VZCZCXYZ0002
RR RUEHWEB

DE RUEHBU #1880/01 2351331
ZNR UUUUU ZZH
R 231331Z AUG 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5626
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2277
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001880 
 
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 
August 18, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- June monthly economic activity (GDP) index up 8.2 percent y-o-y -- 
weaker than expected. 
- Moody's warns on GOA pro-cyclic macro policies. 
- GOA threatens to take Chile dairy product conflict to WTO. 
- Economy Minister Felisa Miceli projects 2006 exports will reach 
USD 45 billion. 
- GOA analyzes how to include pension adjustments in 2007 budget. 
- GOA eases mortgage loans access to keep rising rent prices down. 
- Commentary of the Week: "The challenge of placing limits on public 
banking" 
 
--------------------------------------------- -------- 
June monthly economic activity index up 8.2 percent y-o-y -- weaker 
than expected. 
--------------------------------------------- -------- 
 
¶1.  The GOA's monthly economic activity index, viewed as a reliable 
leading indicator of GDP, came out was up 8.2 percent y-o-y in June 
-- below the BCRA market survey forecast of 8.5 percent. 
Nonetheless, this continues the recovery since April, which showed 
the weakest growth rate (+6.3 percent) in the past eight months, and 
was in line with the May indicator (+8.1 percent).  Weaker 
performance in March/April was attributed in part to seasonality 
(i.e. Easter effect).  Key contributors to first half growth 
included new investments in car manufacturing and construction.  The 
latest BCRA consensus survey forecasts a 7.8 percent growth in 
economic activity for 2006, a slight upward revision from its 
previous forecast of 7.7 percent. 
 
--------------------------------------------- -------- 
Moody's senior sovereign debt analyst Mauro Leos warns on 
Argentina's future. 
--------------------------------------------- -------- 
 
¶2.  On August 16, Moody's senior sovereign rating analyst Mauro Leos 
presented his concerns about Argentina's future economic performance 
in a Buenos Aires seminar.  According to Leos, Argentina is passing 
through an extended positive "hypercycle" due to favorable world 
commodity prices and a post-crisis rebound effect.  He warned of the 
risk of Argentina following Venezuela's state-centric model and 
reminded that this is the time to save, not to increase pro-cyclical 
expenditures.  The analyst did not indicate whether Moody's is 
considering any change Argentina's sovereign debt rating (currently 
B3). 
 
--------------------------------------------- -------- 
GOA threatens to take Chile dairy product conflict to WTO. 
--------------------------------------------- -------- 
 
¶3.  The GOA rejected arguments presented by the GOC to apply an 
import duty on Argentina's dairy products, and warned that it might 
take the issue to the World Trade Organization (WTO).  According to 
GOA officials, the GOC can't justify import duties of up to 31 
percent on Argentina's dairy products on grounds that Chilean 
producers are being harmed by these imports. 
 
--------------------------------------------- -------- 
Economy Minister Felisa Miceli projects 2006 exports will reach USD 
45 billion. 
--------------------------------------------- -------- 
 
¶4.  Economic Minister Felisa Miceli said Argentine exports will 
probably reach USD 45 billion in 2006, increasing Argentina's trade 
surplus.  Total exports reached USD 21.5 billion during the first 
half of 2006 and were USD 40 billion in 2005, with a 2005 trade 
surplus of USD 11.2 billion.  Miceli stated that this administration 
"has a clear vocation to integrate with the world economy, but in a 
balanced manner and without renouncing our industrial development 
objectives" and that keeping the real exchange rate from 
appreciating is a key strategy to attract long-term investment to 
the export sector. 
 
--------------------------------------------- -------- 
Multilateral real exchange rate depreciates 0.8 percent m-o-m in 
July. 
 
--------------------------------------------- -------- 
 
¶5.  The BCRA's multilateral real exchange rate index -- which 
measures the real exchange rate between the peso and a 
trade-weighted basket of currencies -- depreciated 0.8 percent m-o-m 
in July.  The real depreciation is largely explained by the 
depreciation of the peso against the Brazilian real, partially 
offset by an appreciation against the dollar and the Euro.  The 
index is 5.3 percent above its level twelve months ago and 105.6 
percent above its average value during convertibility.  [The BCRA's 
multilateral real exchange rate index weighs domestic prices and the 
exchange rates of Argentina's main trading partners according to 
their share of Argentina's exports and imports.] 
 
