VZCZCXRO6797
PP RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHQU RUEHTM RUEHVC
DE RUEHBU #2312/01 3411948
ZNR UUUUU ZZH
P 071948Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 9863
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 05 BUENOS AIRES 002312 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR JOSE CARDENAS, ROD HUNTER 
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE 
ROBITAILLE 
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 ETRD ELAB AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, NOVEMBER 
19 - DECEMBER 3, 2007 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period November 19 - December 
3, 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 bond sales: $500 million to Venezuela; $574 million in 
local auction and $607 million to Social Security 
Administration 
-- Argentine power company EMDERSA raises just $60 million in 
local IPO. 
-- Central Bank earns $2.3 billion on investments of official 
reserves 
-- GoA imposes export taxes on metals and minerals to boost 
2008 primary fiscal surplus. 
-- Supreme Court ruling in favor of pensioner sets precedent 
for other cases and creates potential GoA liability of ARP 8 
billion 
-- Chamber of Deputies extension of the Economic Emergency 
Law through December 2008 
-- Unemployment continues to fall, but doubts increase about 
INDEC statistics 
-- Commodity exports drive January - October trade surplus 
 
------- 
Finance 
------- 
 
Argentine bond sales: $500 million to Venezuela, $574 million 
in local auction, and $607 million to Social Security 
Administration 
--------------------------------------------- 
¶2. (SBU) In an effort to fulfill the country's financing 
needs for 2007 before the new administration takes over 
December 10, the GoA conducted several recent bond sales, 
including one to Venezuela.  On November 13 (announced to the 
public November 23), the GoA sold $500 million in 
dollar-denominated Boden 2015 bonds to Venezuela.  (The Boden 
2015 is an Argentine law, 10-year, dollar denominated bullet 
bond first issued October 3 2005, maturing in 2015, carrying 
a fixed 7% coupon rate.)  The bonds were priced at a reported 
yield of 10.43%, 27 basis points lower than the last issuance 
of the same bond to the GoV in August (see Econ/Fin Report 
sent August 22).  So far this year, the GoV has financed the 
GoA for a total of $1.75 billion (effective value), which 
represents 35% of the GoA's total bond sales this year.  It 
is unclear whether the GoV will repackage these Boden 2015s 
with Venezuelan securities as a joint sale of the so-called 
Bono del Sur (BdS).  However, it is irrelevant from the GoA's 
perspective whether the GoV holds the Argentine bonds or 
flips them in a BdS sale. 
 
¶3. (SBU) This Boden 2015 sale follows on the GoA's November 
14 Bonar X auction for $574 million (see readout in November 
19 Econ/Fin Report) and the recent IDB loan disbursement to 
the GoA of $350 million.  The GoA also announced in the 
November 26 Official Gazette that the Social Security 
Administration (ANSES) had purchased $542 million (face 
value, equivalent to $607 million effective value) of 
dollar-denominated Discount bonds issued under Argentine law. 
 The Discount bonds mature in December 2033 and were 
originally issued in the GoA debt restructuring in 2005. 
According to local press reports, the Discounts sold to ANSES 
were priced at 111.9, with a yield of 8.28%, when that same 
day, the bond was trading much lower at 98.27, corresponding 
to a yield of 10.41%.  If true, the reports suggest that 
ANSES "voluntarily" purchased a bond with a yield 212 basis 
points below the market yield.  (Note:  The GoA already 
computes as current income the revenues from individuals who 
have decided to transfer funds from their private pension 
plans to the public GA system.  See February 2 and November 
22 Econ/Fin Reports for background on the pension system 
 
BUENOS AIR 00002312  002 OF 005 
 
 
reform that allows these transfers.  The reason that the GoA 
sold the bond to ANSES was to gain access to surplus ANSES 
funds, derived from workers already paying into the public 
system.) 
 
