VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1943/01 2411853
ZNR UUUUU ZZH
R 291853Z AUG 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5712
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2282
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001943 
 
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 25, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- GOA announces nuclear expansion program. 
- Minister of Economy Felisa Miceli proposes IMF structural 
reforms. 
- GOA primary surplus reaches ARP 2.09 billion in July -- in line 
with market expectations. 
- July industrial production index up 8.8 percent y-o-y. 
- July trade surplus of USD 940 million -- below market 
expectations. 
- Government Confidence Index down 5 percent m-o-m in August. 
- Commentary of the Week: "In the shadow of Gath & Chaves" 
 
--------------------------------------------- -------- 
GOA announces nuclear expansion program. 
--------------------------------------------- -------- 
 
¶1.  Argentina announced that it would expand its nuclear power 
program and reactivate a dormant uranium enrichment facility.  The 
announcement described four pillars upon which Argentina's enhanced 
nuclear energy capabilities would rest: The GOA plans to finish 
construction of the approximately 700MW Atucha II nuclear reactor in 
Buenos Aires province; start design and feasibility studies on a 
possible fourth reactor (Argentina currently has two functional 
nuclear power plants); extend the life of the Embalse reactor in 
Cordoba Province, which had been scheduled to cease operations in 
2011; and reopen a uranium enrichment facility in the town of 
Pilcaniyeu.  Planning Minister De Vido also said that the GOA would 
resume production of heavy water at a plant in Neuquen Province, 
with a goal of producing 600 tons in three years. 
 
--------------------------------------------- -------- 
Economic Minister Felisa Miceli proposes IMF reforms. 
--------------------------------------------- -------- 
 
¶2.  On August 22, during a GoA-sponsored seminar, Economic Minister 
Felisa Miceli previewed IMF reform proposals the GOA plans to 
present in more detail to Mercosur member nations.  She hopes to 
develop a common Mercosur position prior to the IMF's upcoming 
Singapore annual meeting.  Proposed measures included: 
- A return of the IMF to a more "traditional" lender of last resort 
role, including by providing "automatic" credit lines and on-request 
loans in case of crises; 
- Provision of IMF collateral to support member country bond 
issues; 
- A reexamination of the IMF quota determination formula. 
 
¶3.  Miceli also noted that Argentina will not support any increase 
in member fees to finance the IMF.  She lauded Argentina's fiscal 
and trade surpluses, calling them the result of a learning process 
after 15 years of crises without clear assistance from the IMF. 
 
--------------------------------------------- -------- 
GOA primary surplus reaches ARP 2.09 billion in July -- in line with 
market expectations. 
--------------------------------------------- -------- 
 
¶4.  July GOA's primary surplus reached ARP 2.09 billion, up 13.6 
percent y-o-y from ARP 1.84 billion in July 2005.  Primary spending 
remains high:  Capital spending jumped 37  percent y-o-y and 
non-interest current expenditures were up 28 percent y-o-y.  Current 
expenditures are expected to continue their growing trend given 
recent hikes in public wages and pensions.  On a 12-month rolling 
basis, the July primary surplus totaled 3.5 percent of GDP, 
unchanged from June.  The BCRA consensus survey forecasts a primary 
surplus of ARP 21.7 for 2006. 
 
--------------------------------------------- -------- 
July industrial production index up 8.8 percent y-o-y. 
--------------------------------------------- -------- 
 
¶5.  The industrial production index rose 8.8 percent y-o-y in July, 
above market expectations of 8.3 percent and in line with the prior 
month's 8.9 percent increase.  During July, the fastest growing 
sectors included automobile production (+33.9 percent), tobacco 
production (+16.8 percent), non-metallic minerals (+13.7 percent), 
oil refining (+11 percent) and printing (+8.5 percent).  The index 
 
increased 4.9 percent m-o-m non-seasonally adjusted and increased 
0.3 percent m-o-m seasonally adjusted.  The BCRA consensus survey 
forecasts a 7.1 percent industrial production growth for 2006 -- 
above last month's forecast of 6.9 percent. 
 
¶6.  The industry-wide apacity utilization index reached 72.7 
percent in July, up slightly from 72 percent in July 2005.  Sectors 
with the highest capacity utilization rates were included 
metal-based industries (93.3 percent), oil refining (93 percent) and 
textiles (87.4 percent).  Sectors with the lowest capacity 
utilization rates included auto production (55.1 percent), 
non-metallic minerals (63.1 percent) and metal-mechanical excluding 
cars (65 percent). 
 
