new gas price agreement. 
- Argentina will charge higher diesel fuel prices to foreigners 
along its borders. 
- Senate approves budget "superpowers." 
- Buenos Aires province rescinds water company concession. 
- Felisa Miceli announces that price agreements will not change 
until the end of the year. 
- Commentary of the Week: "Since the crisis, spending has grown ARP 
95 billion" 
 
--------------------------------------------- -------- 
Argentina and Chile to set new gas price agreement. 
--------------------------------------------- -------- 
 
¶1.  The new price agreement between the GOA and the Government of 
Bolivia will go into effect on July 15, increasing the price of 
natural gas from USD 3.20 to USD 5 per million cubic meters through 
the end of 2006.  In this context, Chilean Energy and Mining 
Minister Karen Poniachik met with Argentine Planning Minister Julio 
de Vido to reach an agreement on a new price for Argentine gas 
exported to Chile.  Poniachik said her government will analyze a 
variety of tax formulas proposed by the GOA to determine which would 
be the least harmful.  She plans to meet with energy companies that 
will be affected by the new levy on July 17 before making any 
decision.  Chile buys 90 percent of Argentine gas exports, and this 
new price agreement is expected to go into effect at the end of the 
month. 
 
--------------------------------------------- -------- 
Argentina will charge higher diesel fuel prices to foreigners along 
its borders. 
--------------------------------------------- -------- 
 
¶2.  On July 10, the GOA announced that fuel stations will be allowed 
to charge more for diesel fuel sold to foreign-tagged vehicles along 
Argentine borders, beginning August 10.  Since Argentina has frozen 
diesel oil prices while neighboring countries continue to charge 
international prices, there has been a 1.5-2 percent increase in 
demand for diesel fuel at stations along Argentina's borders. 
According to Energy Secretary Daniel Cameron, this situation 
contributed to the shortage of diesel fuel during the past few 
months.  Chilean President Bachelet and Foreign Minister Foxley have 
both said that this measure is discriminatory and an action against 
regional integration.  In Brazil and Chile, a liter of diesel costs 
USD 0.85 and USD 0.90, respectively; in Argentina it costs just USD 
0.48. 
 
--------------------------------------------- -------- 
Senate approves budget "superpowers" 
--------------------------------------------- -------- 
 
¶3.  On July 12, the Senate approved a measure giving the GOA 
budgetary "superpowers" sought by the GOA.  The bill now goes to the 
Chamber of Deputies, where it is expected to be approved.  The 
so-called "superpowers" over the national budget would give the GOA 
the power to modify the Budget Law and give the Chief of Cabinet the 
power to reallocate funds irregardless of the provisions of the 
Financial Administration Act or the Fiscal Responsibility Law.  The 
Senate amended the original proposal, adding a clause that these 
"superpowers" will not extend to SIDE (Argentine intelligence 
service) or to reserved funds. While past governments also have had 
similar "superpowers," this bill is different in that the powers 
granted to the Chief of Cabinet would be permanent. 
 
--------------------------------------------- -------- 
The Senate approves amendments to the Money Laundering Law. 
--------------------------------------------- -------- 
 
¶4.  On July 12, the Senate approved a GOA-proposed law that would 
lift bank and stock market secrecy in money laundering 
investigations by the Argentine financial intelligence unit (UIF). 
Previously, the UIF needed a court order in order to lift bank and 
stock market secrecy.  The law also revamps the UIF's structure, 
replacing the current five directors with a single, appointed 
President, who would have the authority to lift banking and stock 
 
market secrecy.  Opponents say that the law would concentrate too 
much authority in a single official, who will be chosen by the 
executive branch.   Thus far, there is no indication who the GOA 
will pick to be the new president of the UIF. 
 