Argentine power company EMDERSA raises just $60 million in an 
IPO 
-------------------------------------------- 
¶4. (SBU) On December 3, Empresa Distribuidora Electrica 
Regional (EMDERSA -- a power distributor in the northwest of 
Argentina) raised just $60 million in a local IPO, after 
calling off its original attempt to raise $200 million both 
locally and internationally.  The company originally launched 
the opening of 155.6 million ordinary class B shares on 
November 26 in separate tranches targeting local and 
international equity markets.  The company had anticipated a 
pricing of ARP 3.70 - 4.40 for ordinary class B shares and 
$11.75-13.97 for global depository shares.  However, the 
offering only attracted bids for $10 million from 
international investors and $80 million locally (mainly from 
private pension funds -- AFJPs).  Following this 
disappointing result, the Company canceled the initiative and 
rescheduled it for December 3, but only for local investors. 
The second round was also relatively disappointing, with 
EMDERSA selling only 55 million shares at a price of only 
about 3.45 per share, obtaining ARP 190 million ($60 
million), or 30% of the target amount. 
 
¶5. (SBU) EMDERSA has indicated it plans to use proceeds from 
the IPO to cover operating and financing costs and to invest 
in expansion projects (including 110mw/h thermal plant and a 
combined cycle plant along in Salta province with Pan 
American Energy) and acquisitions.  Many analysts attributed 
the market's lack of interest in this transaction to the 
GoA's continued delays in authorizing electricity tariffs 
increases.  The GoA's refusal to raise tariffs largely frozen 
since 2002 has undermined the profitably of energy companies 
-- including EMDERSA -- operating in Argentina.  Some 
analysts also criticized the offer as overpriced compared to 
other Latin American companies of the sector.  EMDERSA 
(controlling power distribution in the provinces of Salta, 
San Luis and La Rioja) is controlled by a unit of JPMorgan, 
which also managed the IPO along with Merrill Lynch. 
 
Argentine Central Bank earns $2.3 billion on investments of 
official reserves 
----------------------------------------- 
¶6. (SBU) The BCRA announced November 28 that it earned $2.3 
billion through October 2007 on the investment of its 
reserves.  This represents a 7.1% annual yield, 200 basis 
points higher than for the same period last year.  According 
to the BCRA, the positive result was due to three factors: 
the extension of maturities on its investments, currency 
diversification (especially into the Euro), and increased 
value of its gold holdings.  According to the BCRA release, 
its Euro portfolio gained 16% and its gold position gained 
26% through end-October.  The BCRA does not appear to be 
pursuing a different reserves management strategy than it has 
in the past, but the BCRA press release boasts that its 
adequate reserve management -- maximizing reserves while 
limiting risks -- left it well-positioned to benefit from the 
dollar's depreciation and the increasing price of gold.  The 
BCRA's latest official report on November 23 shows reserves 
at $44.4 billion.  Press reports on December 3 announced that 
official reserves had exceeded $45 billion for the first 
time. 
 
GoA imposes export taxes on minerals to boost the 2008 
primary fiscal surplus 
---------------------------------------- 
¶7. (SBU) The GoA abruptly imposed on November 30 a new 10% 
tax on all exports of minerals.  This followed recent 
increases of agriculture and hydrocarbons export taxes (see 
Nov 19 Econ/Fin Report).  The GoA formally announced the 
measure December 4.  In the context of the strong rally in 
international mineral prices, the action seeks to retain for 
the government part of the increased revenue going to the 
sector.  Private analysts expect the tax to raise additional 
revenues of ARP 800 million (slightly over $250 million). 
(Note: Copper and gold exports alone are estimated at $2.7 
billion in 2007.)   This tax is the latest effort of 
 
BUENOS AIR 00002312  003 OF 005 
 
 
President Nestor Kirchner's government to increase federal 
tax revenue and boost the GoA primary fiscal surplus prior to 
the changeover of government on December 10.  According to 
Ecolatina (a local consultancy), the combined increase in 
export taxes in agriculture, hydrocarbons, and minerals will 
raise revenues of approximately $2.8-3.2 billion, or over 1% 
of GDP -- a significant contribution to President-elect 
Cristina Fernandez de Kirchner's goal of increasing the GoA's 
primary fiscal surplus to 4% in 2008 (from the estimated 3 to 
3.25% in 2007). 
 
