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R 241921Z MAY 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8248
INFO RUEHAC/AMEMBASSY ASUNCION 6183
RUEHBR/AMEMBASSY BRASILIA 6050
RUEHLP/AMEMBASSY LA PAZ MAY MONTEVIDEO 6459
RUEHSG/AMEMBASSY SANTIAGO 0430
RUEHSO/AMCONSUL SAO PAULO 3290
RUEHRI/AMCONSUL RIO DE JANEIRO 2232
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001043 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR NANCY LEE, AJEWEL, WBLOCK, LTRAN 
NSC FOR JOSE CARDENAS, ROD HUNTER 
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE 
ROBITAILLE 
PASS EXIM BANK FOR MICHELE WILKINS 
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI 
USTR FOR SUSAN CRONIN 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, MAY 14 - 
18, 2007 
 
 
¶1. Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period May 14 - 18, 2007.  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 distribution list. 
 
----------------- 
Weekly Highlights 
----------------- 
 
-- GoA Bond issued at higher yield than corporates 
-- Economy Minister Announces Launch of National Production 
Plan 
-- Rumor of domestic group purchasing 25% of YPF 
-- GoA reaches agreement with beef producers 
-- FDI into Argentina down 4% y-o-y in 2006 
-- Argentina's Export Performance Comparison with other 
Emerging Economies 
 
------------------- 
Banking and Finance 
------------------- 
 
GoA Bond Issued at Higher Yield 
than Corporates 
------------------------------- 
¶2. On May 10, the GoA issued $750 million of a 
ten-year-maturity bond, the Bonar X (also known as the Bonar 
2017) at a yield of 8.44% -- only two basis points lower than 
the first GoA auction of $750 million in Bonar X on April 12. 
 (Note:  The Bonar X is a ten-year, dollar-denominated, 
bullet with a 7% coupon issued under Argentine law). 
Interestingly, the Bonar X's yield was higher than that of 
two recent corporate issues:  Alto Palermo (a real estate 
company that develops and administers the main Argentine 
shopping malls) and TGS (a gas pipeline company).  Alto 
Palermo and TGS each recently tapped the market at yields of 
7.875% for similar dollar denominated instruments.  (Note: 
the TGS bond has a ten-year maturity, similar to the Bonar X 
and the Alto Palermo bond, but has a shorter average life 
since it has an amortizing principal structure.) 
 
¶3. Many private analysts believe that the higher GoA yields 
are at least partially explained by market concerns over GoA 
manipulation of the statistical agency's (INDEC) CPI figures 
and by the GoA's inability to issue debt in international 
markets under foreign law.  (Note: the TGS and Alto Palermo 
bonds were issued under New York law).  However, some local 
analysts also point to slowing growth, brewing corruption 
scandals, and GoA market interventions as factors in the 
interest rate differential.  GoA sources choose to accentuate 
the positive:  the oversubscription of the Bonar X issuance, 
with the GoA receiving bids for $1.9 billion in the May 
auction, compared to $1.5 billion for the April auction. 
With this transaction, the GoA will only need to raise 
between $1.5 and 1.8 billion to complete its 2007 financial 
needs. 
 
--------------- 
Economic Policy 
--------------- 
 
Economy Minister Announces Launch 
of National Production Plan 
---------------------------------- 
¶4. On May 11, President Kirchner and Economy Minister Miceli 
convoked provincial economy ministers to announce the 
development over the coming six months of a post-crisis 
National Production Plan.  President Kirchner said that on 
the December 10, 2007, change of administration, "we will 
 
leave hell" (i.e. the crisis period) and, bolstered by 
dramatic drops in the levels of poverty and strong increases 
in investment, Argentina will then be able undertake a 
national debate on the nation's economic future.  The 
fundamentals of such an economic future, he said, would 
certainly maintain the foundations of current economic 
growth, including fiscal and trade account surpluses, export 
growth based on a "competitive" exchange rate and expanding 
investment in the productive economy.  Minister Miceli noted 
that the plan will address asymmetries in national income 
distribution, particularly in impoverished northern provinces. 
 
Rumor of Domestic Group Purchasing 25% of YPF 
--------------------------------------------- 
¶5. On May 15, daily newspaper Cronista Comercial reported 
that Spain's Repsol is currently negotiating the sale of 25% 
of Repsol's Argentine subsidiary YPF to a local group. 
Repsol representatives have not provided details on the 
potential buyers, due to a confidentiality agreement. 
However, Cronista and other local media report rumors that 
potential buyers include: Enrique Eskenazi (President of 
Banco de Santa Cruz, Santa Fe and Entre Rios), Jorge Brito 
(President of Banco Macro), and other local businessmen with 
close ties to the Kirchner administration.  (Note:  However, 
Ambassador was told that the primary candidates are not those 
mentioned in the press.  End Note)  Cronista quoted Powerful 
Minister of Planning Julio De Vido saying that the government 
welcomes partial local-ownership of YPF, which is the largest 
oil company in Argentina and is valued at about $15-18 
billion. 
 