--------------------------------------------- -------- 
Buenos Aires province rescinds water company concession. 
--------------------------------------------- -------- 
 
¶5.  The Buenos Aires provincial government rescinded the water and 
sewage concession contract granted to Aguas del Gran Buenos Aires 
(AGBA), saying the company had not met its obligations.  Italian 
construction firm Impregilo and Spain's Dragados hold a 43 percent 
and a 27 percent share in AGBA, respectively, while Spain's Aguas de 
Bilbao Vizkaia hold a 20 percent stake and the company's workers 
hold the remaining 10 percent.  Governor Felipe Sola said that the 
decision to rescind the contract was taken to "ensure that running 
water and sewage drains are expanded in the places that most need 
them, using a health-based, rather than a business-based, criteria." 
 The AGBA's services will be assumed by Aguas Bonaerenses (ABSA), a 
company that is 90 percent owned by the province and 10 percent 
owned by workers, which already operates in many parts of the 
province. 
 
--------------------------------------------- -------- 
Felisa Miceli announces that price agreements will not change until 
the end of the year. 
--------------------------------------------- -------- 
 
¶6.  On July 11, Economic Minister Felisa Miceli told the Senate that 
the GOA intends to continue with its policy of negotiating sectoral 
price agreements, and that existing price agreements will remain 
unchanged for the rest of the year.  According to Miceli, price 
agreements have been efficient instruments to reduce inflation 
expectations. 
 
--------------------------------------------- -------- 
Provincial finances increasingly dependent on the GOA. 
--------------------------------------------- -------- 
 
¶7.  According to private consultants, Argentine provincial finances 
are becoming more dependent on discretionary transfers from the GOA. 
 Between 2002 and 2006, the share of discretionary federal transfers 
(i.e., transfers above and beyond those legally required by the 
Argentine "co-participation" revenue sharing system) in overall 
provincial revenues rose from 17 percent to 24 percent, indicating 
that provinces are increasingly dependent on the federal government. 
 The GOA has seen a significant increase in revenues in the past 
four years particularly from export taxes, which are not 
automatically shared with the provinces. 
 
--------------------------------------------- -------- 
Kirchner announces the creation of the Southern Market. 
--------------------------------------------- -------- 
 
¶8.  At the Argentine stock market's 152nd anniversary on July 10, 
President Nestor Kirchner announced the creation of the Southern 
Market, which will be inaugurated with the issuance of the Southern 
Bond (a bi-national to be issued jointly with Venezuela).  The 
President remarked that these bonds will be priced in both 
countries' markets and that negotiations are already underway with 
the Caracas stock market. 
 
--------------------------------------------- -------- 
Argentine economic mission visits Washington. 
--------------------------------------------- -------- 
 
¶9.  An economic mission headed by Secretary for Economic Policy 
Oscar Tangelson visited Washington this week.  The mission presented 
a restructuring proposal for the Inter-American Development Bank 
(IDB), which includes proposals for a redirection of infrastructure 
loans, a reduction in transaction costs and a credit line in local 
currency.  In an IDB meeting on July 17, the mission will announce 
its support to forgiving the debt of highly indebted countries such 
as Bolivia, Honduras, Nicaragua and Haiti. 
 
--------------------------------------------- -------- 
Neuquen court orders Chevron to pay royalty in cash. 
--------------------------------------------- -------- 
 
 
¶10.  A court in the province of Neuquen has ordered the local unit 
of U.S.-based Chevron to pay recently increased provincial royalties 
in cash.  The provincial government decreed an increase in royalties 
on March 1.  Under the new plan, the province calculates the 12 
percent nationwide royalty using international oil prices. 
Previously, companies were required to pay royalties on global oil 
prices less a federally mandated 45 percent export tax.  Oil 
companies operating in Neuquen have pursued different paths to avoid 
paying the higher royalties.  Chevron offered to pay the additional 
amount in kind with a portion of its oil production, while 
Repsol-YPF and Total filed complaints in the Argentine Supreme 
Court.  The Neuquen ruling against Chevron states that only the 
province, not the company, has the right to offer oil instead of 
cash payments for disputed royalties. 
 