¶8. (SBU) Local press articles state that the measure became 
effective on November 30 by way of two official letters to 
the Argentine Customs Service, one from the Secretary of 
Mining and the other from Secretary of Internal Commerce 
(Guillermo Moreno).  These letters instructed Customs to 
impose the 10% tax on all minerals exports, effective 
immediately.  There is still some question as to whether this 
measure is legal, given that it appears to violate (or at 
least modifies) existing law governing the mining sector. 
Regulation governing the mining sector is codified in 
Argentina's "Ley de Inversiones Mineras" (Mining Investment 
Law), introduced in 1993.  This law establishes regulations, 
incentives, and royalty rates (3% on gross output value, paid 
to provincial governments) for the mining sector for thirty 
years (ending 2023).  It is still unclear at this time if the 
companies affected by this new tax will seek legal recourse 
through Argentine courts. 
 
--------------- 
Economic Policy 
--------------- 
 
Supreme Court ruling in favor of pensioner sets precedent for 
other cases and creates potential GoA liability of ARP 8 
billion 
-------------------------------------------- 
¶9. (SBU) The Argentine Supreme Court ruled November 26 in 
favor of a pensioner seeking an adjustment to his pension to 
make up for the extreme divergence in salary and pension 
levels since the end of the 2001-2002 financial crisis.  In 
the case filed by pensioner Adolfo Badaro, the Supreme Court 
agreed that the GoA's net 11% increase in pension benefits 
from 2002 to 2006 did not reflect the much higher increase in 
salaries during the time period.  The Supreme Court ordered 
the GoA to compensate Mr. Badaro by increasing his pension by 
88.5% (retroactive to 2002), based on the increase in 
statistical agency INDEC's salary indices.  The ruling sets a 
possible precedent for 1.4 million other public pensioners to 
claim similar adjustments on their pensions. 
 
¶10. (SBU) Osvaldo Giordano, Director of local think tank 
IDESA (Institute for the Social Development of Argentina), 
estimates the ruling could increase the GoA's annual 
expenditures on pensions by ARP 8 billion (over $2.5 
billion).  However, another local think tank, RSH 
Consultores, calculates that if this ruling were applied 
retroactively to all pensioners in the same situation as the 
claimant, the GoA would face a liability of about ARP 27 
billion (over $8.5 billion) for the period 2002-2007, in 
addition to the ARP 8 billion per year going forward.  The 
Supreme Court also ruled unconstitutional Article 7 of the 
Social Security Law, which allows Congress to determine the 
level of pension increases in the annual budget.  Instead, 
the Supreme Court called on Congress to approve an automatic 
mechanism for adjusting pensions (this would require a change 
to current law prohibiting indexation). 
 
Chamber of Deputies approves extension of the Economic 
Emergency Law 
------------------------------------------ 
¶11. (SBU) The Chamber of Deputies voted December 4 to approve 
a one-year extension of the Economic Emergency Law, due to 
expire December 31.  The Senate was due to vote on the law 
December 5 to allow the new administration to come into 
office with this important -- albeit controversial -- tool at 
its disposal.  However, the official majority party was 
unable to muster a quorum, and postponed the vote until next 
week.  The media reports that the Senate will attempt to pass 
the measure into law December 12, two days after President 
Cristina Fernandez de Kirchner assumes office.  Congress 
 
BUENOS AIR 00002312  004 OF 005 
 
 
first approved the Economic Emergency Law in 2002 following 
Argentina's economic and financial crisis, and has since 
extended it on an annual basis.  This law allows the 
executive branch to enact a wide range of economic policies 
by decree (e.g., debt and utility tariff renegotiations), 
which otherwise would require Congressional authorization. 
Even though Argentina's economy is growing rapidly for the 
fifth consecutive year and unemployment is near 8% (see below 
item), the GoA argues that the extension of the Emergency Law 
is necessary to allow the country to defend itself in 
international lawsuits filed by holdouts from the 2005 debt 
exchange. 
 
---------------- 
Economic Outlook 
---------------- 
 
Unemployment continues to fall, but doubts increase about 
INDEC statistics 
------------------------------------------- 
¶12. (SBU) INDEC (GoA statistical agency) announced November 
22 that Argentina's unemployment rate had fallen 0.4 
percentage points to 8.1% in the third quarter of 2007, 
compared to 8.5% in the previous quarter.  However, INDEC's 
report highlighted that it was unable to conduct the 
household survey used to calculate the unemployment level in 
many of the cities where it is normally done, including the 
key districts of Buenos Aires' suburbs, La Plata, Mar del 
Plata and Bahia Blanca (representing 63% of the country's 
population).  Instead, the agency calculated the overall 
unemployment rate assuming that cities not surveyed had 
unemployment rates roughly equivalent to the level of those 
surveyed.  Local analysts argue that this assumption has 
biased the index in favor of a lower unemployment rate, since 
the excluded districts mentioned above are thought to have 
significantly higher unemployment than the national average. 
 
