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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001890 
 
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, SEPTEMBER 
5-14, 2007 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period September 5-14, 2007. 
The unclassified email version of this report includes tables 
and 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 
---------- 
 
-- Presidential candidate Cristina Kirchner's 
business-friendly speech promises continuation of current 
economic policies 
-- August CPI increases 0.6% m-o-m, roughly half of private 
sector estimates 
-- Argentine Court orders recalculation of CPI data 
-- Argentina's trade balance down:  overall, with Brazil, and 
in budget projections 
-- Election-year politics stop Buenos Aires City 
under-the-table effort to improve its finances 
-- September 12 airline strike paralyzes domestic travel 
 
---------------- 
Economic Outlook 
---------------- 
 
Presidential candidate Cristina Kirchner's business-friendly 
speech promises continuation of current economic policies 
--------------------------------------------- ------ 
¶2. (SBU) Leading Presidential candidate, Senator, and First 
Lady Cristina Fernandez de Kirchner spoke on September 4 at a 
high-profile lunch organized by the prominent Argentine 
business association IDEA (Argentine Business Development 
Institute), where she highlighted her interest in ensuring a 
business and investor-friendly environment in Argentina. 
Many of the Argentine and expatriate business elite attending 
the lunch subsequently praised her welcoming approach to the 
private sector, contrasting her attempt to build 
relationships with the confrontational style of her husband, 
President Nestor Kirchner. 
 
¶3. (SBU) Nevertheless, many participants privately perceived 
her comments as evidence of her intention to continue current 
GoA policies.  As a subsequent Deutsche bank report noted, 
Cristina presented the key  economic tenets of her government 
as a continuation of her husband's policies; she praised 
Nestor Kirchner's accomplishments and downplayed what many 
see as growing risks and challenges to economic growth in 
2008 (high inflation, excessive GoA expenditures, union's 
demands for excessive salary increases).  Her speech, 
therefore, implied that post-election policy changes will be 
gradual, and did not clarify how inclined she would be to 
address what most economists consider an overheating economy. 
 Main highlights of Cristina's speech: 
 
-- If elected, her government would target a primary fiscal 
surplus of 3.15% of GDP in 2008.  (Comment: the 2007 primary 
fiscal surplus is estimated at 3.1 to 3.5% of GDP, but falls 
to only approximately 2% when excluding one-off assets 
transfer resulting from the 2007 pension reform.  In order to 
achieve a 3.15% primary surplus, Cristina's government would 
have to decrease subsidies, particularly to the energy 
sector, which -- in order to preclude an energy crisis -- 
would also probably require the GoA to allow increases to 
energy prices that have been broadly frozen since 2002.) 
 
-- She called for the creation of a "social pact" in 2008, 
among government, the private sector, and labor unions. 
(Comment: This has been interpreted as a means to encourage 
moderation in union demands for formal sector wage increases 
that exceed actual inflation.  Other countries have used such 
business/labor/government pacts, with questionable 
effectiveness, as a means to control both wage growth and 
price increases.) 
 
BUENOS AIR 00001890  002 OF 004 
 
 
 
-- She argued that Argentina's "competitive exchange rate is 
not forever" and that competitiveness should not solely rely 
on the exchange rate, but should be complemented by 
technological and productive investment. 
 
-- She supported the current administration's argument that 
it has not manipulated official statistics, and stood by the 
Argentine statistical agency INDEC's published CPI data (see 
items below).  She also denied that recent global market 
volatility has had or would have an outsized impact on 
Argentina.  (Comment: private sector estimates for inflation 
are now in the range of 15-20%, compared to INDEC's 8-9% for 
the CPI.) 
 
-- She promised an agreement with the Paris Club following 
the October 28 elections. 
 
