VZCZCXRO3055
PP RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHQU RUEHTM RUEHVC
DE RUEHBU #2251/01 3251949
ZNR UUUUU ZZH
P 211949Z NOV 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 9758
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
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 SECTION 01 OF 04 BUENOS AIRES 002251 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CLAY LOWERY, BO'NEILL, AJEWEL, LTRAN, MMALLOY 
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, NOVEMBER 
1 - 16, 2007 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period November 1 - 16, 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 
---------- 
 
-- GoA raises $574 million financing at a cost two percentage 
points higher than in May 
-- Capital flight jumps in third quarter due to international 
and domestic concerns 
-- GoA buys back $500 million GoA debt from Social Security 
Administration 
-- Private peso deposits decline in October, complicating 
BCRA efforts to reduce interest rates 
-- First post-election CPI report disappoints; yet more 
disturbances by INDEC employees 
-- GoA raises export taxes to shore up fiscal balance and 
reduce inflationary pressures 
 
------- 
FINANCE 
------- 
 
GoA raises $574 million financing at a cost two percentage 
points higher than in May 
---------------------------------------- 
¶1. (SBU) On November 14, the GoA issued $574 million of a 
ten-year-maturity bond, the Bonar X (also known as the Bonar 
2017) at a yield of 10.50%.  This yield was 204 basis points 
higher than the strike yield from the GoA's auction of $750 
million in Bonar X on May 12.  (The Bonar X is a dollar 
denominated bond, with a 7% coupon, maturing in April 2017.) 
Though the GoA was able to issue more than twice the minimum 
amount announced ($250 million), the result was disappointing 
(and costly) compared to the May issue.  Bids totaled $670 
million, compared to the $1.9 billion received in May.  Only 
10% of bids were from foreign investors (low compared to 
other issuances over the last two years), with the majority 
of bids coming from local pension funds forced to repatriate 
funds due a recent change in local regulation (see October 26 
Econ/Fin Report).  Fortunately for the GoA, these 
shortcomings went mostly unnoticed in the media, as the 
auction occurred the same day that Chief of Cabinet Alberto 
Fernandez announced the names of President-elect Cristina 
Fernandez de Kirchner cabinet Ministers (she takes office 
December 10). 
 
¶2. (SBU) The timing of this auction raised concern and 
speculation among local and foreign analysts.  First, the 
fact that the GoA would issue bonds during the current 
difficult international financial environment indicates that 
it is in a more desperate financial situation than the market 
anticipated.  Most analysts had expected that the GoA, to 
avoid issuing high-yield debt, would instead tap public 
entities such as the Central Bank (BCRA), the Social Security 
Administration (Anses) or the Argentine IRS (AFIP) to meet 
its financing needs for the rest of the year. (In the next 
month, GoA faces debt payments for about $2.2 billion.)   The 
more optimistic view held by some analysts is that the GoA 
made a sound financial decision in issuing longer-term debt 
now as opposed to issuing short-term debt instruments to 
public entities.  The GoA will be able to blame out-going 
Economy Minister Miguel Peirano for the high cost of this 
issue and  incoming Economy Minister Martin Lousteau is 
positioned to look good by issuing cheaper debt after markets 
settle.  A November 19 Ambito Financiero article reported 
that Minister Peirano may auction another tranche of the 
Bonar X before he departs the ministry on December 10. 
 
GoA buys back $500 million debt from Social Security 
 
BUENOS AIR 00002251  002 OF 004 
 
 
Administration 
------------------------------------------ 
¶3. (SBU) The GoA bought back approximately $500 million of 
debt issued under the 2005 debt exchange ("Canje") as 
required by the debt restructuring prospectus.  According to 
the prospectus, the GoA has to repurchase restructured debt 
(e.g. Pars, Discounts or Quasi-pars) when GDP growth exceeds 
the base GDP growth level established in the prospectus.  For 
2007, private analysts estimated that the GoA would be forced 
to repurchase bonds of about $400-500 million.  However, the 
GoA disappointed the market by apparently repurchasing the 
bonds from Anses, (the Argentine Social Security 
Administration), instead of purchasing bonds on the secondary 
market, which would have increased demand (and prices) for 
GoA debt.  Anses has GoA bonds (mostly Quasi-pars) in its 
portfolio as a result of the so-called pension 
counter-reform, which allows workers in the private sector to 
transfer back to the federal government's pay-as-you go 
system (see February 2 Econ/Fin Report).  Under the reform, 
private pension funds (AFJPs) transfer the funds of those who 
have chosen revert to the government system to Anses, and the 
transfers reflect the composition of the AFJPs' portfolios 
(which are only 5% cash and the rest in financial assets, 
including stocks but mainly GoA bonds).  Although the GoA has 
not made the details of the purchase public, Embassy 
government contacts confirm that the GoA completed the 
repurchase by October 31 as required by the prospectus to 
avoid a technical default, and also confirm that they 
purchased Anses-held bonds. 
 