¶13. (SBU) INDEC is widely accused of tampering with national 
statistics, principally the CPI index (see Econ/Fin Reports 
from Feb 2, Sep 20, Oct 26, Nov 19).  This latest 
announcement is the latest INDEC action that is fueling 
suspicions that INDEC may be manipulating other statistics 
besides inflation numbers, possibly including (in addition to 
unemployment) GDP, industrial production, and poverty levels. 
 (Note:  INDEC includes beneficiaries of the GoA's "Heads of 
Households" financial support program as employed in 
calculating the 8.1% unemployment rate recently announced. 
When excluding these beneficiaries, the unemployment rate 
fell to 8.8% in Q3, from 9.5% in Q2.) 
 
----- 
Trade 
----- 
 
Commodity exports drive January - October trade surplus 
------------------------------------------ 
¶14. (SBU) Argentina's trade surplus for January - October 
2007 totaled $8.3 billion (compared to a surplus of almost 
$10 billion for the same period in 2006).  On a 12-month 
rolling basis, the trade balance widened to $10.7 billion in 
October, from $10.5 billion in September.  Exports for 
January-October 2007 increased 18% y-o-y to $44.8 billion, 
and imports grew 30% y-o-y to $36.5 billion during the same 
period.  Exports in the month of October were higher than 
expected, growing 32% y-o-y to a historical, single-month 
record of $5.5 billion, while imports grew 35% y-o-y to $4.4 
billion. 
 
¶15. (SBU) October export growth was due to similar increases 
in both volumes (16%) and prices (14%).  Three items explain 
almost three-quarters of monthly export growth:  oilseeds, 
vegetable oils, and pellets.  Overall exports of agribusiness 
products increased 40% y-o-y in October, while industrial 
exports rose only 24%, although local speculation is that 
during October commodity exporters were accelerating 
shipments ahead of the expected increases in export taxes 
(reported in the November 19 Econ/Fin Report).  Even so, the 
wide disparity in export growth rates indicates what many 
analysts see as a marked shift to primary goods and 
agribusiness products as the main drivers of export growth, 
taking the lead away from industrial goods exports. In fact, 
 
BUENOS AIR 00002312  005 OF 005 
 
 
the accumulated annual trade surplus is mostly the result of 
the trade in primary goods, which shows a surplus of about 
$11.5 billion.  On the other hand, industry as a whole 
(including the food industry) experienced a trade deficit -- 
for the first time in the past decade -- of roughly $3.2 
billion. 
 
¶16. (SBU) Exports of fuels and energy were down 5% y-o-y, 
despite the 29% increase in prices so far in 2007.  Volumes 
of fuel exports fell 27%.  Banco Santander calculates that 
Argentina's external sales of petroleum amounted to 2.16 
million barrels in October, or 56% lower than in October 2006. 
 
¶17. (SBU) October import growth was due primarily to volume 
increases (25%) and much lower price increases (8%).  The 
strength of imports appears to reflect strong domestic demand 
growth, particularly for energy (even though October is not a 
peak month for energy consumption).  Imports of consumer 
goods were up 51% y-o-y, while imports of capital and 
intermediate goods rose 27% and 42% y-o-y, respectively. 
Meanwhile, energy-related imports (diesel, carbon, 
electricity) increased 65% y-o-y in October. 
 
¶18. (SBU) The BCRA's consensus forecast for the 2007 trade 
surplus is about $9.6 billion, and predicts a decline to $8.4 
billion in 2008, with a deceleration in the growth rate for 
both exports and imports as both global and Argentine growth 
slow.  No further increases in agricultural commodity prices 
are anticipated, but given their steep acceleration since 
late Q2, even flat commodity prices would improve the terms 
of trade by 5% next year.  Real import growth is seen 
decelerating slightly, with a more marked slowdown expected 
for prices (assuming fuel price pressures abate in 2008). 
KELLY