VZCZCXYZ0000
PP RUEHWEB

DE RUEHBU #1262/01 1791829
ZNR UUUUU ZZH
P 281829Z JUN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 8531
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UNCLAS BUENOS AIRES 001262 
 
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 
12-27, 2007 
 
REF: BUENOS AIRES 1180 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period June 12-27, 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 
---------- 
 
-- FATF approves Argentine terror finance law 
-- Energy Shortages Continue 
-- GDP growth and industrial production decelerate 
-- Strong May primary fiscal surplus thanks to pension funds 
transfer 
 
------------------- 
Banking and Finance 
------------------- 
 
FATF approves Argentine terror finance law 
------------------------------------------ 
¶2. (SBU) On June 27, member countries of the Financial Action 
Task Force (FATF) agreed during the ongoing plenary in Paris 
to accept the enactment of Argentina's counter-terrorism 
finance (CTF) law as adequate to end FATF's multi-year 
follow-up process on this issue.  With this decision 
Argentina will no longer face the possibility of FATF 
sanctions over its non-compliance with FATF's terrorism 
finance requirements.  During the plenary meeting, GoA 
officials stated that the GoA expected to publish the law 
next week in the Official Gazette, and it would enter into 
force eight days after the date of publication. 
 
¶3. (SBU) As reported in past Reviews, the Argentine Congress 
has been reviewing the GoA's draft counter terrorism and 
counter terrorism finance law since President Kirchner 
submitted it to the Senate on December 20, 2007.  During 
FATF's last plenary, in February 2007, FATF members gave the 
GoA until the June 25-29 plenary to pass the legislation, or 
face the possibility that FATF would issue a public statement 
of non-compliance.  After several months of inaction, the 
Senate passed the bill on June 6, followed rapidly by passage 
on June 13 in the Chamber of Deputies. 
 
¶4. (SBU) Despite some weaknesses, this law represents an 
improvement to the legal and regulatory framework.  Argentine 
lawyers generally argue that the current penal code is 
sufficient to address any crime that could fall under the 
definition of terrorism or facilitating terrorism, and argue 
that the main benefits of this law are to send a signal and 
to provide the legal foundation for the Central Bank and 
Financial Investigative Unit's enforcement measures. 
 
¶5. (SBU) The law is not without its detractors.  The vocal 
human rights NGO, "CELS" (Centro de Estudios Legales y 
Sociales), has criticized the legislation, alleging that the 
Congress rushed passage only to fulfill the FATF requirement, 
and did not give it adequate review.  CELS argues that the 
law is ambiguous and leaves it open to abuse with respect to 
 
protection of human rights. 
 
------ 
Energy 
------ 
 
Energy Shortages Continue 
------------------------- 
¶6. (SBU) Natural gas and electricity shortages continue to be 
front page news in Argentina, and are impacting industrial 
production, government operations, and possibly even 
sovereign bond prices.  Most analysts consider this a 
temporary energy "crunch," and not the beginning of an energy 
crisis for the time being, and expect warmer weather would be 
enough to alleviate the problem.  The colder than normal 
weather recently, coupled with lower hydroelectric output 
(due to below-average rainfall and runoff from snowcaps), 
exposed the real crisis -- inadequate energy sector 
infrastructure.  These supply bottlenecks will likely cause 
shortages and rationing, particularly during summer and 
winter peak usage periods, for years to come. 
 
¶7. (SBU) The culprit is the lack of investment that began in 
the late 1990s and was exacerbated by the 2001/2002 crisis 
and subsequent government price freezes and controls, and 
this is unlikely to change until the GoA adjusts its energy 
sector policies.  So far, the GoA has dealt with the problem 
through rationing and short-term fixes (such as rationing, 
reducing government operations, and consumer education 
programs on energy conservation).  The GoA has enforced the 
rationing primarily on the industrial sector and has 
prioritized energy supplies to residential areas.  Many 
industries are coping with the shortages by shifting 
production to periods when residential demand is low. 
 
