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DE RUEHBU #2798/01 3542044
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R 202044Z DEC 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6810
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 002798 
 
SIPDIS 
 
SENSITIVE 
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 NANCY LEE, ALICE FAIBISHENKO 
USDOC FOR ALEXANDER PREACHER AND JOHN ANDERSEN 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV AR
SUBJECT: A SURPLUS 2007 BUDGET DESIGNED TO BOLSTER KIRCHNER 
ADMINISTRATION'S RE-ELECTION BID 
 
 
Summary 
------- 
¶1. (SBU) The Argentine Senate approved the 2007 National 
Budget December 13, 2006, in the face of opposition criticism 
over its growth and inflation assumptions, the continuation 
of "superpowers" that allow the GoA to make future fiscal 
decisions without Congressional authorization, and the lack 
of transparency in disbursement of subsidy payments.  The 
Budget estimates federal revenues at ARP 128.5 billion 
(approx. $41.5 billion or 18% of GDP), and expenditures are 
forecast at ARP 121.3 billion (approx. $39.1 billion or 17% 
of GDP), achieving an overall balance of 1% of GDP and 
primary fiscal surplus of 3.03% of GDP.  The Kirchner 
administration has tailored the 2007 Budget to help it win 
the October 2007 presidential elections.  The Budget 
underestimates resources, envisions a significant increase in 
social expenditures, and considers GoA refinancing of 
provincial debt, all of which should win Kirchner votes.  End 
Summary. 
 
Senate Passes 2007 Budget Bill Into Law 
--------------------------------------- 
¶2. (SBU) The GoA sent its fiscal year 2007 (which corresponds 
to the calendar year) Budget bill to Congress September 15 as 
required by the Constitution, and Minister of Economy Felisa 
Miceli presented it to the Chamber of Deputies for its 
approval on September 26.  The Chamber passed the bill 
November 23 (with 143 votes in favor, 77 against, 6 
abstentions), and the Senate approved it without modification 
on December 13 (with 41 votes in favor and 22 against). 
 
¶3. (SBU) During debate in both houses, the opposition 
criticized the budget for underestimating both GDP growth and 
revenue prospects, setting the stage for the GoA to use 
surplus tax revenues to finance discretionary pre-election 
social policy and targeted infrastructure development 
expenditures.  They also criticized the so-called 
"Superpowers" Law, which allows the GoA to make subsequent 
changes to the budget without prior Congressional approval. 
The opposition also expressed concern over increasing 
subsidies, mainly to the energy and transportation sectors, 
and criticized the lack of transparency in the disbursement 
of such funds.  (Note:  Congress approved the "superpowers" 
law August 2 as an amendment to the existing Financial 
Administrative Law.  The amendment gives te GoA the legal 
ability to modify the Budget Law and reallocate funds 
regardless of the provisions of the Financial Administrative 
Law or the Fiscal Responsibility Law, and without consulting 
Congress.  Although opposition parties are seeking to repeal 
the "superpowers," the GoA's majority support in the House 
and Senate makes this unlikely.  End Note). 
 
Conservative Macroeconomic Assumptions 
-------------------------------------- 
¶4. (SBU) The Budget's macroeconomic assumptions are 
conservative compared to private analysts' economic 
forecasts, as measured in the central bank's (BCRA's) 
consensus survey from September.  GDP is forecast to increase 
only 4% in 2007, well below the current BCRA consensus 
forecast of 6.3%.  The Kirchner administration has used this 
strategy of underestimating growth in past budgets -- 
underestimating revenues by ARP 19 billion (31% of total 
revenues) in 2004, ARP 11 billion (13% of total revenues) in 
2005, and ARP 14 billion (14% of total revenues) in 2006 -- 
and it allows the administration to spend excess revenues at 
the end of the year with only perfunctory Congressional 
approval (Note: The Kirchner administration's solid majority 
support in both houses of Congress makes Congressional 
approval a sure thing.  End Note). 
 
¶5. (SBU) As in previous years, the opposition in both houses 
harshly criticized the growth assumption, claiming it 
underestimates revenues by ARP 8 - 12 billion (approx. $2.6 - 
3.9 billion, or 6-9% of total revenue).  However, Minister 
Miceli has publicly defended budget assumptions, arguing (in 
a reference to a succession of budget deficits in the 1990s 
 
 
 
 
 
that required the GoA to increase its borrowing in 
international capital markets), that, "generating 
expectations for revenues that the GoA cannot fulfill would 
be a return to the past."  She further explained that the GoA 
will prioritize spending of any higher than projected 
revenues on education, retirement benefits, and higher wages 
for state employees. 
 
¶6. (SBU) The Budget also lowballs other assumptions.  It 
estimates CPI inflation at 7.7%, compared to the BCRA 
consensus survey forecast of 10.5%.  It assumes an average 
nominal exchange rate of 3.13 ARP/USD, compared to the BCRA 
consensus survey of 3.20 and the 2006 Budget assumption of 
3.09.  It forecasts export growth of 7.8% and import growth 
of 10.7% in 2007 (in real terms), resulting in an $8.1 
billion trade surplus ) substantially below the BCRA's $9.6 
billion consensus forecast.  Finally, the budget forecasts 
investment growth of 7.2%, compared to the BCRA consensus 
forecast of 13%, with total investment in 2007 reaching 23.3% 
of GDP.  The budget forecasts nominal GDP to reach ARP 694 
billion (approximately $224 billion) by the end of 2007. 
 