--------------------------------------------- -------- 
GOA analyzes how best to include pension adjustments in the 2007 
Budget. 
--------------------------------------------- -------- 
 
¶6.  On August 8, the Argentine Supreme Court ruled against selective 
pension increases set by the GOA, claiming that this action is 
unconstitutional, particularly for the case of pensions above ARP 
1,000 per month.  Since then, the GOA has been analyzing how best to 
include pension adjustments in the 2007 budget, given that private 
consultants estimate its fiscal cost at approximately ARP 5.2 
billion annually,  approximately 0.8 percent of GDP.  On August 16 
Argentine President Nestor Kirchner said he is not going to play 
"Santa Claus" only to disappoint later, adding that he will be 
serious and responsible in following the Supreme Court's ruling. 
The GOA is considering an option of gradually adjusting pensions to 
keep pace with social security contributions. 
 
--------------------------------------------- -------- 
The GOA eases mortgage loans access to control rising rents. 
--------------------------------------------- -------- 
 
¶7.  After meeting with players in the real estate sector to discuss 
rising rent prices, Secretary of Internal Trade Guillermo Moreno 
proposed "reactivating" the mortgage loan market through via an 
"incentives" plan.    The measure has two objectives, easing 
mortgage loans' accessibility and providing economic incentives to 
construction companies.  The GOA will allow informal employees 
access to mortgage loans if they can show an income history; and 
construction companies will enjoy reimbursement of anticipated VAT 
(valued added tax) payments.  According to the National Bureau of 
Statistics (INDEC), rents have increased 7.2 percent in 2006, while 
the CPI increased 4.9 percent. 
 
--------------------------------------------- -------- 
Banks' 6-month 2006 profits already exceed full year 2005 profits. 
--------------------------------------------- -------- 
 
¶8.  The BCRA published its banks report showing that banks' profits 
for the first half of 2006 already exceed those of 2005 in its 
entirety.  During the first half of 2006, banks' earnings reached 
ARP 1.80 billion, vs. ARP 1.79 billion in 2005.  According to the 
report, this confirms continued financial system recovery after the 
2002 crisis.  2005 was the first year since then with positive 
annual earnings for banks.  Private bank profits in the first half 
of 2006 were ARP 1.1 billion, also exceeding their 2005 results. 
The BCRA report also indicates a reduction in private banks' 
exposure to the public sector and an improvement in portfolio 
quality. 
 
--------------------------------------------- -------- 
Buenos Aires province to issue a new bond. 
--------------------------------------------- -------- 
 
¶9.  According to local media, Buenos Aires province is preparing a 
bond issuance of ARP 1 billion to meet its financial budget for this 
year.  This will be the first bond offering by an Argentine province 
since the 2002 financial crisis and could take place between 
September and October.  The province must first seek authorization 
from the provincial legislature to increase the budget for 2006 and 
to raise its authorized debt level.  The province's public accounts 
deterioration (its 2006 fiscal deficit is estimated at ARP 0.5 
billion), resulting partly from salary hikes and the lack of 
additional funds from the GOA, led to this decision. 
 
--------------------------------------------- -------- 
GOA transfers to provinces 27 percent over-budget in first half 
¶2006. 
--------------------------------------------- -------- 
 
¶10.  During the first half of 2006, the GOA transferred 27 percent 
more than budgeted to provinces; the National Treasury committed to 
transfer ARP 37.1 billion in 2006, but in just the first half, GOA 
transfers reached ARP 23.6 billion (27 percent over the amount 
planned for the first half).  These additional transfers will permit 
provinces to fulfill Fiscal Responsibility Law obligations which 
limit debt service payments to a maximum of 15 percent of current 
revenues.  The Federal Council of Fiscal Responsibility has already 
warned six provinces (Chaco, Formosa, Jujuy, Rio Negro, San Juan and 
Tucuman) to reduce their debt exposure. 
 
