VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1993/01 2482050
ZNR UUUUU ZZH
R 052050Z SEP 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5773
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2286
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001993 
 
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 
September 1, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- GOA attempts to ease mortgage loan access. 
- GOA uses "Superpowers" to reallocate fiscal surplus funds. 
- Central Bank President Redrado calls high reserves best defense 
against intl. volatility. 
- July construction activity index up 27.9 percent y-o-y... record 
high. 
- GOA seeks to control prepaid medical plan rates. 
- US Court of Appeals' ruling favorable to Argentina expected on the 
reserve freeze suit. 
- Commentary of the Week: "The Real Solution for Mortgages is the 
Capital Market" 
 
--------------------------------------------- -------- 
GOA attempts to ease mortgage loan access. 
--------------------------------------------- -------- 
 
¶1.  On August 17 the BCRA announced it will work to encourage banks 
to boost mortgage lending and ease applicant paperwork in an effort 
to address rising rents.  This initiative follows Secretary of 
Internal Trade Guillermo Moreno's proposal to "reactivate" the 
mortgage loan market through an "incentives" plan.  According to the 
National Bureau of Statistics (INDEC), rents jumped 7.2 percent year 
to date 2006, while the CPI increased 4.9 percent.  Initially, only 
government-owned banks Banco de la Nacion Argentina, Banco Ciudad de 
Buenos Aires and five provincial banks (Buenos Aires, Santa Fe, 
Entre Rios, Santa Cruz and San Juan) announced they would expand 
their supply of mortgage credit.  On August 30, the GOA announced 
that an additional 6 private banks (Macro Bansud, BBVA Frances, Rio, 
Galicia, Hipotecario and Credicoop) are also committed to this 
project.  Media reports note that all these private banks were short 
on details, privately skeptical of the government's ability to grow 
the mortgage market absent direct subsidies (see Commentary 
article), and very concerned about their continuing inability to 
foreclose on 2002 crisis mortgage defaults:  An emergency ban on 
foreclosures has been repeatedly extended by the Congress.  The GOA 
also announced plans to encourage residential construction through 
strategies such as reimbursements on anticipated VAT (value added 
tax) reimbursements. 
 
--------------------------------------------- -------- 
GOA uses "Superpowers" to reallocate fiscal surplus funds. 
--------------------------------------------- -------- 
 
¶2.  The GOA used recently approved so-called "superpowers" to 
reallocate ARP 750 million from its 2006 fiscal surplus to public 
works projects including road and sewer infrastructure and housing 
construction.  Parliament recently granted the Chief of Cabinet 
power to reallocate budget funds irregardless of the provisions of 
the Financial Administration Act or the Fiscal Responsibility Law. 
Some estimates show that the reallocation will reduce the projected 
2006 fiscal surplus by 4.8 percent. 
 
--------------------------------------------- -------- 
Central Bank President Redrado calls high reserves best defense 
against international volatility. 
--------------------------------------------- -------- 
 
¶3.  On August 29, during an international economic symposium held by 
Tel Aviv University, BCRA president Martin Redrado said new economic 
configuration is here to stay, with highly volatile global 
imbalances, commodities prices, the rapid evolution of international 
commerce flows and increased geo-political uncertainly.  According 
to Redrado, this new configuration augurs for increased volatility 
and high reserve stocks are the best strategy to smooth the impact 
of inevitable external shocks.  Redrado also stated that the BCRA 
can comfortably continue its sterilization strategy, with discount 
borrowing incomes and from other sources remain above Lebacs and 
Nobacs interests payments. 
 
