VZCZCXYZ0000
PP RUEHWEB

DE RUEHBU #1180/01 1661754
ZNR UUUUU ZZH
P 151754Z JUN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 8420
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 6240
RUEHBR/AMEMBASSY BRASILIA PRIORITY 6107
RUEHCV/AMEMBASSY CARACAS PRIORITY 1300
RUEHLP/AMEMBASSY LA PAZ JUN 4702
RUEHPE/AMEMBASSY LIMA PRIORITY 2067
RUEHMD/AMEMBASSY MADRID PRIORITY 1849
RUEHMU/AMEMBASSY MANAGUA PRIORITY 0120
RUEHME/AMEMBASSY MEXICO PRIORITY 1383
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 6519
RUEHQT/AMEMBASSY QUITO PRIORITY 0937
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 0477
RUEHSO/AMCONSUL SAO PAULO PRIORITY 3336
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY

UNCLAS BUENOS AIRES 001180 
 
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, JUNE 
4-12, 2007 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period June 4-12, 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 
---------- 
 
-- Argentina's trade deficit with Brazil narrows 15% due to 
strong Real 
-- Exports rising, imports increasing faster, but terms of 
trade improving 
-- U.S. closes antidumping case against Argentina 
-- Energy shortages impact growth projections for 2007 
-- Are Argentina's reserves and resulting costs of 
sterilization too high? 
-- GoA issues peso denominated Bonar V at a yield of 11.70% 
 
---------------- 
Economic Outlook 
---------------- 
 
Argentina's trade deficit with Brazil narrows 15% due to 
strong Real 
--------------------------------------------- --- 
¶2. (U) Argentina's trade deficit with Brazil shrank over the 
first five months of 2007, the first such reversal in several 
years.  Exports to Brazil in that period were $3.9 billion, 
35% more than the same period in 2006, led by a 68% increase 
in exports of autos and auto parts.  Imports were $5.1 
billion, 18% higher.  The resulting trade deficit of $1.27 
billion was 15% lower than the deficit for the same period in 
2006 ($1.5 billion).  Local analysts attribute the change to 
the stronger Real.  Argentina had a $2.3 billion surplus with 
Brazil in 2002, followed by deficits of $33 million in 2003, 
$2.1 billion in 2004, and $4.1 billion in both 2005 and 2006. 
 Imports from Brazil grew from $2.5 billion to $12.3 billion 
during that period, while exports only rose from $4.8 to $8.1 
billion. 
 
Exports rising, imports increasing faster, but terms of trade 
improving 
--------------------------------------------- - 
¶3. (U) Exports in dollars rose 9% y-o-y in April, to a record 
monthly high of $4.261 billion.  This increase was due to an 
8% y-o-y increase in prices and a 1% y-o-y increase in 
quantities, and primarily explained by exports of cereals. 
Imports rose 23% y-o-y in April to $3.139 billion, mainly due 
to increased quantities (22%).  Imports of intermediate goods 
and parts of capital goods, accounted for 66% of this 
increase.  April's trade surplus was $1.162 billion, or 18% 
lower than in April 2006.  Exports rose 10% y-o-y in the 
first four months, to $15.27 billion, while imports increased 
24% y-o-y to $12.3 billion.  The surplus was $2.97 billion 
during the first four months, or 23.8% y-o-y lower than the 
equivalent period in 2006. 
 
¶4. (U) Argentina has benefited from the commodity price boom, 
but not to the same degree as many other commodity exporting 
 
countries.  Argentina is a world-class exporter of 
agricultural products, but is not as significant of an 
exporter of petroleum and energy.  Petroleum prices in 
dollars increased 391.5% between 1998 and 2006, while prices 
for most agricultural goods have only increased between 20 
and 30% from their highs in the 1990s.  Petroleum prices 
declined 16.8% between Q3 2006 and Q1 2007, while food prices 
increased 6% during the same six months.  During that period, 
Argentina's terms of trade (price of exports over price of 
imports) improved 0.9%, compared to an improvement of 13.9% 
since Q1 2005. 
 
