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RR RUEHWEB

DE RUEHBU #2445/01 3031951
ZNR UUUUU ZZH
R 301951Z OCT 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6349
INFO RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCPDOC/USDOC WASHINGTON DC

UNCLAS BUENOS AIRES 002445 
 
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 EINV ECON AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL WEEKLY (OCTOBER 
27, 2006) 
 
 
¶1.  Provided below is Embassy Buenos Aires' Economic and 
Financial Review for the week ending October 27, 2006.  The 
unclassified email version of this report includes tables and 
 
SIPDIS 
charts tracking Argentine economic developments.  Contact 
EconOff Chris Landberg at landbergca@state.gov to be included 
on the email recipient list. 
 
----------------- 
Weekly Highlights 
----------------- 
 
--Buenos Aires Province successfully launches $475 million 
bond issue 
--Argentine Congress may extend Economic Emergency Law 
through December 2007 
--Tensions rise between GoA and health insurers over proposed 
2007 fee increases 
--GoA announces intention to terminate "Price Agreements" at 
the end of 2007 
--Argentina's September trade surplus is $895 million, in 
line with market expectations 
--BCRA forecasts low inflation, record GDP growth, and lower 
unemployment 
--Argentina to import electricity from Brazil during 
high-demand peaks expected late-2006 
--GoA will not increase penalties on households that fail to 
reduce energy consumption 
--Oil production in Argentina expected to decrease by 17% 
between 2007 and 2009 
--Commentary of the week:  When the Lights Are On and the 
Economy Is Off 
 
Buenos Aires Province successfully launches $475 million bond 
issue 
--------------------------------------------- ---- 
 
¶2. On October 25, the Province of Buenos Aires successfully 
issued $475 million in 12-year bonds.  The Province received 
$1.2 billion in bids for its original issuance of $300 
million (four times oversubscribed), prompting it to increase 
the amount to $475 million (the maximum amount allowed by the 
provincial congress).  The bond was priced to yield 9.75% or 
a spread of 492 basis points over comparable maturity U.S. 
Treasury securities, and it immediately tightened to 9.57% in 
the secondary market.  Merrill Lynch was the lead-manager of 
the transaction.  (Note:  Similar to the federal government, 
B.A. Province defaulted on its debt following the 2001/2 
financial crisis.  In December 2005, the Province 
restructured the majority of the $3 billion in private sector 
bonds it had defaulted on at 45 cents on the dollar.  The 
Province achieved a 93% acceptance rate from bondholders 
versus 76% in the federal government's March 2005 debt 
exchange.  End Note).  The Province plans to use the proceeds 
to make debt payments and fund capital expenditures.  S&P has 
assigned its speculative grade single-B-plus rating to the 
province, the same as Argentina's sovereign rating, with a 
stable outlook.  Moody's has assigned ratings of B3 to the 
offering, also the same as its sovereign rating for the 
country but two notches below S&P's. 
 
Argentine Congress may extend Economic Emergency Law through 
December 2007 
--------------------------------------------- ------- 
 
¶3.  Argentine Senator Capitanich stated on October 20 that 
Congress is considering xtending the Economic Emergency law, 
due to expire December 31, 2006, for one year.  Congress 
first approved the Economic Emergency Law in 2002 following 
Argentina's economic and financial crisis, and has since 
extended it on an annual basis.  This law delegates 
legislative powers to the executive branch and allows the 
President to enact a wide range of economic policies by 
decree (e.g. debt and utility tariff renegotiations).  Even 
though the economy is growing rapidly for the fourth 
consecutive year, the GoA argues that the extension of the 
Emergency Law is necessary to allow the country to defend 
itself in lawsuits filed by holdouts from the 2005 debt 
 
 
exchange.  Additionally, the GoA says it needs the extension 
to facilitate renegotiation of contracts with private utility 
companies. 
 
Tension rises between the GoA and health insurers over 2007 
fee increases 
--------------------------------------------- ---- 
 
¶4.  On October the 23, health insurers announced that they 
will increase fees by 18-23%, effective January 2007, in 
order to cover rising costs, including a 19% salary increase 
for the sector's workers.  (Note: this fee increase will 
impact three million private health insurance subscribers.). 
Economic Minister Miceli responded on October 24 that the GoA 
would not allow "irresponsible" price hikes and reassured the 
public that the GoA would use "whatever means" it has to 
prevent them.  Furthermore, Miceli reiterated that the GoA 
will continue its price control regime for as long as 
necessary.  In a more conciliatory move, Miceli said the GoA 
would review the health sector's cost structure to determine 
whether some level of fee increase might be justified.  Local 
analysts estimate that the 18-23% fee increase would result 
in a 0.8% m-o-m increase in the January CPI. 
 