--------------------------------------------- -------- 
July construction activity index up 27.9 percent y-o-y (seasonally 
adjusted) - a record high. 
--------------------------------------------- -------- 
 
¶4.  The National Bureau of Statistics (INDEC) released its July 
 
construction activity index, showing an increase of 27.9 percent 
y-o-y seasonally adjusted, the largest annual increase since March 
¶2004.  Construction activity, an important component of gross fixed 
investment, grew 3 percent m-o-m seasonally adjusted and 1.6 percent 
unadjusted.  The fastest growing sectors were residential 
construction and private building for other purposes, up 26 percent 
and 27 percent y-o-y, respectively.  During the first seven months 
of the year, construction activity rose 21.7 percent against the 
same period in 2005, taking the index to record highs. 
 
--------------------------------------------- -------- 
GOA seeks to talk down prepaid medical plan rates. 
--------------------------------------------- -------- 
 
¶5.  On August 24, Secretary of Internal Trade Guillermo Moreno said 
that prepaid medical plan companies will not raise their rates as 
they had previously announced.  Moreno added that companies which 
had already increased prices would have to reimburse their clients. 
A number of medical plan companies announced their intent to go 
ahead with planned increases.  GOA Health Services Superintendent 
Hector Capaccioli urged Argentines (of whom some 2.5 millions engage 
private prepaid medical services) not to pay increasing rates in 
coming months and to file complaints with the Internal Trade 
Secretariat. 
 
SIPDIS 
 
¶6.  According to local newspaper El Cronista, Chilean prepaid 
medicine provider Clio reported attempted extortion by the GOA 
Internal Trade Secretariat and suspended its five-year USD 20 
million investment plan.  According to this source, Clio General 
Manager Horace Galaz said the company would invest only what is 
necessary to maintain current services. 
 
--------------------------------------------- -------- 
US Court of Appeals' ruling favorable to Argentina expected on 
reserve freeze suit. 
--------------------------------------------- -------- 
 
¶7.  On August 29, a US Court of Appeals held a hearing on USD 105 
million in BCRA deposits frozen in the Federal Reserve of New York 
since late 2005.  Plaintiffs EM Ltd and NML Capital seek to attach 
the BCRA deposits, arguing that December 2005 GOA decrees 
authorizing the BCRA to use its reserves to  repay IMF credits made 
these reserves ineligible for sovereign immunity.  Argentine media 
anticipates a favorable U.S. court ruling for the GOA in light of 
amicus briefs in favor of Argentina's position filed by the USG. 
 
--------------------------------------------- -------- 
Manager of second-largest fund group in Argentina keeping money out 
of the local stock market. 
--------------------------------------------- -------- 
 
¶8.  Banco Santander Central Hispano's executive Ricardo Daud, 
manager of the second-largest fund group in Argentina, said he has 
limited Argentine equity holdings to only 3.5 percent of his Latin 
America fund, with fully 57 percent invested in Brazilian and 29 
percent in Mexican assets.  According to Daud, GOA policies are 
squeezing corporate profits, adding that "even with the Argentine 
economy growing at high rates, from the point of view of quality it 
is not going as well as in other regions."  Daud oversees ARP 2 
billion in various funds at the Buenos Aires unit of this 
Madrid-based bank 
 
--------------------------------------------- -------- 
Former Minister Lavagna warns on impact of a power crisis on 
companies' costs of production. 
--------------------------------------------- -------- 
 
¶9.  Former Kirchner's Economic Minister Roberto Lavagna warned about 
the impact of a future power crisis on companies' costs of 
production.  According to Lavagna, a power crisis in Argentina is 
not a potential risk, but a current and very serious problem.  With 
private companies already building their own back-up power plants in 
anticipation of future grid shortages, Lavagna projected production 
costs will rise, putting pressure on prices. 
 
--------------------------------------------- -------- 
Tax revenue expected to increase 22 percent y-o-y to ARP 12.5 
billion in August. 
--------------------------------------------- -------- 
 
 
¶10.  According to Reuters, a source at the Ministry of Economy said 
August federal tax revenues jumped 22 percent to ARP 12.5 billion. 
This estimate is in line with BCRA consensus survey projections. 
The BCRA forecasts tax revenues of ARP 144.2 billion for 2006. 
 