¶5. (U) Between 2003 and 2006, Argentine exports grew 80% in 
dollar terms from $25.65 billion to $46.18 billion, while 
imports increased about 280% from $9 billion to $34.19 (Note: 
imports plummeted by 55.7% in 2002).  Argentina still manages 
to have a trade surplus, partly due to the more favorable 
terms of trade (but also because of increasing volumes, 
particularly in agriculture).  Although food prices have not 
grown as much as those of petroleum, the former exhibit a 
growing trend that appears likely to continue in the medium 
term, which bodes well for Argentina's ability to maintain 
its trade surplus. 
 
U.S. closes antidumping case against Argentina 
--------------------------------------------- - 
¶6. (SBU) A bilateral trade dispute between the U.S. and 
Argentina, dating to 1995, appears to be finally nearing the 
end.  The U.S. has applied antidumping duties to Argentina's 
exports to the U.S. of oil country tubular goods (OCTG - 
specialized steel pipes used in petroleum fields) since 1995, 
and the Argentine government filed WTO complaints against the 
U.S. for its sunset reviews in both 2000 and 2005.  The 
appeal was finalized on April 12, 2007, with both sides 
claiming victory, as U.S. sunset procedures were upheld but 
the duties in this specific case were unsupported. 
 
¶7. (SBU) Accordingly, the U.S. announced May 31 that it would 
revoke the antidumping duties.  However, on May 25 the GoA 
had stated its intention to seek $44 million in compensation 
for lost exports.  Although an Econ Ministry contact says the 
GoA claim "should be dropped" if the duties have been 
revoked, a Foreign Ministry official familiar with the case 
said that the U.S. announcement to revoke duties was "an 
excellent signal," but the GoA would wait for the official 
revocation before terminating its compensation request. 
 
------ 
Energy 
------ 
 
Energy shortages impact growth projections for 2007 
--------------------------------------------- ------ 
¶8. (U) Dr. Daniel Artana, the Chief Economist of FIEL 
(Fundacion de Investigaciones Economicas Latinoamericanas), 
one of Argentina's most well-known private think-tanks, 
stated during a May 30 presentation that recent gas and power 
cuts would adversely impact Argentina's economic growth in 
¶2007.  He blamed the cuts on the unusually cold weather in 
May, but they are also the expected result of the GoA's 
policies since 2002 of controlling utility prices.  These 
tariff controls have deterred new investment in exploration 
(for gas), as well as in generation, transmission, and 
distribution of both electricity and gas.  Using as a 
reference Brazil's experience and energy rationalization 
plans enforced at the end of the 1990s, Artana estimated that 
 
energy sector problems would result in a reduction in 2007 
real GDP growth of up to one percentage point.  However, he 
argued that the impact of energy problems in Argentina could 
be even worse than they were in Brazil, since the GoA has 
enforced rationing on industries and commercial users while 
protecting residential users as much as possible.  Conversely 
in Brazil, Artana stated, all sectors shared the brunt of the 
shortages. 
 
------------------- 
Banking and Finance 
------------------- 
 
Are Argentina's reserves and resulting costs of sterilization 
too high? 
--------------------------------------------- 
¶9. (U) During the May 30 presentation, FIEL Chief Economist 
Daniel Artana compared the amount of Argentina's official 
reserves against those of Brazil and Mexico.  He used 
different measurements to assess whether Argentina had 
amassed an excessive amount of reserves as a result of its 
policy of purchasing foreign currency to avoid the nominal 
appreciation of the peso.  Artana noted that Argentina's 
reserves/GDP ratio of 18.5% was high relative to Brazil 
(12.1%) and Mexico (7.1%).  Argentina also has 14.4 months of 
import cover, significantly higher than Mexico's 3.3 months, 
although only slightly higher than Brazil's level.  Artana 
also compared several reserve/debt ratios (including both 
public and sector debt), which in most cases show Argentina 
as having a margin -- compared to the other two -- to 
continue accumulating reserves. 
 
¶10. (U) The flip-side of the Central Bank's reserve 
accumulation policy is the cost of sterilizing the increased 
money supply, which it does by issuing relatively short term 
bills and notes (Lebacs and Nobacs).  According to Artana, 
the BCRA still has a margin to continue issuing debt without 
incurring a quasi-fiscal deficit (difference between the 
interest earned and paid on BCRA assets and liabilities). 
However, he argued that this window would close relatively 
soon.  He commented that Central Bank President Martin 
Redrado would not want to be remembered as the one 
responsible for running a quasi-deficit, so would soon pursue 
alternative ways to mop up (or absorb) excess peso liquidity 
(Note:  Artana assumes that allowing the peso to appreciate 
is not an option).  One option would be to increase bank 
reserve requirements, which he has already done once in 2007. 
 A better option would be for the Economic Ministry to use 
its own peso reserves from the primary fiscal surplus, which 
do not need to be sterilized, to purchase foreign currency. 
However, most analysts consider this unlikely prior to the 
October Presidential elections. 
 