--------------------------------------------- -------- 
July trade surplus of USD 940 million -- below market expectations. 
--------------------------------------------- -------- 
 
¶7.  The July trade surplus reached USD 940 million, below market 
expectations of USD 1.1 billion.  Exports increased 6 percent y-o-y 
to USD 3.8 billion, following 12 percent y-o-y growth in June, with 
an increase of 9 percent in price, partially offset by a 3 percent 
decrease in quantity.  Exports were driven by increases in 
industrial goods (+21 percent y-o-y), agribusiness (+11 percent 
y-o-y) and fuel and energy (+6 percent y-o-y), while primary goods 
decreased 22 percent y-o-y.  Imports increased 21 percent y-o-y to 
USD 2.9 billion, with increases in both price (+2 percent) and 
mainly in quantity (+19 percent).  Imports were driven by increases 
in capital goods (+32 percent), consumer goods (+26 percent), 
passenger vehicles (+23 percent), accessories for capital goods (+22 
percent), fuel and oil (+17 percent) and intermediate goods (+14 
percent).  The accumulated trade surplus reached USD 6.9 billion 
during the first seven months of 2006 and according to the BCRA 
consensus survey, it is expected to narrow to USD 10.6 billion by 
the end of the year, compared with USD 11.3 billion in 2005. 
 
--------------------------------------------- -------- 
2007 national budget could include higher expenditures. 
--------------------------------------------- -------- 
 
¶8.  On August 21, El Cronista reported that the 2007 national budget 
may include expenditures of more than ARP 130 billion.  One of the 
major causes for the expected rise in expenditures is a Supreme 
Court ruling dictating that the GOA should include pension 
adjustments in the 2007 budget (at an estimated cost of ARP 5.2 
billion annually).  The 2007 budget is expected to be sent to 
Congress on September 15.   In 2006, budgeted expenditures totaled 
ARP 93.7 billion but, according to local consultants, could reach 
more than ARP 110 billion by the year end. 
 
--------------------------------------------- -------- 
Government Confidence Index down 5 percent m-o-m in August. 
--------------------------------------------- -------- 
 
¶9.  The Government Confidence Index decreased 5 percent m-o-m in 
August to 2.41 points, 0.18 below the average during the Kirchner 
administration and well above the 1.2-point level in May 2003 when 
Kirchner took office.  Confidence in the GOA's ability to solve 
citizens' problems decreased 5 percent m-o-m, but remained the 
single factor generating the highest level of confidence.  Public 
opinion about the honesty of GOA officials and the efficiency of 
public spending increased 3 percent and 1 percent m-o-m 
respectively, while the perception of the GOA's general performance 
decreased 9 percent m-o-m.  The index slightly fell 0.4 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 public spending, honesty of GOA officials and the 
government's ability to solve problems.] 
 
--------------------------------------------- -------- 
Unemployment officially fell to 10.4 percent in Q2 of 2006. 
--------------------------------------------- -------- 
 
¶10.  On August 22, INDEC (National Bureau of Statistics) officially 
announced that the unemployment rate dropped to 10.4 percent in the 
second quarter of 2006, vs. 11.4 percent in Q1 of 2006 and 12.1 
percent in Q2 of 2005.  This figure was in line with President 
Nestor Kirchner's preliminary announcement made July 27.  The GOA 
 
projects unemployment will be below 10 percent by the end of the 
year for the first time in 13 years, while analysts in a Reuters' 
survey expect the rate to fall to 9.3 percent by December.  INDEC 
also publishes the unemployment rate that results from considering 
as unemployed those receiving State Head of Household benefits, 
which reaches 12.8 percent. 
 
--------------------------------------------- -------- 
BCRA rolls over maturities and decreases rates for Lebacs and 
Nobacs. 
--------------------------------------------- -------- 
 
¶11.  The BCRA received ARP 1.3 billion in bids at its August 22 
Lebac and Nobac auction, and no Lebacs or Nobacs came due during the 
week.  It accepted ARP 697 million in Lebac bids and ARP 288 million 
in Nobac bids.  The yield on the 154-day Lebac decreased from 8.39 
percent to 8.30 percent and the yield on the 238-day Lebac decreased 
from 9.95 percent to 9.90 percent.  The yield on the longest term 
instrument, the 350-day Lebac, dropped from 11.75 percent to 11.65 
percent.  Lebacs for maturities of more than 350 days were withdrawn 
because of the BCRA's decision not to validate the yield proposed by 
the market.  The spread on the one-year Nobac decreased from 1.30 
percent to 1.15 percent and the two-year Nobac from 2.98 percent to 
2.68 percent.  The Badlar rate (the base rate for Nobacs) is 
currently at 9.4 percent.  Rates fell for the fourth consecutive 
week due to strong market demand and the BCRA's decision to accept 
more Lebacs rather than Nobacs bids. 
 
