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DE RUEHBU #2139/01 2622200
ZNR UUUUU ZZH
R 192200Z SEP 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5958
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RHMFIUU/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 002139 
 
SIPDIS 
 
SIPDIS 
 
E FOR THOMAS PIERCE, WHA FOR WHA/BSC AND WHA/EPSC 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
TREASURY FOR ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PREACHER AND JOHN ANDERSEN 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for the week ending 
September 15, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
-  GDP up 7.9 percent yoy in Q2 2006. 
-  GOA announces 13 percent rise in pension payments. 
-  2007 budget may incorporate lower GDP growth projection. 
-  Argentina and Venezuela joint oil company plan advances. 
-  Argentine provinces prepares for power shortages. 
-  Argentine and Chilean presidents push economic integration. 
-  Multilateral real exchange rate depreciates 0.3 percent m-o-m in 
August. 
-  Commentary of the Week: "Disrupted Energy" 
 
--------------------------------------------- -------- 
GDP up 7.9 percent yoy in Q2 2006. 
--------------------------------------------- -------- 
 
¶1.  The GOA announced that GDP grew 7.9 percent yoy in the second 
quarter of 2006 -- slightly above the central bank (BCRA) consensus 
forecast of 7.8 percent -- and 8.3 percent yoy in the first half of 
¶2006.  Growth derived primarily from strong domestic demand - 
primarily increased investment and higher private and public 
consumption - boosted by a 3.1 percent increase in exports.  During 
the second quarter, investment grew 18.5 percent yoy, with increases 
of 23.2 percent yoy in construction and 11 percent yoy in plant and 
machinery investment.  Private consumption rose 8.2 percent yoy, and 
public consumption was up 6.5 percent yoy.  Goods and services 
production increased 8.2 percent and 7.5 percent yoy, respectively. 
The BCRA forecast for GDP growth stand at 7.8 percent for 2006 and 6 
percent for 2007. 
 
--------------------------------------------- -------- 
GOA announces 13 percent rise in pension payments. 
--------------------------------------------- -------- 
 
¶2.  On August 8, the Argentine Supreme Court ruled unconstitutional 
a GoA plan for selective pension increases that favored low income 
earners, instead requiring across the board increases to restore 
pensioner purchasing power.   The GoA modified its plan accordingly 
and, effective January 1, 2007, the monthly minimum pension paid to 
retirees will increase from ARP 470 to ARP 560.  Pensions above the 
minimum will be increased 13 percent.  This will be the second 
across the board increase in pension payments since an 11 percent 
increase in May 2002.   The GOA estimates this policy's fiscal cost 
at approximately ARP 4.1 billion in 2007, roughly 0.55 percent of 
GDP. 
 
--------------------------------------------- -------- 
2007 budget may incorporate lower GDP growth projection. 
--------------------------------------------- -------- 
 
¶3.  Local media reported preliminary macroeconomic projections that 
the GOA will likely include in the 2007 budget -- which is expected 
to be sent to Congress on September 15.  Reportedly, the projections 
may include:  4 percent GDP growth, an 8-11 percent inflation band 
(with a 9 percent average) and primary fiscal surplus totaling 3.2 
percent of GDP.  Previous reports indicated that the GOA could 
project GDP growth as high as 4.5 percent.  This downward trend is 
in line with GOA's practice of underestimating growth, only to later 
recognize "unexpected" revenues to spend out of the budget (BCRA's 
consensus survey forecasts a 6 percent GDP growth for 2007). 
 
--------------------------------------------- -------- 
Argentina and Venezuela joint oil company plan advances. 
--------------------------------------------- -------- 
 
¶4.  Argentina's General Inspection of Justice approved the 
establishment of a joint venture between Venezuela's state-owned oil 
company PDVSA and GOA-owned Enarsa, with an initial capitalization 
of ARP 2 billion.  PDVSA will hold a 60 percent stake in the joint 
venture and Enarsa 40 percent.  The company will be established 
under the Energy Cooperation Agreement framework and will be 
responsible for the production, transportation and sales of national 
and international hydrocarbons. 
 
--------------------------------------------- -------- 
Argentine provinces prepare for power shortages. 
--------------------------------------------- -------- 
 
 
¶5.  Argentine provinces are setting up contingency plans to deal 
with possible power shortages during the coming austral summer: 
Misiones is exploring the potential to purchase energy from 
Paraguay; Catamarca is considering a declaration of a provincial 
energy emergency in order to permit the provincial government to 
acquire back-up power generators; Entre Rios is considering 
extending daylight saving time to save energy; and more industrially 
developed Cordoba and Santa Fe are following the federal 
government's  policy of imposing administrative controls on 
industrial power consumption.  Only Tucuman's governor Jose 
Alperovich is considering electricity tariffs increases, saying that 
a long term solution to Argentina's energy shortage will require 
appropriate pricing to incent new investment by wholesale 
electricity suppliers. 
 