--------------------------------------------- -------- 
Beef producers try to reopen the beef export market. 
--------------------------------------------- -------- 
 
¶11.  On August 30, the GOA extended the mechanism to ease the beef 
export ban for an additional 30-day period.  Manufacturers and 
producers are working to persuade Economic Minister Felisa Miceli 
that the sector will supply the local market at the agreed prices 
even if the beef export ban is fully terminated.  According to the 
National Food and Animal Health Inspection Service (SENASA), 
Argentine beef exports totaled USD 480 million during first half of 
2006, down from USD 627 million in the same period in 2005 (-23 
percent y-o-y).  By volume, beef sales decreased 37 percent y-o-y. 
[On March 8, 2006, the GOA imposed a ban beef exports for 180 days 
and raised export taxes on boned cuts and heat-processed beef from 5 
percent to 15 percent in an attempt to keep local prices under 
control.  On May 29, the GOA eased the ban via an export quota 
system.] 
 
--------------------------------------------- -------- 
GOA analyzes pension system reform for 2007 budget. 
--------------------------------------------- -------- 
 
¶12.  According to local media, the GOA is working on a pension 
system reform to capitalize the pay-as-you-go public retirement 
system, easing the impact of pension adjustments to be included in 
the 2007 budget.  One option is to allow those starting their first 
jobs to join and contribute to the public retirement program, if 
they have not yet contributed to private pension funds (AFJPs). 
Such up-front new hire payments into to the public system could ease 
the fiscal burden of anticipated pension payment increases in the 
2007 budget.  [Currently new hires who don't specifically ask to be 
included in the public pension system are automatically incorporated 
into the private AFJP system.] 
 
--------------------------------------------- -------- 
GOA announces oil exploration incentives for private companies. 
--------------------------------------------- -------- 
 
¶13.  The GOA will offer private oil companies the chance to become 
"partners" with GOA-owned energy company Enarsa, supplying financing 
for hydrocarbon exploration.  Budget-constrained Enarsa owns all 
exploration permits and production concessions for offshore areas 
that were not under license when it was created by law (November 2, 
2004).  According to a Ministry of Economy resolution dated July 31 
of 2006, Enarsa has a staff of 24 employees and a limited 
exploration budget of ARP 2.9 million. 
 
--------------------------------------------- -------- 
GOA reduces export tariffs on some dairy products. 
--------------------------------------------- -------- 
 
¶14.  On August 24, the GOA announced it will reduce export tariffs 
on powder milk from 15 percent to 10 percent, and on cheese products 
from 10 percent to 5 percent.  These taxes were raised July 2005 in 
an effort to contain rising domestic dairy product prices.  Analysts 
attribute this easing to an expected 10 percent-30 percent increase 
in milk production. 
 
--------------------------------------------- ------- 
GOA reduces import tariffs on Brazilian cars. 
--------------------------------------------- -------- 
 
¶15.  On August 24, the Economy Ministry announced a significant 
reduction in Brazilian car import tariffs from 70 percent to 35 
percent, dropping back to a rate earlier imposed until 2005.  This 
measure comes as a result of a reduction in Argentina's trade 
deficit with Brazil. 
 
--------------------------------------------- -------- 
Tourism up 33 percent y-o-y in Q2 of 2006. 
--------------------------------------------- -------- 
 
¶16.  The National Bureau of Statistics (INDEC) announced that net 
tourism revenues increased 33 percent y-o-y in the second quarter of 
2006, with the number of incoming tourists up 20 percent y-o-y to 
445,000 partially offset by the number of outgoing tourists up 12 
percent y-o-y to 271,000.   Preferred tourist destinations include 
the city of Buenos Aires, Cordoba Province, and the Atlantic coast, 
chosen by 55 percent, 6 percent and 4 percent of tourists, 
respectively.  Visiting tourists were mainly from the European Union 
(22 percent), followed by Brazil (19 percent), the rest of Latin 
America (16 percent), and the U.S. and Canada (15 percent). 
 