-- She called recent austral winter energy shortages a 
negative by-product of Argentina's rapid economic growth 
since 2003.  (Comment: At the conference, a draft study 
prepared by the Technical Institute of Buenos Aires said that 
Argentina will need $3-5 billion per year in energy sector 
investment each year for the next 4-5 years to meet 
burgeoning Argentine energy demand.  End Comment) 
 
--------- 
Inflation 
--------- 
 
August CPI increases 0.6% m-o-m, roughly half of private 
sector estimates 
--------------------------------------------- -- 
¶4. (SBU) On September 6, the GoA statistical agency INDEC 
announced that the August CPI increased 0.6% m-o-m, in line 
with expectations that already anticipated significant 
underreporting.  Local private analysts estimate that the 
published increase represents about half the "true" inflation 
rate.  As reported in the September 4 Report, provincial CPIs 
indicate that "true" inflation for 2007 will be in the 15-20% 
range.  According to INDEC, accumulated inflation for the 
first eight months of the year reached 5%, compared to the 
8-10% rate that most private consultants estimate.  The 
sub-indexes with the largest m-o-m increases were: Education 
(1.6%), health services (1.3%), food and beverages (1.2%) and 
housing (1%), which were partially offset by a decrease of 
1.2% in entertainment.  Credit Suisse notes that the August 
CPI does not point to any obvious manipulation of the data. 
However, anecdotal evidence suggests that food and beverage 
price increases have been much higher.  (Note: food/beverage 
prices are key data used in the measurement of indigence and 
poverty levels.  End Note) 
 
Argentine Court orders recalculation of CPI data 
--------------------------------------------- --- 
¶5. (SBU) On September 12, Federal Judge Rodolfo Canicoba 
Corral ordered the Federal Police and external experts to 
verify whether INDEC authorities have manipulated CPI 
statistics, based on confiscated INDEC forms containing 
January price surveys.  Judge Canicoba Corral said he would 
use the results to decide whether to summon the Ministry of 
Economy's Secretary of Internal Commerce, Guillermo Moreno, 
known as the GoA's price control Czar, and other INDEC 
authorities as defendants in a case on official statistics 
manipulation.  Simultaneously, a group of INDEC employees 
reported to local press that they would submit a report to 
the GoA outlining INDEC management's actions taken to force 
INDEC's professional staff to manipulate statistics.  These 
include firing the head of the construction prices section in 
early September, following her refusal to exclude some price 
increases in the monthly cost of construction index. 
 
¶6. (SBU) The experts that Judge Canicoba Corral designated 
will attempt to use INDEC forms to reproduce INDEC's public 
methodologies and compare the outcomes with INDEC's official 
CPI reports.  However, there are reports that INDEC personnel 
destroyed many forms after the Courts issued an order to 
confiscate the documents.  Local analysts have pointed out 
that this court-ordered recalculation could encourage 
 
BUENOS AIR 00001890  003 OF 004 
 
 
judicial cases against the GoA by holders of CPI-linked 
Argentine debt, and could also complicate the GoA's wage 
negotiations with unions.  Federal Attorney Carlos Stornelli 
initiated this judicial case after the GoA sacked INDEC 
director Graciela Bevacqua last February due to her 
opposition to GoA intervention in INDEC. 
 
----- 
Trade 
----- 
 
Argentina's trade balance down: overall, with Brazil, and in 
budget projections 
--------------------------------------------- --- 
¶7. (SBU) Argentina's July 2007 trade surplus decreased almost 
50% y-o-y to $479 million, totaling $10.7 billion in the 12 
months ending July 31, 2007.  July exports grew 22% y-o-y, 
while imports grew 45%, totaling $50 billion and $39.2 
billion respectively during the preceding 12 months.  July 
imports reached a single-month record of $4.1 billion. 
 
¶8. (SBU) The falling July surplus was driven primarily by 
reduced energy exports and increased energy imports, against 
increased agricultural and automobile exports.  Continued 
cutbacks in energy exports (intermittent since 3Q06) have led 
to a 17% y-o-y decrease from Jan-Jul 2007, and 32% y-o-y in 
July alone.  Increased energy imports have been more 
dramatic: the y-o-y increases have been 44% for the first 
seven months and 159% in July (totals of $1.4 billion and 
$467 million respectively).  More than 90% of the annual 
increase in exports was in four sectors: cereals, oilseeds, 
edible oils and automobiles, and much of that is due to 
record harvests and rising world commodity prices. 
 