GoA issues peso denominated Bonar V at a yield of 11.70% 
--------------------------------------------- ----------- 
¶11. (U) On June 7, the GoA successfully issued ARP 1.5 
billion (approx. $500 million) of the Bonar V (or Bonar 
2012), a peso denominated, five-year bond, with a fixed 
coupon rate of 10.50%, at a yield of 11.70%.  This was the 
first time since the 1990s that the GoA issued a fixed-rate, 
peso denominated bond without an adjustment for inflation 
clause.  (Note: The GoA last issued a peso denominated bond 
in July 2005, the Boden 2014, but this bond was adjusted by 
CER - a CPI-linked index.  The GoA also issued 
peso-denominated bonds as part of the mid-2005 debt exchange, 
but these were also indexed to inflation). 
 
 
¶12. (U) The 11.7% yield split the middle of the market's 
expected range of 11.25-12.20%.  However, traders praised the 
result of the auction, given the negative market environment 
last week generated by expectations of FED rate increases and 
also following continued, high-profile GoA manipulation of 
official inflation statistics (Note:  The statistical agency, 
INDEC, published a 0.4% inflation rate for May, lower than 
even the most optimistic private sector estimates). 
 
¶13. (U) The auction was more than three times 
over-subscribed, with total bids of ARP 5.2 billion.  Local 
and international analysts tell Post that foreign investors 
searching for high yields and minimal currency risk purchased 
the vast majority (over two-thirds) of the issuance.  JP 
Morgan Chase, Deutsche bank, and Citibank together purchased 
over 50%.  In addition to the high yield, the ability to use 
the bond to get around capital controls may partly explain 
the popularity of the bond (Note: primary issuances are 
exempt from the BCRA requirements of a one-year minimum 
investment, with a 30% unremunerated deposit). 
 
¶14. (U) GoA Finance Secretary Sergio Chodos stated publicly 
that the goal of the issue was not only to raise funds, but 
also to build out a peso-yield curve (which would be used as 
a reference for the private sector).  With this transaction, 
the GoA would only need to raise about $2.6 billion more to 
meet its budgeted 2007 financial needs of $5.7 billion. 
However, a local think tank (Melconian) argues that the GoA's 
increasing expenditures so far during this election year will 
require it to raise an additional $2 billion on top of the 
$5.7 billion amount.  Given the relative success of the 
auction, analysts expect the GoA to tap the market again in 
the near future (also confirmed by GoA contacts).  The GoA 
also has up to $1.0 billion more of the dollar-denominated 
Bonar X (10-year, fixed rate) available for issuance. 
However, most analysts expect the GoA to hold off with 
further issuances of dollar bonds, since they have suffered 
in recent weeks as a result of rising Treasury rates (Note: 
the Bonar X was issued with a yield of 8.44% on May 10, but 
it is now trading at 9.20%.) 
 
¶15. (SBU) To secure the success of the issue, the GoA 
apparently attempted to limit competition in the week leading 
up to the auction. The CNV (GoA securities regulator) 
reportedly tried to block new issues from the private sector 
(specifically from the banking and energy sector) to reduce 
the upward pressure on the peso (from incoming dollar flows) 
and also to keep the market clear for a GoA peso denominated 
issue.  However, Post's private sector contacts assert that 
the GoA quickly backed off and allowed the issuances to go 
through.  Interestingly, the private sector has been able to 
issue peso (and dollar) debt at lower yields than the 
sovereign in recent months.  Two recent examples are Banco 
Macro's early June issuance of a 5-year, peso linked (pays in 
dollars but at spot exchange rate) corporate bond for the 
equivalent of $100 million at a yield of 10.75%, and Banco 
Santander-Rio's issuance in April of a ARP 450 million 3-year 
 
bond at a yield of 11.375%. 
 
MATERA