--------------------------------------------- -------- 
The GOA creates a new subsecretary to fight against informal 
employment. 
--------------------------------------------- -------- 
 
¶11.  Minister of Labor Carlos Tomada announced the creation of the 
Subsecretary of Work and Social Security Control as part of a series 
of instruments to fight against informal employment.  According to 
an inspection last year of 134,021 private companies, 38 percent had 
irregularities in their employees' status.  Tomada said that most of 
the companies that have employees who are not registered in the 
Social Security program are not even officially listed as employers. 
 Tomada also said that the Ministry will simplify the process of 
employee registration and present a new law to introduce a better 
mechanism for registering rural workers. 
 
--------------------------------------------- -------- 
Consumer Confidence Index down 1.3 percent m-o-m. 
--------------------------------------------- -------- 
 
¶12.  The consumer confidence index -- measured by Torcuato Di Tella 
University -- decreased 1.3 percent m-o-m in July to 57.7 points, 
down from 58.5 points in June.  Only one component of the index 
decreased: consumer sentiment toward the macroeconomic environment 
(-5.8 percent m-o-m).  The other two components increased: consumer 
willingness to purchase durable goods and real estate (+0.65 
percent) and improvement in personal situation (+1.8 percent m-o-m), 
but not enough to outweigh the drop in consumer sentiment.  The 
index rose 14.3 percent y-o-y.  The index is based on surveys of 
individual economic sentiment and consumer willingness to purchase 
durable goods, houses and cars. 
 
--------------------------------------------- -------- 
World Bank approves a USD 75 million loan for road infrastructure in 
Cordoba province. 
--------------------------------------------- -------- 
 
¶13.  The World Bank approved a USD 75 million road infrastructure 
and maintenance loan for the province of Cordoba.  The fixed-spread 
loan is repayable over 13.5 years, including a six-year grace 
period.  The Bank is emphasizing infrastructure projects in its 
Country Strategy for the 2006-2009 period.  Currently, the WB funds 
several operations that promote more efficient public expenditure 
and sustainability in road infrastructure, including the National 
Highway Asset Management Project for USD 220 million, the Provincial 
Roads II Project for USD 150 million, and the Buenos Aires Province 
Sustainable Investment Development Project for USD 200 million. 
 
--------------------------------------------- -------- 
May wage index increased 1.53 percent m-o-m. 
--------------------------------------------- -------- 
 
¶14.  The National Bureau of Statistics (INDEC) announced that the 
wage index increased 1.53 percent m-o-m in May.  This index defines 
wages as a price, without considering hours worked or special 
payments for productivity gains.  This index surveys the formal and 
informal private sector and the public sector, which rose 1.62 
percent, 1.80 percent and 1.10 percent, respectively.  INDEC also 
announced that the basic food basket -- used to measure poverty and 
indigence -- increased 0.04 percent m-o-m in June, showing a slight 
increase after experiencing its sharpest drop in three years in 
May. 
 
¶15.  According to INDEC, inequality has also increased in Argentina. 
The difference between the medium income of the richest 10 percent 
of the population and the poorest 10 percent increased from 32 to 36 
times between Q3 of 2005 and Q1 of 2006. 
 
--------------------------------------------- -------- 
The BCRA reduces the limit on the amount of public debt that banks 
can hold. 
--------------------------------------------- -------- 
 
¶16.  The BCRA will reduce the regulatory limit on the amount of GOA, 
provincial and municipal debt that banks may hold to 35 percent of 
their total assets, down from 40 percent.  The aim of this measure 
is to generate greater liquidity, promote private lending and limit 
bank financing to the GOA and trying to prevent the crowding out of 
the private sector in favor of public sector financing that has 
occurred at various times in the past.  Currently, banks' assets are 
ARP 233 billion, of which ARP 63 billion are held as public debt (27 
percent of the total).  This measure will not affect the BCRA's 
Lebacs or Nobacs and will be effective as of July 1, 2007. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  Investors keep concentrating their 
bids in Nobacs. 
--------------------------------------------- -------- 
 