---------------- 
Economic Outlook 
---------------- 
 
GDP growth and industrial production decelerate 
--------------------------------------------- -- 
¶8. (SBU) Industrial production (IP) increased a modest 0.4% 
m-o-m and 6.4% y-o-y in May, disappointing the market, which 
forecast a 6.9% y-o-y increase.  The soft May reading was not 
the result of the GoA's recent rationing of natural gas and 
electricity, as local media have erroneously reported. 
Rather, it is largely explained by labor strikes over higher 
wages, technically scheduled work stoppages for maintenance, 
as well as by two holidays that shortened production 
schedules during May.  The negative impact of energy 
rationing is yet to come, and will be felt strongly in 
June-August (usually the coldest months in the southern 
hemisphere).  The GoA also reported an increase of only 0.2% 
m-o-m in April of the seasonally adjusted EMAE index 
(estimador mensual de actividad economica), a proxy for GDP 
growth.  This was lower than the 0.6% seasonally adjusted 
average increase in the first quarter of the year, and may be 
an indicator that overall growth is slowing.  Nevertheless, 
the index increased 8.4% on a year-on-year basis, driven 
mainly by the services-related sectors, such as financial 
services, retail and wholesale trade, and transport and 
communication. 
 
¶9. (SBU) This winter's colder than normal weather and lower 
hydro output could accelerate the decline of IP and GDP 
growth.  As reported in the last Review, many local analysts 
 
predict growth to decelerate further in coming months due to 
the energy shortages, with the worst case scenario of a 
reduction in 2007 real GDP growth of one to two percentage 
points.  However, other analysts discount their impact and 
argue that the expected weaker performance of the 
manufacturing (industrial) sector (which represents about 22% 
of GDP) will be at least partly offset by expected record 
grain harvests this year.  Even so, energy sector problems 
have ancillary costs, including increased power generation 
expenditures (through use of diesel generators), increased 
government subsidies (that primarily benefit residential 
consumers, and which will worsen GoA fiscal performance), and 
higher fuel imports (which could dent the trade surplus). 
The media also reports that Argentina's bond prices have 
fallen, as the market adjusts downwards its expectations of 
future growth, so the GoA's cost of financing could also 
worsen. 
 
Strong May primary fiscal surplus thanks to pension funds 
transfer 
--------------------------------------------- - 
¶10. (SBU) The GoA announced June 21 a record monthly primary 
fiscal surplus of ARP 5.3 billion ($11.7 billion) for May, a 
37% y-o-y increase.  The primary surplus for the first five 
months of 2007 was ARP 12 billion (almost $4 billion).  The 
strong result in May is explained by rising tax collection 
(up 30% y-o-y) and an extraordinary ARP 1.5 billion (roughly 
$500 million) transfer from the private pension funds to the 
GoA as part of the counter-reform of the pension system 
(explained below).  The higher surplus also comes in the face 
of rapidly increasing primary and capital expenditures (up 
45% and 51% y-o-y, respectively) ahead of the October 
presidential elections. 
 
¶11. (SBU) Excluding the one-time pension funds transfer, the 
primary fiscal surplus would have only reached ARP 3.8 
billion, 2.4% lowerthan in May 2006.  According to analysts 
from Argentine think tanks FIEL (Fundacion de Investigaciones 
Economicas Latinoamericanas) and Ecolatina, the reform of the 
pension system will result in transfers of ARP 8 billion 
($2.6 billion) in 2007, or about 1% of GDP.  This will allow 
the primary fiscal surplus to remain at about 3.5% of GDP, as 
in 2006.  Otherwise it would fall to the range of 2.5% of 
GDP.  Local analysts consider that the huge revenue cushion 
available -- including from pension transfers -- will allow 
the GoA to avoid moderating its primary spending growth in 
the months leading to the elections. 
 
¶12. (SBU) Note: the so called counter-reform of the pension 
system allows workers in the private sector to transfer back 
to the federal government's pay-as-you go system.  The May 
transfer is a "stock" transfer, (accumulated savings), which 
has a one-time impact, as compared to a monthly "flow" 
transfer.  It is also interesting to note that the transfer 
reflects the composition of the pension fund portfolio, which 
is only about 5% cash and the remainder in assorted financial 
assets (e.g., stocks, government bonds).  Therefore, a 
significant portion of the transfer booked as GoA revenues 
will not provide financing unless the stocks and bonds are 
sold.  Also important to note is that the transfer from the 
private pension system to the government pay-as-go-system 
also creates a future liability for the GoA, as it is now 
responsible for making future payments to future retirees. 
End Note. 
 
WAYNE