--------------------------------------------- -------- 
Argentina and Bolivia agree on the construction of a gas pipeline. 
--------------------------------------------- -------- 
 
¶11.  On August 14, Argentina's Planning Minister Julio de Vido and 
Bolivia's Vice President Alvaro Garcia agreed to build a USD 1.2 
billion gas pipeline linking southern Bolivia to northern Argentina 
and a USD 250 million gas separation plant near the border.  Bolivia 
committed to boost gas exports to Argentina from 7.7 million cubic 
meters to 27.7 million cubic meters per day.  According to de Vido, 
the construction bidding process will be completed before the end of 
the year, and according to local media, construction will take two 
years.  Negotiations on gas prices for 2007 are expected to be 
completed by October.  Argentina's current import gas price 
agreement of USD 5 per million cubic meters from Bolivia expires by 
the end of 2006. 
 
--------------------------------------------- -------- 
Union leader Hugo Moyano asks for family allocation increase. 
--------------------------------------------- -------- 
 
¶12.  On August 16, union leader Hugo Moyano said that Argentina's 
President Nestor Kirchner committed, in a private meeting, to 
increase family allocations between October and November.  Moyano 
had already demanded this increase during the Minimum, Vital and 
Mobil Wage Council meetings that granted a 27 percent increase in 
the minimum wage; on that occasion, Moyano asked an increase in 
family allocations from ARP 60 to ARP 75 per child, but according to 
local media is now asking for a 50 percent increase. 
 
--------------------------------------------- -------- 
Argentina, Brazil and Paraguay set up an anticrime border center. 
--------------------------------------------- -------- 
 
¶13.  The Governments of Argentina, Brazil and Paraguay set up a 
joint intelligence center to combat smuggling and money laundering 
in the region where their borders meet, also known as the Tri-Border 
area.  The center will be located at Foz do Iguacu in Brazil, using 
facilities of the Brazilian Federal Police.  The United States has 
complained that this area has long served as a venue for illicit 
activity including drugs, arms smuggling and money laundering, and 
that part of the large Arab community in the area raised funds for 
terrorist organization Hizbollah in Lebanon. 
 
--------------------------------------------- -------- 
BCRA to reduce bank costs in September. 
--------------------------------------------- -------- 
 
¶14.  The BCRA is studying a plan to reduce overall bank expenses, to 
lessen the impact of recently announced tightening of reserve 
requirements:  Banks' cash holdings will no longer count toward 
reserve requirements from September, and reserve requirements will 
rise from 17 percent to 19 percent on demand deposits starting in 
August.  According to BCRA officials, the plan to reduce expenses 
will focus on banks with branches throughout the country, especially 
those away from urban centers.  Some banks are starting to announce 
increases between 10 percent-15 percent for commissions charged to 
their clients. 
 
--------------------------------------------- -------- 
JPMorgan upgrades Argentina's sovereign external debt rating. 
--------------------------------------------- -------- 
 
¶15.  JPMorgan upgraded Argentina's sovereign external debt to 
Overweight in its Emerging Market Bond Index Global [an 
independently maintained and published index composed of debt 
securities in 27 countries, which includes Brady bonds, sovereign 
debt, local debt and Eurodollar debt, all of which are 
dollar-denominated].  The investment firm said it upgraded Argentina 
in the belief that the Federal Reserve will leave rates unchanged 
for an "extended window of time", therefore supporting higher risk 
credits.  JPMorgan also forecasted solid fundamentals for Argentina, 
including strong economic growth, "a slight moderation of inflation, 
a stable fiscal surplus, and a rising trade surplus".  [Overweight 
means that over the next three months the recommended position is 
expected to outperform the relevant index.] 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities. 
--------------------------------------------- -------- 
 
¶16.  The BCRA received ARP 2 billion in bids at its August 15 Lebac 
and Nobac auction, and no Lebacs or Nobacs came due during the week. 
 It accepted ARP 468 million in Lebac bids and ARP 446 million in 
Nobac bids.  The yield on the 161-day Lebac decreased from 8.50 
percent to 8.39 percent and the yield on the 245-day Lebac was 9.95 
percent.  The yield on the longest term instrument, the 357-day 
Lebac, dropped from 11.90 percent to 11.75 percent.  Lebacs for 
maturities of more than 357 days were withdrawn due to lack of 
demand.  The spread on the one-year Nobac decreased from 1.57 
percent to 1.30 percent and the two-year Nobac from 3.43 percent to 
2.98 percent.  The Badlar rate (the base rate for Nobacs) is 
currently at 9.4 percent.  Rates fell for the third consecutive week 
thanks to strong market demand (the BCRA rejected 55 percent of the 
received bids). 
 