¶6.  On September 13, the Senate approved a bill to promote electric 
power production from renewable resources via tax reimbursements. 
The GoA's goal is to have renewable resources (wind power, biogas 
and geothermic power) contribute 8 percent of electric power 
consumption by the year 2015. 
 
--------------------------------------------- -------- 
Multilateral real exchange rate depreciates 0.3 percent m-o-m in 
August. 
--------------------------------------------- -------- 
 
¶7.  The BCRA's multilateral real exchange rate index -- which 
measures the real exchange against a trade-weighted basket of 
currencies -- depreciated 0.3 percent m-o-m in August.  This 
weighted real depreciation is largely explained by the depreciation 
of the peso against the Brazilian real (35.3 percent weight) and the 
Euro (19.2 percent weight), partially offset by an appreciation 
against the dollar (14.5 percent weight).  The index is 3.8 percent 
above its level twelve months ago and 106.1 percent above its 
average value during convertibility. 
 
--------------------------------------------- -------- 
Argentine and Chilean presidents push for further economic 
integration. 
--------------------------------------------- -------- 
 
¶8.  On September 12, Argentine and Chilean presidents Nestor 
Kirchner and Michelle Bachelet agreed to reopen, by the end of 2009, 
a cross-Andes cargo and passenger train route that has been idle 
since 1984.  Both presidents called the initiative a move to further 
economic integration and to better manage growing cross-border 
trade. 
 
¶9.  The presidents also discussed gas pricing, an ongoing source of 
bilateral friction.  Local media reported that President Kirchner 
denied President Bachelet's request to maintain the cost of gas 
exports to Chile below levels Argentina currently pays for Bolivia 
gas.   Following a re-negotiation of gas supply prices in June 2006, 
Argentina currently pays Bolivia in the $5/million BTU range, 
roughly 55 percent above the $3.20 /MBTU price Argentina had 
previously paid.  Current Bolivian deliveries to Argentina are in 
the 4.5 million cubic meters/day range, with plans to increase 
imports to as high as 20 million cubic meters a day following 
planned construction of additional pipeline capacity.  For its part, 
Argentina currently supplies Chile roughly three times the amount 
Argentina imports from Bolivia - in the range of 15 million cubic 
meters/day of natural gas per day.  The price of Argentine natural 
gas exports to Chile rose to the $4.80/million BTU range - roughly 
equivalent to Argentina's current cost of gas imports from Bolivia - 
following an increase in Argentina's gas export tax this past summer 
(austral winter) from 20 percent to 45 percent. 
 
--------------------------------------------- -------- 
Minister of Economy at annual Bank/Fund meeting in Singapore. 
--------------------------------------------- -------- 
 
¶10.  Economic Minister Felisa Miceli, will speak on behalf of her 
Mercosur colleagues at the IMF's International Monetary and 
Financial Committee meeting September 18. 
 
--------------------------------------------- -------- 
National public sector' debt decreased 0.1 percent between December 
2005 and March 2006. 
--------------------------------------------- -------- 
 
 
 
¶11.  According to Argentine Secretariat of Finance, national public 
sector's stock of debt totaled USD 152 billion in March 2006, 
approximately 80.4 percent of GDP (including debt owed to holdout 
investors).  Public debt decreased USD 157 million between December 
2005 and March 2006.  With valuation adjustments due to exchange 
rate changes, inflation, capitalization and interest payments delays 
excluded, public debt rose USD 165 million. 
 
--------------------------------------------- -------- 
Banco Nacion holds 24.6 percent of outstanding BCRA debt 
instruments. 
--------------------------------------------- -------- 
 
¶12.  State-owned Banco Nacion remains the primary holder of BCRA 
debt instruments, with 24.6 percent of the outstanding Lebac and 
Nobac stock.  BBVA Banco Frances is second, with 5.31 percent of the 
stock. 
 
--------------------------------------------- -------- 
Petrobras and YPF announce participation in GOA's oil exploration 
program. 
--------------------------------------------- -------- 
 
¶13.  A unit of Brazil's state energy company Petrobras will team up 
with Repsol unit in Argentina YPF and GOA-owned energy company 
Enarsa, to expand oil exploration off Argentina's Atlantic coast. 
This consortium will search for hydrocarbons in waters about 155 
miles off Mar del Plata.  Petrobras and YPF will finance all 
exploration efforts, with Enarsa reimbursing them for its share of 
the total investment if commercially viable resources are found. 
[Enarsa owns all exploration permits and production concessions for 
offshore areas that were not under license when it was created by 
law on November 2, 2004] 
 
--------------------------------------------- -------- 
The GOA launches mortgage loan access plan. 
--------------------------------------------- -------- 
 
¶14.  On September 14, the GOA launched its plan to ease mortgage 
loan access, in an effort to control rising rent prices.  As 
expected, state-owned Banco Nacion announced the most "aggressive" 
credit line, with an 8.4 percent annual fixed rate, a 30-year term 
and a maximum amount of between ARP 200,000 and ARP 300,000. 
Private banks offered more conservative programs, with fixed rates 
ranging from 9.05 percent to 9.75 percent. 
 
