VZCZCXYZ0012
PP RUEHWEB

DE RUEHBU #1082/01 1522022
ZNR UUUUU ZZH
P 012022Z JUN 07
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UNCLAS BUENOS AIRES 001082 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CLAY LOWERY, 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 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, MAY 21 - 
31, 2007 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period May 21 - 31, 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.  This document is sensitive 
but unclassified.  It should not be disseminated outside of 
USG channels or in any public forum without the written 
concurrence of the originator.  It should not be posted on 
the internet. 
 
---------- 
Highlights 
---------- 
 
-- Energy Shortages Bite 
-- Central Bank reserves top $40 billion 
-- Counter Terrorism Finance bill clears Senate Committees 
-- ICSID rules against Argentina for $106.2 million 
-- Unemployment continues to fall 
 
---------------- 
Economic Outlook 
---------------- 
 
Energy Shortages Bite 
--------------------- 
¶2. (SBU) This week Argentine natural gas distributors cut the 
supply to some industries and wholesale users as household 
heating demand rose sharply due to extremely cold weather. 
On May 28, exports to Chile were temporarily cut off.  With a 
large share of Argentina's non-hydro electricity generating 
capacity fired by natural gas, electricity supplies to large 
customers have also been rationed and some urban centers, 
including Buenos Aires, have experienced short rolling 
blackouts over the past week.  Local media highlighted 
protests by Buenos Aires taxi drivers unable to find adequate 
compressed natural gas to fuel their vehicles. 
 
¶3. (SBU) Cristian Folgar, Undersecretary of Energy for Fuels, 
said May 29 that domestic energy demand would be met:  "We're 
calm,'' Folgar said.  "Our two systems of gas and electricity 
are functioning at full capacity and this will be sufficient 
to meet the demand we have...we are prioritizing residences, 
compressed natural gas (for vehicles) and some industrial 
uses." 
 
¶4. (SBU) Argentina's austral winter is just starting, and so 
more energy cuts in coming weeks and months are possible. 
While some analysts see current energy shortages threatening 
more than four years of economic growth of over 8.5% per 
year, embassy industry contacts, argue that current cuts will 
not dampen economic activity significantly; many industrial 
users are implementing contingency plans to switch from gas 
to more expensive and less environmentally friendly fuel oil 
and diesel to operate their plants. 
 
¶5. (SBU) Argentina has experienced an energy crunch since the 
economy rebounded from deep crisis in 2001-02, with tariff 
caps and price controls simultaneously boosting demand and 
dampening investment.  In 2004, the GoA began limiting 
natural gas exports to Chile (in violation of its contract), 
began importing natural gas from Bolivia, and initiated low 
key energy rationing. 
 
------------------- 
 
 
Banking and Finance 
------------------- 
 
Central Bank reserves top $40 billion 
------------------------------------- 
¶6. (SBU) Argentina's Central Bank (BCRA) reserves exceeded 
$40 billion on May 21, the highest level in the country's 
history.  The previous high, pre-crisis, was $37.4 billion in 
January 2001.  These record levels are the result of the 
BCRA's official but not quite public policy of maintaining an 
undervalued currency.  It does this by buying up foreign 
exchange to avoid peso appreciation, and then engaging in 
sterilization operations to avoid a monetary impact.  The 
BCRA has been buying over $100 million per day for the last 
three weeks, injecting over 300 million pesos per day into 
the economy that it must then absorb by issuing short term 
debt (mainly Lebacs and Nobacs, or Letters of the central 
bank and Notes of the central bank).  The BCRA's total peso 
debt is currently about $18 billion. 
 
¶7. (SBU) The BCRA argues that reserve accumulation is an 
insurance against exogenously imposed crisis, and BCRA 
President Redrado does not openly recognize that the BCRA's 
goal is to prevent peso appreciation.  However, local media 
and analysts treat it is an open secret that the BCRA is 
pursuing this policy at President Kirchner's behest.  Redrado 
has stated that the BCRA will maintain this policy as long as 
the BCRA's balance does not show a deficit (known as a "quasi 
fiscal deficit").  However, the job of maintaining an 
undervalued peso is getting tougher with the huge inflow of 
foreign currency from exports and increasing foreign 
investment in financial assets and property, and the BCRA is 
struggling to absorb the inflow to maintain the quasi-fixed 
nominal exchange rate of about 3.08 pesos/USD.  The BCRA has 
bought $8 billion since the beginning of 2007 and $1.3 
billion in the first three weeks of May.  Private analysts 
estimate that the BCRA will purchase $16.5 billion in 2007, 
or $2.5 billion more than in 2006.  Meanwhile, the BCRA has 
sterilized 15.2 billion pesos so far this year, almost 50% 
more than during the same period last year. 
 