Macroeconomic Assumptions For 2007 
---------------------------------- 
                                           Market 
                              Budget    Expectations 
--------------------------------------------- -------- 
GDP (real growth)               4.0             6.3 
Consumption (real growth)       3.3             5.9 
Investment (real growth)        7.2             13.0 
Exports (USD in billions)       52.6             48.3 
Imports (USD in billions)       44.4             38.7 
Inflation (average)             7.7            10.5 
Nominal Exchange Rate (average) 3.13            3.20 
--------------------------------------------- -------- 
 
Revenues: Increase Driven By Economic Activity 
--------------------------------------------- -- 
¶7. (SBU) Federal revenues are estimated at ARP 128.5 billion 
(approx. $41.5 billion or a 16% nominal and 9% real increase 
over 2006), equivalent to 18% of GDP.  Tax revenues account 
for 74% of federal revenues, social security contributions 
for 20%, and non-fiscal revenues, mainly financial profits 
from GoA financial investments, revenues from the sales of 
GoA machinery and real estate, and BCRA profits, total ARP 7 
billion ($2.26 billion or 5% of total revenues).  The fiscal 
burden (total tax collection and social security 
contributions) will reach 17.5% of GDP in 2007, compared to 
16.8% in 2006. 
 
¶8. (SBU) The Budget estimates total tax revenue at ARP 95.3 
billion (approx. $30.7 billion), an increase of 13% in 
nominal terms and 6% in real terms over 2006 (Note:  this 
calculation uses the GoA's 2007 7.7% CPI inflation target. 
End Note).  This forecast is based on expected nominal price 
increases, and strong economic activity, employment, and 
trade, as well as an improvement in tax compliance.  The 
highest increases are: import taxes ( 15.4%), export taxes 
( 14.4%), financial transactions tax ( 13.9%), and income tax 
( 12.7%). 
 
¶9. (SBU) Tax revenues account for 64% of the increase in 
total revenue.  Social Security contributions comprise 28% of 
the increase in revenue, and are estimated at ARP 26 billion 
(approx. $8.4 billion; a 24% nominal and 16% real increase 
versus 2006).  This is due to the expected increase in 
nominal salaries as well as an increase in the number of 
contributors. 
 
¶10. (SBU) The GoA's 2007 budget does not envision changing 
tax regulation, unlike in previous years when it considered 
the elimination or phase-out of the export and financial 
transactions (FTT) taxes.  The IMF -- supported by many in 
the opposition -- has consistently advocated the elimination 
of both taxes, which represent 28% of fiscal revenue, due to 
their distortive impact.  However, the Kirchner 
 
 
administration's congressional majority has refused to 
support a reduction of either tax, since that would eliminate 
the GoA's primary fiscal surplus.  (Note: Export tax revenues 
reached ARP 12 billion and FTT ARP 9.3 billion during the 
first ten months of 2006, and the primary fiscal surplus 
reached ARP 21.2 billion, or 3.5% of GDP on an annualized 
basis.  100% of export tax revenues and 70% of FTT revenues 
are not subject to co-participation with the Provinces, 
offering the Kirchner administration added political leverage 
in the allocation/distribution of such revenues.  On November 
15, Congress approved the extension of the FTT through the 
end of 2007.  End Note). 
 
Expenditures: Increase Driven By Social Expenditures 
--------------------------------------------- ------- 
¶11. (SBU) The GoA budgets 2007 expenditures at ARP 121.3 
billion ($39.1 billion, or a 15% nominal and 8% real increase 
over 2006), equivalent to 17% of GDP.  The GoA prioritizes 
expenditures on social security, education, science and 
technology, and economic and social infrastructure with the 
overall goal of generating improved income distribution. 
 
¶12. (SBU) The highest year-over-year increase is spending on 
social services -- ARP 78 billion (approx. $25 billion, or an 
18% nominal increase over 2006), equivalent to 11% of GDP and 
64% of total expenditures.  This includes a 13% increase for 
pensions in 2007, on top of the 11% increase in 2006, and the 
60% increase in unemployment benefits (up from ARP 250 to ARP 
400 per month).  The bill allows the GoA to increase pensions 
further in 2007, as long as excess funds are available. 
(Note:  The Argentine Supreme Court mandated a minimum 13% 
pension increase in a 2006 ruling.  End Note). 
 
¶13. (SBU) Education, science and technology expenditures are 
forecast to increase ARP 1.6 billion (17% nominal) to ARP 
10.7 billion.  This increase is consistent with the GoA's 
Education Financing Law, which calls for annual federal 
(0.5%) and provincial (0.2%) spending increases through 2010 
in order to bring total education expenditure to 6% of GDP. 
 