¶17.  The BCRA received ARP 2.3 billion in bids at its July 11 Lebac 
and Nobac auction, compared to ARP 1.1 billion in Lebacs that came 
due during the week.  ARP 118 million came from the fixed peso 
segment and ARP 1 billion from the pesos indexed by CER segment.  It 
accepted ARP 416 million in Lebac bids and ARP 1.6 million in Nobac 
bids.  The yield on the 70-day Lebac and the 168-day Lebac remained 
at 7.10 percent and 8.50 percent, respectively.  The yield on the 
245-day Lebac decreased from 10.18 percent to 10.06 percent and for 
the 364-day Lebac the yield was 12.15 percent.  The yield on the 
longest term instrument, the 490-day Lebac, was 12.56 percent. 
Lebacs for maturities of more than 490 days were withdrawn due to 
lack of interest by the BCRA.  The spread on the one-year Nobac 
decreased from 2.19 percent to 2.10 percent and on the two-year 
Nobac increased from 3.74 percent to 3.75 percent.  The Badlar rate 
(the base rate for Nobacs) is currently at 9.2 percent.  Investors 
continue concentrating their bids in Nobacs; this was a response to 
the BCRA's downward movement in the Lebacs yield and to a high 
Badlar rate. 
 
--------------------------------------------- -------- 
The peso is unchanged against the USD this week, closing at 3.10 
ARP/USD. 
--------------------------------------------- -------- 
 
¶18.  The peso remained flat versus the USD this week, closing at 
3.10 ARP/USD.  On Wednesday, the BCRA purchased USD 89.5 million to 
keep the peso unchanged against the USD.  In the first three days of 
the week, the BCRA purchased USD 170 million.  The peso exchange 
rate has depreciated 1.6 percent since the beginning of the calendar 
year.  The BCRA's reserves stood at USD 26.1 billion as of July 11, 
and have increased USD 7.5 billion, or 41 percent, since the GOA 
prepaid its entire IMF debt on January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week: "Since the crisis, spending has grown ARP 95 
billion", by Jos Luis Espert, from an article published in Ambito 
Financiero on June 14. 
--------------------------------------------- -------- 
 
¶19.  In the last quarter century, Argentina has stood out among 
those countries that have had very frustrating experiences with 
respect to economic growth.  Between 1980 and 2006, real GDP per 
capita grew at an insignificant annual average of 0.50 percent, a 
figure similar to Brazil (0.51 percent) and countries that were 
communist until 1989 such as Romania (0.4 percent) and Bulgaria (0.5 
percent).  In the same period, Chile grew 2.9 percent per year, 
China 8 percent, Ireland 4.2 percent and India 4 percent. Quite a 
contrast, no? 
 
¶20.  A major explanation for such poor performance has been the 
recurring financial collapses brought on by enormous -- although 
decreasing -- fiscal deficits, with the exception of 2001.  When the 
"Rodrigazo" occurred in the middle of 1975, the budget deficit 
 
reached 14 percent of GDP.  At the end of the Martnez de Hoz's 
"tablita" in January of 1981, it was 11.5 percent of GDP.  During 
the hyperinflation of 1989, it was at 8.3 percent.  When the Tequila 
crisis hit in 1995, it was 3 percent and when convertibility 
shattered in 2001 it was 5.3 percent of GDP.  Today we have 
surpluses of 1.5 percent of GDP after interest payments, a historic 
record not only in the last quarter-century but also in the last 
half-century.  But we have to be cautious, as this is happening in 
the middle of a cycle of large capital inflows to emerging markets 
and an increase in our terms of trade rarely seen in history. 
 