Capital flight jumps in third quarter due to international 
and domestic concerns 
------------------------------------------ 
¶4. (SBU) Capital flows out of Argentina's financial system 
(by the non-financial private sector) reached $4.4 billion in 
the third quarter of 2007, according to the BCRA's quarterly 
foreign exchange report, released on November 1 (one week 
later than scheduled).  This compares to inflows of $253 
million in QIII 2006 and $771 million inflow in QII 2007. 
Some analysts speculated that the BCRA's delay in releasing 
the report was to avoid announcing the negative news of 
capital outflows prior to the October 28 presidential 
elections.  In its report, the BCRA blamed the increase in 
capital outflows on international financial turmoil, with 
investors seeking lower-risk assets in a "flight to quality." 
 However, private analysts argue that domestic factors played 
a role.  These include the deterioration of fundamentals 
(rapid increase in GoA expenditures, the surge in "true" 
inflation, and the loss of credibility of GoA statistics), 
along with the uncertainties surrounding the presidential 
election.  Third quarter capital outflows from the 
non-financial private sector bring accumulated outflows for 
the year to date to $2.8 billion.  Nevertheless, many 
analysts expect the outflows to decelerate or reverse if 
Cristina Kirchner announces sound economic policy measures. 
 
¶5. (SBU) According to the report, taking into account the 
public sector (GoA and BCRA) and the financial and 
non-financial private sector, net demand for foreign currency 
in the third quarter reached $743 million.  The private 
financial sector supplied $542 million of the total demand. 
In order to avoid an appreciation of the peso, the BCRA met 
the remainder through the sale of $201 million in reserves 
(which reduced BCRA reserves to $42.9 million at 
end-September).  (Comment: the BCRA's net sale of foreign 
currency would normally contract the money supply, as the 
BCRA absorbed pesos in return for dollars sold.  However, the 
BCRA more than compensated for its dollar sales by injecting 
peso liquidity through repo transactions and repurchasing 
Lebacs and Nobacs (BCRA financial instruments).  Therefore, 
by selling dollars and simultaneously injecting peso 
liquidity, the BCRA attempted to avoid both a peso 
depreciation and an increase in domestic interest rates.) 
 
¶6. (SBU) Other highlights of the Foreign Exchange Balance 
report include: 
--  A surplus of $2.8 billion for the trade account of the 
Foreign Exchange Market for the third quarter, accumulating a 
surplus of $10.3 billion for the year (This is the net inflow 
 
BUENOS AIR 00002251  003 OF 004 
 
 
of FX from all trade transactions, including merchandise, 
services, and investment income); 
--  A deficit of $3.6 billion for the capital account in 
QIII, generated by the $4.4 billion capital outflow from the 
non-financial private sector and the $1.3 billion payments 
(considered an "outflow") of the public sector (GoA and 
BCRA), partially compensated by roughly $2 billion inflows 
from the financial private sector.  Year-to-date, the capital 
accounts accumulated a deficit of 182 million. 
 
¶7. (SBU) Note: the Foreign Exchange Balance (FEB) and the 
Balance of Payments (BOP) report have a similar format. 
However, the former reports purchase and sales of foreign 
currency without considering the residency of the parties, 
while the latter reports economic transactions focusing on 
the residency of the intervening parties.  Also, the FEB uses 
a cash basis methodology, while the BOP uses accrual 
accounting. 
 
Private peso deposits decline in October, complicating BCRA 
efforts to reduce interest rates 
---------------------------------------- 
¶8. (SBU) Political uncertainty coupled with rising inflation 
and concerns about the stability of the Argentine peso, which 
many analysts believe will depreciate further against the 
dollar, help explain the ARP 1.9 billion fall in private 
sector peso deposits (both sight and term accounts).  (Peso 
private sector deposits reached ARP 121.6 billion at the end 
of October, down from ARP 123.5 in September.)  Depositors 
shifted much of these funds into dollar deposits, which 
increased by $709 million (about ARP2.2 billion). 
 
¶9. (SBU) This fall in private peso deposits does not 
facilitate the GoA's various initiatives to put downward 
pressure on interest rates (see October 26 Econ/Fin Report). 
In fact, despite the BCRA efforts to inject liquidity to the 
system, interest rates remain stubbornly high (from 2.5 to 4 
percentage points higher than in mid-July).  Meanwhile, 
public sector deposits increased by ARP 1.4 billion during 
October and currently stand at ARP51.4 billion.  This 
partially compensated for the fall in private sector 
deposits. 
 