¶14. (SBU) Infrastructure spending is comprised mainly (83%) 
of transportation (ARP 6.1 billion, or almost $2 billion) and 
energy (ARP 5.6 billion, or $1.8 billion) subsidies to the 
private sector, to keep energy and public transportation 
prices unchanged and control inflation.  As noted above, the 
opposition and local press have criticized the government for 
the increases in such expenditures and also for the less than 
transparent way that such funds have been disbursed in the 
past. 
 
¶15. (SBU) Interest payments are estimated to increase from 
ARP 12.7 billion to ARP 14.1 billion, or 2% of GDP in 2007. 
Interest payments on peso-denominated debt (including 
guaranteed loans, Bodens, Bocones, and restructured debt) are 
ARP 5 billion.  Payments on foreign currency debt (USD 
Bodens, restructured debt, and payments to IFIs) are ARP 8.8 
billion.  (Note:  In 2007, the GoA will pay approximately 
$650 million in interest on debt included in the 2005 
sovereign debt exchange.  Post roughly estimates that the GoA 
would have paid an additional $230 million/year to holdouts 
from the debt exchange, had they accepted the same deal in 
¶2005.  This debt represents a potential contingent liability 
if/when the GoA eventually reaches an accommodation with 
holdouts.  End Note) 
 
Fiscal Balance: Positive But Decreasing 
--------------------------------------- 
¶16. (SBU) The 2007 federal government primary fiscal surplus 
(revenues less expenditures, excluding interest and principal 
payments on debt) is forecasted at ARP 21 billion (approx. 
$6.8 billion) or 3.03% of GDP, close to the 2006 forecast of 
3% included in the 2006 budget.  The consolidated federal 
primary fiscal surplus - adding in fiduciary trusts and 
social security, but excluding provinces - is projected to 
fall to 3.15% of GDP from 3.26% in 2006.  The projected 
overall balance for the consolidated federal government 
 
 
totals ARP 7.1 billion (approx. $2.3 billion or 1% of GDP, 
compared to 1.15% in 2006). 
 
¶17. (SBU) The Budget bill does not include a breakdown of 
individual provincial finances.  However, it notes that the 
provincial primary fiscal balance will be "slightly 
positive."  The consolidated public sector primary surplus, 
including provinces, will remain at 3.15% of GDP in 2007 
under the budget's best case scenario that provinces have a 
neutral primary fiscal surplus.  However, the consolidated 
public sector primary surplus (including provinces) would 
drop to 3.03% of GDP if the Provinces end 2007 with a 
0.1%/GDP deficit, as most private consultants forecast. 
(Note:  This expected provincial deficit is primarily due to 
Buenos Aires Province's projected deficit, which the province 
plans to finance partially via an international bond issuance 
and partially via borrowings from the federal government. 
End Note). 
 
Financing: GoA Relying Primarily On New Debt Issuance 
--------------------------------------------- -------- 
¶18. (SBU) The GoA's 2007 financing needs total ARP 73 billion 
($23.5 billion), including ARP 57 billion in debt 
amortization and ARP 16 billion in "financial investment" 
(i.e., lending to provinces for project and deficit finance). 
 The GoA will finance these needs via: 
 
- ARP  7.2 billion from the federal fiscal surplus; 
- ARP 23.5 billion in new debt issuance; 
- ARP  7.0 billion in IFI financing; 
- ARP 20.4 billion in BCRA financing; 
- ARP  9.0 billion domestic demand for GoA debt; and 
- ARP  4.8 billion loan repayments (mainly from Provinces). 
 
¶19. (SBU) Central Bank (BCRA) net financing totals ARP 2.1 
billion as a result of ARP 20.4 billion financing and ARP 
18.3 billion GoA repayment of short-term BCRA financing.  The 
Budget assumes the IDB and World Bank will reduce their net 
exposure, providing ARP 7 billion total financing, with 
scheduled GoA repayments of ARP 4.3 billion to the Bank and 
ARP 3.3 billion to the IDB. 
 
Province Debt Renegotiation: Tool To Gain Political Support 
--------------------------------------------- --- 
¶20. (SBU) The 2007 Budget allows the Ministry of Economy to 
modify (restructure) the financial conditions of provincial 
debt owed to the federal government, although it lacks 
details on the terms and conditions of the restructurings. 
This is a key provision for the GOA during an election year, 
as the Provinces are beginning to face financial difficulties 
and this is one way to gain their favor.  According to local 
think tank, "Economia y Regiones," provincial debt available 
for restructuring totals ARP 6 billion (almost $2 billion, or 
10% of total provincial debt to the GoA). 
 
Comment 
------- 
¶21. (SBU) The 2007 Budget has clearly been designed to 
support the Kirchner administration's re-election bid next 
October.  The positive (forecasted) fiscal balance and 
increased social expenditures, transfers, and subsidies to 
the private sector (in order to keep energy and 
transportation prices low and control inflation), all serve 
to win voter support for the GoA.  The Budget's 
underestimation of GDP growth will likely result in ARP 8 - 
12 billion extra revenue, and the "Superpowers" law will 
allow the GoA to use this available cash to target social and 
infrastructure expenditures to woo particular constituencies. 
 End Comment. 
WAYNE