Counter Terrorism Finance bill clears Senate Committees 
--------------------------------------------- ---------- 
¶8. (SBU) Argentine Senator Vilma Ibarra, Chair of the Justice 
and Penal Issues Committee in the Senate, chaired a joint 
meeting of her Committee, the International Security and 
Narcotrafficking Committee, and the National Economy and 
Investment Committee on May 22 to debate the draft counter 
terrorism and counter terrorism finance (CTF) bill, which 
President Kirchner sent to the Senate on December 20, 2006. 
The three Committees approved the bill and will pass it for 
full Senate hearing on/about June 6, where most analysts 
expect it will pass with ease. 
 
¶9. (SBU) Local media report that even if the Senate approves 
the bill within the next two weeks, this will not give the 
Chamber of Deputies sufficient time to approve it before the 
late-June plenary of the Financial Action Task Force (FATF). 
FATF, of which Argentina is a member, has given the GoA until 
the next plenary to get full Congressional approval of the 
draft law, or else face possible sanctions.  (Note: almost 
all FATF member countries have legislation criminalizing the 
financing of terrorism.  Other than Argentina, the exceptions 
are Turkey and Mexico, which are in the process of finalizing 
their laws, and Brazil, which has an older law that the GoB 
argues can be used to penalize the terrorism financing.  End 
 
Note) 
 
¶10. (SBU) Senator Ibarra and other Senators present from 
President Kirchner's coalition expressed strong support for 
the bill and emphasized the importance of complying with FATF 
recommendations and avoiding sanctions, which they noted 
could have a severely negative impact on Argentine companies, 
financial institutions, and economy in general. 
 
¶11. (SBU) The GoA's National CTF Coordinator and a 
representative from the Attorney General's office 
participated as observers in the meeting, as did a 
representative of the human rights NGO "CELS" (Centro de 
Estudios Legales y Sociales).  The CELS representative 
criticized the bill, arguing that it did not respect 
international humanitarian laws, and also alleging that it 
could be used to target other activities, such as social 
protest, as "acts of terror."  However, the GoA 
representatives clarified that the bill carefully defined 
"acts of terror" to avoid ambiguity.  They noted the draft 
corresponded closely to UN Resolutions on money laundering 
and counter terrorism finance, all of which Argentina has 
signed and ratified. 
 
ICSID rules against Argentina for $106.2 million 
--------------------------------------------- --- 
¶12. (SBU) On May 22, the International Center for the 
Settlement of Investment Disputes (ICSID), an independent 
tribunal associated with the World Bank, ruled against 
Argentina in a case filed by Enron Corporation and Ponderosa 
Assets, L.P., former shareholders of Transportadora de Gas 
del Sur (TGS - a natural gas pipeline company).  The ruling 
was for $106.2 million in damages vs. Enron's claimed losses 
totaling between $453 and $582 million since 2001 due to the 
government's freeze in gas tariffs.  In addition to the 
compensation award, the ICSID arbitral panel ruled that the 
GoA must pay interest of Libor plus 2%, retroactive to 
January 2002, for an estimated total of approximately $165 
million.  (Note: Enron sold its 15.2% of its shares of TGS to 
DW Shaw investment fund.)  There are 31 other ICSID claims 
pending against Argentina, totaling $18 billion in damages. 
The bulk of these claims stem from the GoA's unwillingness to 
allow utility companies to raise tariffs to compensate for 
the post-crisis devaluation of the peso. 
 
------------- 
Labor Economy 
------------- 
 
Unemployment continues to fall 
------------------------------ 
¶13. (SBU) The official GoA unemployment rate, which treats 
unemployed beneficiaries of GoA "labor plans" as employed, 
fell from 11.4% in Q1 of 2006 to 9.8% in Q1 2007.  The actual 
rate, which counts labor plan beneficiaries as unemployed, 
fell even more in percentage terms, from 14.1% to 11.1%. 
President Kirchner said on May 30 that the 9.8% rate of Q 1 
2007 fell to 8.3% in April, although the official release 
will only take place on June 6.  These figures indicate that 
unemployment, whatever the measurement, is still decreasing 
following its peak in 2002 of 21.5% (or 26% including labor 
plan beneficiaries).  Also, the number of people who receive 
unemployment subsidies ("labor plans") is lower than a year 
ago, both in absolute value and as a percentage of the labor 
force. 
 
¶14. (SBU) A local consulting company -- Macrovision -- doubts 
this reduction in unemployment will significantly contribute 
to potential GDP growth, since a good part of the previous 
unemployed are informal workers  ill-prepared to take up jobs 
in an expanding formal sector without investment in training 
and education.  Macrovision calls it unlikely that the rate 
of unemployment will quickly converge to Argentina's 
historical natural rate of 6%.  Even if it does, the marginal 
productivity of labor will not be high.  SEL Consultants, 
which focuses on social issues in Argentina, estimates that 
the current natural rate of unemployment in Argentina is 
closer to 9%, much higher than the average 5% unemployment 
rate for the 1974 - 1992 period.  SEL points out that 
unemployment affects the informal sector primarily, where 
government labor policy interventions are not effective. 
SEL's classification of the unemployed, based on the economic 
sectors from which they were expelled, shows that most of 
them are increasingly coming from the informal sector. 
MATERA