¶21.  Although in all the crises suffered in the past 26 years 
(except the end of convertibility) the fiscal deficits were 
increasingly smaller, public spending has continued to grow.  If we 
analyze the federal-plus-provincial fiscal results, that is, if we 
exclude public service entities/companies whose services were not 
eliminated but rather were replaced (up until now) by private 
concessions and we keep in mind that interests on public debt 
averaged 1.6 percent of GDP with little variation (except 1982 and 
2001, with 4.5 percent), primary public spending was 21.8 percent of 
GDP in 1981, 22.3 percent prior to hyper inflation, 24 percent 
before the Tequila crisis, and 25 percent before the collapse of 
convertibility.  And it (primary public spending) increased so much 
since the launching of the "productive model" that it has already 
reached a historic record (in the last quarter century as well as in 
the last half century) of 35.5 percent of GDP. 
 
¶22.  In other words, little by little, the federal government has 
continued gaining positions despite the fact that the economy, 
relative to the world, went backward (probably the country lagged 
because the state moved forward).  Furthermore, as capital 
expenditures began the period at 5 percent of GDP and fell to 1 
percent of GDP in 2002, the bulk of the rise in primary spending was 
for increased current spending without interest (salaries, pensions, 
goods and services, transfers to the private sector).  The jump in 
current spending was even  greater than in primary spending: it went 
from 14 percent of GDP in 1982 to 22 percent in 2006.  Too much for 
an economy that was almost stagnant for more than 25 years. 
 
----------- 
New Record 
----------- 
 
¶23.  However, if fiscal deficits have been decreasing and public 
spending increasing, this means that tax collection has consistently 
increased.  The average during the 1980s was 18.4 percent of GDP 
(with value-added tax (VAT) making up 2.7 percent of GDP); during 
convertibility it was 23.5 percent (VAT 6.4 percent) and today we 
are already scratching off another historic record of 29 percent of 
GDP (VAT 7 percent) -- a record for the last quarter century as well 
as the last half century. 
 
¶24.  Certainly, after a 26-year period (1980-2006) in which 
Argentina had the poorest economic growth in its entire history, 
even worse than the period between the two world wars with the Great 
Depression included (0.74 percent real per capital GDP growth per 
year between 1913 and 1950), the "lesson" that we have apparently 
learned is that one must not have a fiscal deficit.  The level of 
public spending doesn't matter at all.  Public spending can always 
grow because taxes, sooner or later, can also increase indefinitely. 
 It is so today, that those who are in the formal sector pay the 
equivalent of nearly 45 percent of GDP in taxes (assuming that 
evasion is 1/3), as if we were a rich country.  This is nonsense. 
 
¶25.  It is very likely that our sudden fiscal discipline is directly 
connected to the inability to finance fiscal deficits after having 
bastardized the currency with hyperinflation and the public debt 
with various defaults.  One also must not underestimate Kirchner's 
tricky and Machiavellian interpretation in the sense that he knows 
that within the political "class," the party loyalties of factions 
and even of ideologies change and switch fluidly, as if it were a 
market for the buying and selling of stinking cauliflower or an 
endless soap opera. 
 
¶26.  From January 2002 and until the end of this year (according to 
the figures from the Secretary of the Treasury), that is, after the 
last five years of the productive model, consolidated public 
spending of the federal and the provincial government will have 
increased ARP 95 billion (120 percent) consisting of, among other 
 
things, an additional ARP 25 billion in salaries, ARP 9 billion in 
goods and services, ARP 13 billion in social security, ARP 18 
billion in transfers to the private sector, ARP 6 billion in 
transfers to municipalities and ARP 20 billion in capital 
expenditures.  Tax collections will reach ARP 182 billion, ARP 118 
billion more than in 2001, with an additional ARP 53 billion going 
to the provinces.  Provinces have no right to go into deficit as is 
being announced.  Is there never enough money to meet their 
desires? 
 
¶27.  But what is most serious is that society hasn't realized that 
having a fiscal surplus is important not only in order to avoid the 
explosion of public debt that led to crises in the past.  It is also 
crucial, for long-term growth, to minimize public spending.   It is 
stable private spending subject to competitive rules (not corporate 
rules like in Argentina) that will give us a healthier future than 
that of the "fakirs" of the last quarter century.  Public spending 
that is clientelist in the best case and corrupt in the worst does 
not appear to be the solution to our decadence.  (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 
2