¶9. (SBU) Meanwhile, official statistics indicate that 
Argentina's trade deficit with neighbor and biggest trading 
partner Brazil reached a monthly record of $512 million in 
July -- 115% more than the July 2006 deficit -- for a 
cumulative 2007 deficit of $2.43 billion, up 12% y-o-y. 
Energy imports from Brazil through July 2007 grew 368% y-o-y 
(to $173 million), but the largest dollar increases in July 
imports from Brazil were in capital goods and automobiles, 
which increased $112 and $99 million (56% and 96%) 
respectively compared to July 2006. 
 
¶10. (SBU) According to press reports about the GoA's 2008 
budget proposal (presented to Congress September 19 by 
Economy Minister Peirano), the trade surplus is projected to 
total $11 billion for 2007 and $10.5 billion in 2008.  These 
are down from the $12.3 billion surplus in 2006, and well 
below post-crisis surpluses of $16.4 and $15.5 billion in 
2002 and 2003, respectively. 
 
¶11. (SBU) These numbers appear in the context of Argentina 
seeking to implement new trade measures to reduce imports of 
manufactured goods from China and the GoA's current 
participation in a Doha round negotiations in Geneva on 
Agricultural, NAMA and Service sector modality papers. 
 
------- 
Finance 
------- 
 
Election-year politics brake Buenos Aires City effort to 
improve its finances 
--------------------------------------------- - 
¶12. (SBU) Jorge Telerman, outgoing Mayor of the City of 
Buenos Aires, announced August 24 increases in fees for ABL 
services (ABL: Alumbrado, Barrido y Limpieza -- charges to 
property owners for street lights, cleaning, and trash 
collection).  He justified the decision with the argument 
that ABL fees are too low given the dramatic increases in 
property prices over the last five years.  He said this was 
particularly true for upper-class neighborhoods, entailing an 
unfair burden on poorer areas, which supported his 
administration's decision to disproportionately apply the 
increases on rich households.  What Telerman did not publicly 
highlight, however, is that the City is desperately searching 
for ways to increase revenues to finance its budget deficit 
 
BUENOS AIR 00001890  004 OF 004 
 
 
of approximately ARP 1 billion ($315 million) before the 
newly elected Mayor Mauricio Macri takes office in December. 
 
¶13. (SBU) Telerman's administration intended for the 
increased "fees" to help cover the financing gap without 
calling it a tax increase (which would have required approval 
of the Buenos Aires legislature).  While the measure 
technically entered into force August 27, it created a storm 
of controversy that forced Telerman to shelve the initiative 
temporarily, while a Congressional committee reviews the 
issue.  Opponents of the measure argued against it on 
technical grounds (charging that the formula for applying the 
increases was flawed).  However, the opposition was led by 
the Frente para la Victoria, President Kirchner's coalition, 
and local press reported that they were motivated by 
presidential election-year political considerations.  As 
supporting evidence of this allegation, the Congressional 
committee participants have indicated that the City will not 
implement the measure during 2007. 
 
----- 
Labor 
----- 
 
September 12 airline strike paralyzes domestic travel 
--------------------------------------------- -- 
¶14. (SBU) On Monday, September 12, air cabin crew members 
from Aerolineas Argentinas and its subsidiary Austral staged 
a nationwide 24-hour strike that that forced the cancellation 
of virtually all domestic flights and stranded 13,000 irate 
passengers at Buenos Aires's Jorge Newbery Airport and most 
provincial airports.  Both airlines are owned by the Spanish 
tourism group Marsans.  The next day, the two carriers' 
unions, working with GoA Ministry of Labor, reached agreement 
with management on a 23% average monthly wage increase, 
retroactive to April.  The accord includes a "social peace" 
clause in which the union agreed not to stage any job actions 
until April 1, 2008.  Flights were rescheduled for Tuesday, 
and did not affect international arrivals or departures. 
(Comment:  some local analysts expect similar strikes in 
other sectors, as unions stretch their muscles in the run-up 
to the October 28 presidential election.  End Comment) 
WAYNE