GoA Reaches Agreement with Beef Producers 
----------------------------------------- 
¶6. After about two months of protests by most beef-producing 
associations, the GoA agreed to allow "reference" (i.e., 
fixed) prices to rise approximately 12%, permit a minimum of 
500,000 tons of exports (a 25% increase) in 2007, as well as 
provide some subsidies aimed at increasing future production. 
 The new prices are generally thought to be close to true 
market prices.  The butchers' association was also party to 
the agreement to control prices.  Questions remain about how 
long the new price levels will be sustainable, and how 
effective the subsidies will be, but this may be enough to 
keep beef, which constitutes 4.5% of the CPI basket, on the 
table and off the agenda until the October elections. 
 
---------------- 
Economic Outlook 
---------------- 
 
FDI flows to Argentina down 4% y-o-y in 2006 
-------------------------------------------- 
¶7. FDI flows to Argentina were $4.8 billion in 2006, 4% lower 
than in 2005, according to ECLAC's recent publication. 
Argentina's share of FDI flows to Latin America was 6.7% in 
2006, down slightly from its 7% share in 2005.  Argentina had 
received an average share of 14.4% of FDI inflows into Latin 
America between 1992 and 2000.  Even if the purchase of YPF 
by Spain's Repsol and FDI directed to privatizations in the 
1990s (which meant high FDI inflows) were excluded from the 
data, Argentina's average share of FDI in Latin America was 
still 8.8% in 1992-2000.  According to Embassy calculations, 
Argentina's 2006 share of Latin American FDI inflows would 
have been 11.1% if Argentina's FDI share had tracked with GDP 
growth as it did in 1992-2000, and all other variables had 
remained constant.  (Note: this estimate excludes the 
purchase of YPF and the 1990s privatizations from the 
calculation of the 1992-2000 average.) 
 
Argentina's Export Performance 
Comparison with other Emerging Economies 
 
---------------------------------------- 
¶8. Argentine exports will have grown an estimated 40.4% from 
2002 to end-year 2007, a 7% annual average.  However, the 
Argentine share of world exports was 0.40% in 2002, 
decreasing slightly to 0.39% in 2006.  In comparison, Chilean 
exports are expected to grow by 92.4% during the same period, 
for a 14% annual average.  The Chilean share of world exports 
was 0.28% in 2002, increasing to 0.48% in 2006.  Also, 
Brazilian exports are expected to grow 64% from 2002 to 2007, 
a 10.4% annual average, and the Brazilian share of world 
exports was 0.94% in 2002 up from 1.14% in 2006.  The table 
below shows the results of a comparison of export growth and 
real GDP growth for major emerging market countries exports 
in the 2002-2007 period (with projections for end-year 2007), 
modeled after UCLA Professor Arnold Harberger's analysis of 
the growing relative importance of international trade (Trade 
and Economic Growth, Part I;  National Center for Policy 
Analysis, May 2006).  Harberger analyzed periods of high 
economic growth during the last four decades, concluding that 
the empirical evidence shows that real export growth was 
higher than real GDP growth in the great majority of high 
growth periods.  Argentina is among those exhibiting the 
worst exporting performance vis-a-vis GDP growth. 
 
Table:  Comparison of Real GDP and Export growth 
 
State  Export growth  Real GDP Growth  % Excess 
       (2002-07 avg   (2002-07 avg     Xpt/GDP 
        annual %)      annual %)       Growth 
                                       (2002-07) 
--------------------------------------------- - 
India       21.02        8.38          12.64 
Serbia      16.15        5.94          10.22 
Peru        15.24        6.09           9.15 
Chile       13.98        5.12           8.87 
Poland      12.09        4.32           7.77 
Brazil      10.41        3.11           7.30 
China       17.11       10.04           7.07 
Romania     11.79        6.03           5.76 
Korea        8.98        4.20           4.78 
Ukraine     11.47        6.78           4.69 
Venezuela   11.18        7.24           3.94 
Uruguay      9.94        6.33           3.61 
South Africa 7.74        4.14           3.61 
Ecuador      8.53        4.93           3.60 
Russia      10.01        6.72           3.29 
Hungary      6.13        3.68           2.46 
Turkey       8.34        6.04           2.29 
Singapore    8.76        6.62           2.14 
Colombia     7.55        5.41           2.13 
Thailand     6.38        5.31           1.06 
Mexico       3.27        3.37          (0.10) 
Malaysia     4.91        5.74          (0.82) 
Indonesia    4.38        5.42          (1.04) 
Israel       3.14        4.21          (1.07) 
Taiwan       2.95        4.42          (1.46) 
Argentina    7.02        8.50          (1.48) 
Panama       4.62        6.73          (2.11) 
Philippines  2.30        5.30          (3.00) 
Hong Kong    2.09        5.94          (3.85) 
 
Data Source: IMF 
WAYNE