--------- 
INFLATION 
--------- 
 
First post-election CPI report disappoints; yet more 
disturbances by INDEC employees 
------------------------------------------- 
¶10. (SBU) GoA statistical agency INDEC announced November 6 
that the October CPI increased 0.7% m-o-m, in line with 
market expectations for the announcement but only about half 
of the level that analysts estimate for "true" or "actual" 
inflation.  The October report actually showed a decelerating 
trend for prices (8.4% y-o-y compared to 8.6% in September), 
despite most analysts' predictions that inflation is 
accelerating.  The INDEC report dashed hopes that the GoA 
would attempt to restore INDEC's credibility following the 
October 28 presidential elections by reporting a reading 
closer to independent estimates of domestic inflation. 
According to INDEC, accumulated inflation for the first ten 
months of the year reached 6.6%, compared to the 12-13% rate 
that most private consultants estimate.  All nine sub-indexes 
show increases, with the largest m-o-m increases being 
transportation and communications (1.2%), health care (1%), 
education (0.7%) and leisure (0.7%). 
 
¶11. (SBU) The local controversy over INDEC's application of 
"methodological innovations" to CPI numbers once again flared 
up following November 2 media reports that thirteen INDEC 
workers who had testified against Secretary of Internal Trade 
Guillermo Moreno had been fired.  Moreno is the GoA official 
responsible for the government's system of price controls and 
is also alleged to be the mastermind behind the manipulation 
of INDEC data.  The INDEC employees were testifying in a 
judicial case regarding the alleged index manipulation. 
INDEC subsequently issued a press release explaining that the 
dismissed workers' contracts expired October 31 and INDEC 
 
BUENOS AIR 00002251  004 OF 004 
 
 
management had decided not to renew them.  To limit the 
uproar following the story, Chief of Cabinet Alberto 
Fernandez and Economy Minister Miguel Peirano agreed with the 
Civil Servant Association (Asociacion de Trabajadores del 
Estado) to rehire the dismissed workers for one year.  The 
workers will now work for the Ministry of Economy, but will 
no longer perform their previous duties of measuring the CPI 
and the conducting the permanent household survey. 
 
----- 
TRADE 
----- 
 
GoA raises export taxes to shore up fiscal balance and reduce 
inflationary pressures 
------------------------------------------ 
¶12. (SBU) AGRICULTURE:  On November 7, the GoA announced 
export tax increases on certain agricultural products, the 
ostensible goal being to increase revenues and shore up the 
primary fiscal surplus.  The rate applied to soybeans went 
from 27.5% to 35%; on corn, from 20% to 25%; on wheat, from 
20% to 28%; on soy oil, from 24% to 32%; and on sunflower 
oil, from 20% to 30%.  Cabinet Chief Alberto Fernandez 
justified the changes in the press on November 8: 
"Agriculture producers should recognize that the GoA has 
worked to get a reasonable price for fuels used as a 
productive inputs, has worked to have a peso that allows them 
to be competitive, and that all of these entail costs that 
the whole Argentine society is paying for."  Besides the 
obvious benefit of increased tax revenue, the increased taxes 
also limit the impact of high world commodity prices on 
politically sensitive domestic food prices.  Another 
motivation for the increase is likely the GoA's interest in 
taking advantage of the rally in commodity prices.  For 
example, soy prices reached a record of $400 per ton on 
November 20, and have increased over 50% so far in 2007. 
Private sector estimates for increased revenue from the 
increases in agricultural export taxes vary depending on 
estimates of commodity prices and average exchange rates in 
2008, and range from $1 to 1.8 billion per year, or 
approximately 0.5% to 0.9% of GDP. 
 
¶13. (SBU) HYDROCARBONS:  On November 15, the GoA announced 
additional tax increases, this time for export taxes on 
hydrocarbon exports.  The new measure, which entered into 
effect November 19, fixes the export tax on all hydrocarbon 
exports at 45%, as long as the world price for crude oil is 
above $45/barrel.  It also caps the maximum market price of 
Argentine crude oil at $42/barrel for domestic sales. 
Well-known local economists, such as Miguel Angel Broda and 
those at the prominent consulting firm FIEL, estimate the 
measure will result in increased revenues of between $850 
million and $1 billion.  However, other local analysts 
comment that the real reason for the increase in hydrocarbon 
export taxes was not so much revenue as domestic price 
stabilization.  In fact, the measures may end up effectively 
redirecting the bulk of Argentine hydrocarbon production 
(both crude and refined) to domestic consumption, and so may 
not be a significant source of new revenue.  A second and 
more Machiavellian interpretation is that the GoA increased 
hydrocarbon tariffs to reduce the value of energy sector 
assets, such as those of Repsol/YPF (negotiating the sale of 
25% of YPF assets to domestic investors) and Exxon (which has 
put all of its Argentine refining and retail operations on 
the block). 
 
¶14. (SBU) FIEL estimates that revenue from export taxes (for 
all goods, including hydrocarbon products) will be 2.32% of 
GDP in 2007 and increase to 2.92% of GDP in 2008, which will 
contribute significantly to President Cristina Fernandez de 
Kirchner's goal of increasing the primary fiscal surplus to 
4% in 2008. 
WAYNE