--------------------------------------------- -------- 
GOA promises Japan to deal with holdouts investors "in the future". 
--------------------------------------------- -------- 
 
¶17.  On August 29, Argentine Foreign Minister Jorge Taiana and 
Japanese Senate president Chikage Oogi met in an attempt to 
reestablish "normal" bilateral relations following the GOA default 
on sovereign debt obligations in December 2001.  They discussed 
Japanese holdout investors (those who chose not to participate in 
the GOA debt exchange that closed February 2005), who retain 
approximately USD 2.5 billion in defaulted GoA sovereign debt. 
According to local media, the GOA promised Japan it would reopen the 
debt exchange "in the future", but under conditions less favorable 
than those granted to investors who accepted the debt exchange.  A 
similar promise was made to Italian public officials during their 
visit last June (Italian holdouts retain approximately USD 5 billion 
in defaulted GOA sovereign debt). 
 
--------------------------------------------- -------- 
Bolivian strike cuts gas delivery to Argentina for a day. 
--------------------------------------------- -------- 
 
¶18.  On August 28, Bolivian protesters closed the valves of a gas 
pipeline linking Bolivia and Argentina during a strike against 
Argentina's new policy limiting the times Argentines can cross the 
border to Bolivia to once per month and capping purchases they can 
carry back at USD 50 per trip.  According to the strike's leaders, 
future gas delivery disruptions are not out of the questions while 
they wait for Bolivia's President Evo Morales to offer a solution. 
The shutdown prevented the delivery of some 4.9 million cubic meters 
of gas. 
 
--------------------------------------------- -------- 
Sel Consultores publishes alarming social indicators about the urban 
young. 
--------------------------------------------- -------- 
 
¶19.  SEL Consultores published a study showing 14 percent of 
Argentine youth aged 20-24 (740,000) in the most populated urban 
areas are neither working, trying to find a job nor studying.  Some 
10 percent of the youth aged 20-24 are extremely poor and an 
additional 22 percent are poor.  For those trying to find a job, the 
unemployment rate reaches 24 percent, and this rate grows to 33 
percent for those aged 15-19.  For those working aged 20-24, 58 
percent have informal jobs, and 36 percent have informal jobs that 
are highly unstable.  These urban youth social indicators contrast 
with the promising reduction in unemployment announced by INDEC 
recently, down to 10.4 percent in the second quarter of 2006 from 
12.1 percent in the second quarter of 2005. 
 
--------------------------------------------- -------- 
BCRA rolls over maturities and rejected 82 percent of all Nobac 
bids. 
--------------------------------------------- -------- 
 
¶20.  The BCRA received ARP 1.2 billion in bids at its August 29 
Lebac and Nobac auction.  No Lebacs or Nobacs came due during the 
week.  It accepted ARP 634 million in Lebac bids and ARP 72 million 
in Nobac bids.  The yield on the 182-day Lebac was 8.50 percent and 
the yields on the 231-day Lebac and 343-day Lebac decreased from 
9.90 percent to 9.85 percent and from 11.65 percent to 11.55 
percent, respectively.  The yield on the longest term instrument, 
the 623-day Lebac, was 12.25 percent.  The 518-day Lebac was 
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 1.15 percent to 1.10 percent and the two-year Nobac increased 
from 2.68 percent to 2.73 percent.  The Badlar rate (the base rate 
for Nobacs) is currently at 9.4 percent.  Rates fell (except on the 
 
two-year Nobac) for the fifth consecutive week due to strong market 
demand and the BCRA's decision to accept more Lebacs rather than 
Nobacs bids (rejecting 82 percent of all Nobac bids). 
 