GoA announces intention to terminate "Price Agreements" at 
the end of 2007 
-------------------------------------------- 
 
¶5.  GoA officials and executives of major food companies met 
October 25 and verbally agreed to maintain current food 
prices through December 2007.  Following the meeting, 
Secretary of Internal Trade Guillermo Moreno stated that 
 
SIPDIS 
President Kirchner envisions ending all price control 
agreements at the end of 2007, whereupon it would allow 
market forces to determine prices.  Local media reports on 
this announcement report that local private sector players 
are skeptical that the GoA would end price controls without 
an extended phase-out period. 
 
Argentina's September trade surplus is $895 million, in line 
with market expectations 
--------------------------------------------- ------- 
 
¶6.  The September trade surplus reached $895 million, in line 
with market expectations.  Exports increased 17% y-o-y to 
$4.0 billion, following 12% y-o-y growth in August, with 
increases in both price (6% y-o-y) and quantity (11% y-o-y). 
Exports were driven by increases in industrial goods (35% 
y-o-y), agribusiness (20% y-o-y) and primary goods (15% 
y-o-y), while fuel and energy exports decreased 12% y-o-y. 
Imports increased 28% y-o-y to $3.2 billion, with increases 
in both price (5%) and, especially, in quantity (22%). 
Imports were driven by increases in fuel and oil (67% y-o-y), 
intermediate goods (31% y-o-y), capital goods (30% y-o-y), 
parts for capital goods (22% y-o-y) and consumer goods (17% 
y-o-y).  The accumulated trade surplus reached $9.1 billion 
for the first nine months of 2006.  The BCRA consensus survey 
expects the 2006 annual trade surplus to narrow to $10.8 
billion by the end of the year, compared with a $11.3 billion 
trade surplus in 2005. 
 
BCRA forecasts low inflation, record GDP growth, and lower 
unemployment in 2006 
--------------------------------------------- ------- 
 
¶7.  In its latest Inflation Report, issued October 23, the 
BCRA forecasted 2006 inflation between 8% and 11%, in line 
with the Monetary Program, and estimated that prices will 
show a similar performance in 2007.  The BCRA noted that 
inflationary expectations -- measured by the BCRA consensus 
survey -- had fallen.  The median forecast for year-end 
inflation stood at 9.8% in the September's survey, down from 
11.4% in June and from 13% in January.  According to 
September's survey, the consensus estimate for 2007 inflation 
is 10.5%. 
 
¶8.  The BCRA report also highlighted the strength of the 
 
 
economy and forecast that real GDP growth will exceed 8% in 
2006, with total GDP 16% higher than the record achieved in 
¶1998.  The BCRA also estimates that the unemployment rate 
will fall to 9% by year-end, and the primary fiscal surplus 
will be 3.3% of GDP for 2006 (Note:  this is lower than 
reported in the October 20 E&F Weekly, which stated that at 
current trends the GoA's primary fiscal surplus will reach 4% 
of GDP for 2006, compared to the budget's 3% forecast.) 
 
Argentina to import electricity from Brazil during 
high-demand peaks expected late 2006 
--------------------------------------------- ----- 
 
¶9.  The GoA announced plans to import electricity from Brazil 
during the demand peak expected for the end of 2006.  This 
measure seeks to alleviate expected energy shortages, which 
are the result of the combination of strong demand for energy 
(due to expected higher than normal temperatures) and lower 
supply generated by technical failures at four energy 
generators.  CAMMESA (the wholesale electricity market 
administrator) separately asked electricity generators to 
postpone maintenance-related stoppages and shut-downs until 
after December, when electricity demand is expected to 
decline. 
 
GoA will not increase penalties on households that fail to 
reduce energy consumption 
--------------------------------------------- ----- 
 
¶10.  During an Industrial conference on October 20, Energy 
Undersecretary Folgar stated that the GoA will not accede to 
energy company calls for it to increase penalties (beyond 
current levels) on households that are not reducing their 
energy consumption.  Folgar argued that the existing penalty 
fee structure is adequate and that the incentives under the 
government's current energy savings program are working to 
reduce consumption.  (Note: In May 2005, the GoA introduced a 
plan to induce residential users to save energy.  In order to 
avoid a government-imposed fine, residential users must 
reduce energy consumption relative to the previous year's 
level.  Energy companies have advocated for increasing this 
fine to add further incentive for reducing consumption, and 
thus alleviate the expected energy shortages.)  Folgar also 
denied that the GoA will provide subsidies to industries that 
generate their own electricity. 
 