--------------------------------------------- -------- 
BCRA president Redrado on importance of independent monetary and 
financial institutions. 
--------------------------------------------- -------- 
 
¶15.  On September 13, during a meeting of central bankers held in 
Manila, BCRA president Martin Redrado discussed the importance of 
maintaining independent monetary and financial institutions to guard 
against "fiscal domination" by the state.  Redrado praised 
Argentina's "strength" in confronting global financial "turbulence" 
via a combination of fiscal solvency, exchange rate flexibility and 
cautious monetary policy. 
 
--------------------------------------------- -------- 
BCRA rolls over maturities. 
--------------------------------------------- -------- 
 
¶16.  The BCRA received ARP 1.1 billion in bids at its September 12 
Lebac and Nobac auction, vs. ARP 767 million in Lebacs that came due 
this week.  BCRA accepted ARP 625 million in Lebac bids and ARP 255 
million in Nobac bids.  The yields on the 175-day Lebac and 224-day 
Lebac were 8.41 percent and 10.30 percent.  The yields on the 
357-day Lebac and on the longest term instrument, the 609-day Lebac, 
decreased from 11.55 percent to 11.54 percent and from 12.25 percent 
to 12.20 percent, respectively.  The 504-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 increased from 1.18 
percent to 1.19 percent and for the two-year Nobac decreased from 
2.84 percent to 2.76 percent.  The Badlar rate (the base rate for 
Nobacs) is currently at 9.4 percent.  Rates fell in most segments, 
but not as much as in recent weeks, even though demand for these 
instruments remained strong. 
 
--------------------------------------------- -------- 
 
 
Peso depreciates against the USD, closing at 3.12 ARP/USD. 
--------------------------------------------- -------- 
 
¶17.  The peso depreciated slightly vs. the USD September 12 and 
remained at 3.12 ARP/USD for the rest of the week.  Recent peso 
fluctuations are a function of active BCRA intervention in the 
dollar market.  The peso exchange rate has depreciated 2.3 percent 
since the beginning of the calendar year.  BCRA's reserves stood at 
USD 27.6 billion as of September 13, and have increased USD 9.1 
billion, or 49 percent, since the GOA prepaid its entire IMF debt on 
January 2, 2006 
 
--------------------------------------------- -------- 
Commentary of the week: "Disrupted Energy", by Federico Thomsen, 
informal translation of an article published September 7 in El 
Cronista Comercial. 
--------------------------------------------- -------- 
 
¶18.  The government dislikes rumors about an energy crisis.  It says 
that, even though consumption of gas and electricity grew in 
Argentina, residential consumers did not suffer from cuts and 
productive sectors are growing and investing strongly.  The 
government adds that it is adopting measures to increase energy 
supply. 
 
¶19.  This is true.  What is unclear, however, it is why the 
Executive Branch is dismantling, without public debate, an energy 
sector structure that was working very well. 
 
¶20.  In 1993, the government concluded world class gas and 
electricity market reforms.  With legislation approved by Congress, 
electricity production, transportation and distribution systems were 
separated, companies were privatized and competition was introduced 
whenever possible.  The system served the economy's energy needs 
very well. 
 
¶21.  Once the 2001-2002 crisis passed, an energy sector transition 
could have been justified in order to adjust the system to the new 
economic realities.  Sadly, the Government took another direction: 
 
-  The Government fixed tariffs via political criteria; current low 
tariffs neither promote proper rationing of demand nor stimulate 
supply.  There was no move to create a "social tariff" to 
accommodate low income consumers, while normalizing tariffs for the 
remainder to market rates. 
-  Even though the Government criticized Argentine energy sector 
regulatory agencies because of their alleged inefficacy, it did 
nothing to improve them.  By the end of 2003, instead of filling 
vacant posts on ENRE and Enargas boards by merit according to law, 
the government filled vacancies by decree using political criteria. 
 
-  The Government became an energy sector investor given that, 
without proper tariffs nor credit access, private companies will not 
invest to expand the system.  Therefore, authorities decide what to 
expand, which companies will do it, how to finance them, and who and 
how they are paid, with the subsequent risks of politicization, 
inefficiency and lack of transparency. 
-  The Government created a State Energy Company, Enarsa S.A. which, 
though resource poor,  is acting in the market. 
 
¶26.  All these steps have shifted the organization of the energy 
sector, without a clear view of just where this new hybrid 
state-private sector model is going.  Are we going back to a 
desirable private and competitive energy market or, are we going to 
recreate, step by step, a state system similar to the one that 
failed in the past?   Numerous current and potential investors want 
to know the answer to this question.  According to the Spanish Royal 
Academy, "crisis" means a decisive moment for an important business, 
with profound consequences.  In this sense, the Argentine energy 
system is in crisis.  (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