--------------------------------------------- -------- 
Peso depreciates against the USD, closing at 3.11 ARP/USD. 
--------------------------------------------- -------- 
 
¶21.  The peso depreciated slightly versus the USD August 28 and 
remained at 3.11 ARP/USD for the rest of the week.  The peso 
exchange rate has depreciated 1.97 percent since the beginning of 
the calendar year.  BCRA's reserves stood at USD 27.2 billion as of 
August 29, 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: "The Real Solution for Mortgages is the 
Capital Market", by Miguel Kiguel, from an article published in El 
Cronista Comercial on August 30. 
--------------------------------------------- -------- 
 
¶22.  These days, there is great interest in finding new solutions to 
grow the mortgage market in order to facilitate access to financing 
for prospective home owners.  There are two key impediments 
restricting access to mortgage credit. 
 
¶23.  The first is a colossal gap between property prices and 
salaries.  Most workers cannot cover a mortgage payment with 30 
percent of their salary.  On average, property prices have gone up 
25 percent in dollars since the devaluation in 2002, while the 
equivalent dollar value of salaries has dropped about 30 percent in 
the same period. 
 
¶24.  The second problem is that, for the mortgage market to become 
an important source of home financing, capital markets - and in 
particular institutional investors including pension funds and 
insurance companies must play a larger role.    Banks, in general, 
can only finance a limited volume of long-term fixed rate mortgages 
given their liabilities are mostly short-term variable rate 
deposits. 
 
¶25.  In most countries, banks originate mortgages taking advantage 
of their distribution capacity, with the bulk sold down to the 
secondary market.  These portfolio sales are done at market interest 
rates; therefore a ten-year mortgage would have a slightly higher 
rate than a ten-year Treasury bond rate. 
 
¶26.  In Argentina it is difficult to determine what the rate would 
be today, since there are no long-term fixed rate instruments.  The 
closest we can get is through the one-year LEBAC issued by the 
Central Bank which has a 12 percent return.  The rate for a ten-year 
investment would surely be higher, at least 14 percent.  This, then, 
would be the base rate at which banks could sell mortgages in the 
secondary market. 
 
¶27.  What are the alternatives?  One is that the banks lend money at 
lower rates but maintain their mortgage portfolios on their own 
balance sheets.  The main constraint of this option is that it sets 
a ceiling for growth for the mortgage market.  Another option is to 
try to lower the interest rate.  In some countries, like Spain, this 
objective has been achieved by using adjustable interest rates, for 
example linking it to the CD rate.  Banks prefer this mechanism 
because they are protected in case of a rise in interest rates. 
 
¶28.  With lower interest rates, there would be a larger number of 
families who could qualify for mortgages, broadening the market. 
The main obstacle for variable interest rates that Argentina faces 
today is debtors' fears of a possible hike in rates, understandable 
given a history of macroeconomic instability and a sustained 
two-digit inflation rate. 
 
¶29.  What economic policy measures can be taken in order to remove 
this credit holdup?  The Central Bank has already made some changes 
in regulations allowing banks to finance a larger share of 
residential home credits by allowing banks more flexibility in 
calculating minimum income requirements for mortgage applicants. 
 
 
¶30.  However, rather than in issuing more banking regulations, what 
 
is most needed are measures to facilitate the development of capital 
markets.  Among these measures could be the creation of an interest 
rate swap mechanism allowing debtors to take fixed-rate credits and 
banks to lend to a variable rate.  While this market will eventually 
grow on its own, initially it will require Government support. 
 
¶31.  A second measure is the creation of a fund to subsidize monthly 
mortgage payments during the first five years so debtors could 
qualify for credit.  This subsidy should be paid back in full by the 
debtor during the out  years of a mortgage.  The pay-back would be 
possible since income is expected to grow at the same rate of 
inflation.  This mechanism should not have a net fiscal cost. 
 
¶32.  Summarizing, the development of an Argentine mortgage market 
depends on the ability to develop capital markets.  The economic 
policy measures outlined above offer solutions compatible with the 
development.  (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