--------------------------------------------- -------- 
Peso unchanged against the USD this week, closing at 3.10 ARP/USD. 
--------------------------------------------- -------- 
 
¶12.  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, reducing 
market transparency and depriving investors of useful information. 
The peso exchange rate has depreciated 1.6 percent since the 
beginning of the calendar year.  The BCRA's reserves stood at USD 
27.2 billion as of August 23, and have increased USD 8.7 billion, or 
47 percent, since the GOA prepaid its entire IMF debt on January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week: "In the shadow of Gath & Chaves", by Ricardo 
Esteves, from an editorial printed in La Nacion on July 25. 
--------------------------------------------- -------- 
 
¶13.  On the corner of Florida and Peron, where once stood the symbol 
of Argentine business -- the department store Gath & Chaves -- today 
hosts a flagship of Chilean expansion and commerce: Falabella. 
 
¶14.  This is good news, because Falabella is an efficient provider 
of goods at convenient prices and helps meet the demand of Argentine 
consumers. 
 
¶15.  Seen from a business perspective, it is a painful reminder of 
the slowdown of the Argentine business sector, bothered by systems 
and models that ignore businesses and the accumulation of capital. 
This process explains why Argentina today has a poverty rate of 32 
percent, while Brazil's is only 22 percent.  Just thinking of this a 
few decades ago would have been the result of a sick mind. 
 
¶16.  If Buenos Aires was 30 or 40 years ago the mecca to which 
Chileans flocked in search of high quality articles that they 
couldn't find in their own country, today it is where they come for 
the bargains a favorable exchange rate provides. 
 
¶17.  In the case of Falabella, by basing its business in a country 
with stable policies, it can develop a supply structure around the 
world and grow in other markets 
 
¶18.  If a market suddenly contracts, as tends to happen in 
Argentina, this obliges local firms to discontinue foreign 
operations, break their contracts and lose ground.  The Chileans, on 
the other hand, can maintain a flow of international purchases based 
on a constant level of consumption in Chile. 
 
¶19.  The stability of economic policies is a fundamental condition 
for the financing of any enterprise.  In our country, however, 
changes are typically 180 degrees.  We move to the beat of immediate 
 
political interests, without thinking in the long term.  And despite 
having the largest business structure in Latin America in the middle 
of the 20th century, today it is insignificant compared with that of 
Chile, Brazil or Mexico 
 
¶20.  Hampered by laws and adverse conditions, businesses have known 
only retreat in the past decades.  These negative factors also 
affect foreign investment, which has been insufficient to make up 
for the deteriorating state of the national business sector. 
 
¶21.  The lack of businesses - national and foreign - is at the root 
of high poverty rates.  There is poverty because there is a lack of 
employers.  That why it is so fundamental for the country to 
recreate favorable business conditions that are based on 
profitability and trust in the laws and institutions.  It is also 
essential to protect small and medium enterprises, so that they are 
started, grow, and one day turn into large companies.  If not, there 
will be fewer national enterprises and their owners will become 
renters. 
 
¶22.  Argentine businesses must compete not only with multinational 
corporations, but with businesses from other Latin-American 
countries, which don't repudiate their debts and therefore can 
finance themselves in the long run and at reasonable interest rates. 
 Although no one in his right mind would question the right of 
workers to improve their working conditions, changes must be made in 
a way that does not discourage business ventures, so that 
entrepreneurs grow and can employ more and more people.  Although 
workers may achieve new prerogatives, unemployed and underemployed 
would remain excluded from the system. 
 
¶23.  The insensitivity toward businesses' needs and the lack of 
strategic vision caused the country to squander sectors as its vital 
cultural industries: motion pictures and publishing were among the 
most important in Latin America. 
 
¶24.  It is as if the country renounced businesspeople, globalization 
and the future, without realizing that it still possesses the human 
resources (so long as the effects of its old, competitive, education 
system lasts) to contribute in the global economy provide a more 
decent standard of living to its citizens, reducing the number of 
impoverished people 
 
¶25.  We must have faith in our own strengths and faith in the 
future.  Paradigms are shifting, leaving past arguments without 
backing. 
 
¶26.  Right in the cradle of untamed capitalism, one of those 
paradigm shifts came about that will determine the future. 
 
¶27.  The two richest men in the world, Bill Gates and Warren Buffet, 
whose fortunes sum to tens of billions of dollars - together 
equivalent to half of Argentina's GDP in a year - have decided to 
donate a good part of their fortunes to humanitarian foundations. 
Their money goes not exactly to construct museums or hospitals in 
the United States, their home country, but rather to fight against 
the sickness and catastrophes devastating Africa, and to promote its 
development. 
 
¶28.  If the partnership between opportunities and  entrepreneurs has 
committed abuses and blunders in the international field hand in 
hand with their political leaders, the action of its greatest 
entrepreneurial leaders vindicates them.  (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