Oil production in Argentina expected to decrease by 17% 
between 2007 and 2009 
--------------------------------------------- ------ 
 
¶11.  According to a report elaborated by thirty oil companies 
in Argentina, local oil production will decrease 17% between 
2007 and 2009 due to the natural drying up of existing oil 
wells and the lack of investment in exploration (largely a 
response to GoA taxes on oil exports, which are designed to 
maintain low domestic prices).  Local oil production has 
already decreased 5% in 2005 and 3.2% in the first semester 
of 2006.  Meanwhile, there is surging demand for fuel, driven 
by high GDP growth (e.g. the demand of gasoline increased 18% 
in the first semester of 2006).  As a consequence, oil 
exports decreased 59% y-o-y in the first six months of 2006. 
At this rate, Argentina may go from being an oil exporter to 
an oil importer in the next two years. 
 
Commentary: When the Lights Are On and the Economy Is Off 
--------------------------------------------- ------- 
 
¶12.  In order to avoid an electoral stumble, the government 
is concerned about providing electrical power to heavy 
residential users in the short term.  However, the impact on 
the industrial sector may end up affecting the economic 
growth rate. 
 
¶13.  The government denies the existence of a (energy) crisis 
based on a simple fact: the massive foretold blackouts have 
not occurred.  It is trying to avoid any blackouts in the 
Federal Capital and Buenos Aires suburbs, where the majority 
 
 
of residential users and voters live.  The political 
objective to keep residential users subsidized and protected 
from power outages is at odds with the necessity, also 
political, to maintain a high economic growth rate. 
 
¶14.  The government's main concern is to reduce power outages 
during the (austral) summer season.  Electrical generation is 
currently at maximum capacity, and is at risk, as technical 
studies from CAMMESA (wholesale electricity market 
administrator) anticipated.  The largest consumers of 
electricity, accounting for approximately 30% of total 
demand, will have to satisfy their additional demand for 
electricity from outside the system (either they self 
generate it or purchase it from other producers).  If the 
demand peak surpasses 18.000 MW, large users will not only 
have to search for additional supply, but will also have to 
move their demand off peak. 
 
¶15.  The industrialists are worried about long run results 
and are thus increasingly concerned about the energy 
shortage.  They have, therefore, begun to dust old generating 
equipment, buy new equipment, or rent it from other 
companies, in order to provide themselves with additional 
energy.  In today's market the international wholesale price 
per MW for industry is $35.  However, companies using rented 
equipment to generate their own electricity, using diesel 
oil, face prices five times higher.  This solution, anyway, 
is temporary, just to get through the summer.  If the company 
is to maintain its growth, it must take measures to assure 
long term energy supply.  This is where the other part of the 
energy problem begins.  If a power generation company is to 
sign a contract to provide the needed extra energy output, it 
must purchase additional gas from a gas producer.  As the 
supply of gas is stagnant, and gas reserves are in sharp 
decline, it is impossible to get new contracts for additional 
gas. 
 
¶16.  The government's plan does not take into account all 
these aspects.  The same industrialist who started seeking 
additional electricity to maintain his growth is having his 
legs cut out from under him by the gas supply.  With less 
natural gas for industrial activity (until more comes from 
Bolivia or the LNG (liquid natural gas) plant is 
constructed), users must shift to other more expensive fuels, 
such as diesel, which are also limited.  As the country loses 
its petroleum self sufficiency, the local price for oil 
(until now capped by a mixture of government policy and moral 
suasion) is also beginning to pressure on the up side.  As a 
consequence, prospective investors (in Argentina) face an 
expensive and uncertain energy supply. 
 
¶17.  Investment is required for the government to maintain 
its high-growth strategy.  The need to keep the lights on for 
most voters conflicts with the need to maintain economic 
expansion.  Energy supply is a short term hostage.  If there 
is no investment to increase the energy supply, the economy 
risks faltering.  Paradoxically, if economic growth slows, 
there will less need for the extra energy.  The energy issue 
will say goodbye to newspaper headlines when the country 
overcomes this dilemma:  when there is enough energy for both 
keeping the lights on and sustaining the economy's takeoff. 
(Note: By Daniel Montamat; translated from an editorial 
published in Cronista on October 19.  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