--------------------------------------------- -------- 
The peso depreciated against the USD on Friday, closing at 3.10 
ARP/USD. 
--------------------------------------------- -------- 
 
¶17.  The peso depreciated slightly versus the USD after remaining 
flat most of the week, closing at 3.10 ARP/USD.  The BCRA is still 
not reporting daily transactions in the dollar market.  The peso 
exchange rate has depreciated 1.6 percent since the beginning of the 
calendar year.  The BCRA's reserves stood at USD 27 billion as of 
August 16, and have increased USD 8.4 billion, or 45 percent, since 
the GOA prepaid its entire IMF debt on January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week: "The Challenge of Placing Limits on Public 
Banking", by Nadin Argaaraz and Sofa Devalle, economists at IERAL 
of the Mediterranean Foundation, from an article published in La 
Nacisn on July 23. 
--------------------------------------------- -------- 
 
¶18.  After achieving a relatively larger flow of loans to the 
private sector, the Central Bank of Argentina reduced the maximum 
permitted limit of assistance to public sector banks in its three 
levels, passing from the current 40 percent of valid stocks to 35 
percent as of July 1, 2007 (Communication "A" 4546 of the Central 
Bank). 
 
¶19.  There is no doubt that any action taken to broaden credit to 
the private sector and reduce the substitution effect that occurs 
when loans destined for the public sector reduce loanable funds is a 
measure that strengthens the financial system as a significant means 
to consolidate private productive investment. 
 
¶20.  However, in order to analyze its implications on the ability of 
the public sector to obtain bank financing, it is necessary to 
examine the current composition of financial entities' assets, and 
which would be the entities most affected. 
 
¶21.  An important point to clarify is that assistance to the public 
sector through the form of Central Bank bills and notes would not be 
included in analysis of the imposed restriction, given that it 
excludes Central Bank operations. 
 
¶22.  Analyzing the composition of the stock of all banks as of April 
2006, one observes that 25 percent was allocated to the public 
sector (excluding operations with the Central Bank), as much for 
 
loans as for public stocks.  That is, for all banking entities in 
the country, on average they don't exceed the Central Bank's limit 
on financial assistance to the public sector. 
 
¶23.  However, this conclusion is based on the average of all banks 
in the country, without considering what differences there may be 
between them.  Disaggregating by distinct types of financial 
entities, one realizes that the percentage of assets set aside to 
finance the public sector is higher for public banks than for 
private banks (32 percent and 19 percent, respectively).  Also, 
public banks' assistance to the public sector is even higher among 
the group of provincial and municipal public banks, reaching 40 
percent of total assets. 
 
¶24.  Although the average for banks does not reach the Central 
Bank's maximum, the situation of provincial public banks is more 
difficult. 
 
-------------------- 
A possible increase 
-------------------- 
 
¶25.  This does not mean that provincial public banks must reduce 
loans to the public sector in absolute terms.  The possibility of 
increasing assistance to the public sector will depend on the 
magnitude that assets increase.  Given the current ratio of 40 
percent, if assets increase 20 percent in the next year, assistance 
to the public sector could rise, but in a ratio of $1 to the public 
sector for every $9 to the private sector in order to reduce the 
ratio to 35 percent.  On the other hand, if assets increase by less 
than 15 percent, it would be necessary to reduce credit to the 
public sector in order to comply with the restriction. 
 
¶26.  Considering an economy that maintains its rate of activity, it 
is reasonable to expect that increasing credit will increase banks' 
assets as a result.  Under this scenario, what behavior must each 
group of banks assume?  Looking at the banking sector as a whole, 
one observes that for now there is a lack of strong restrictions on 
credit to the public sector, while in the case of provincial public 
banks, the situation is more delicate. 
 
¶27.  In moments like the present, in which the discussion of closing 
the accounts of the provinces in 2006 is red-hot, the challenge is 
raised of how to go about managing the provincial public banks in a 
scenario in which the public finances of some provinces are 
compromised.  Without going into detail on the individual situation 
of each bank or province, the governors face an important test in 
which they must demonstrate that there is a genuine change of 
behavior toward a greater fiscal discipline in Argentina.  In 
particular, they must show that they are not going to turn to the 
privileged financing of their banks.  (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.) 
 
MATERA 
2