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P 181558Z JAN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 0082
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 000070 
 
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, January 1-11, 
2008 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period January 1-11, 2008.  The 
unclassified email version of this report includes tables and charts 
 
SIPDIS 
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 
---------- 
 
-- 2008 Wage Negotiations: a tough road ahead 
-- Tax revenues increase 39% in December, bringing full-year 
revenues to ARP 200 billion 
-- GDP growth estimated to reach 8.5% y-o-y in 2007, leaving a 
strong push for 2008 
-- Industrial production expected to grow 7.2% y-o-y - one 
percentage point below 2006 
-- Year of the Auto: Argentine car production hits a record in 2007 
 
-- GoA ban on fuel exports forces energy companies to drop domestic 
retail prices 
-- BCRA presents 2008 Monetary Program to the Senate 
-- Argentine bonds slightly positive in December, supported by local 
investors 
 
--------------- 
Economic Policy 
--------------- 
 
2008 Wage Negotiations: a tough road ahead 
------------------------------------------ 
¶2. (SBU) One of the main risks facing the economy in 2008 is the 
trajectory of prices and salaries.  Attention is focused on upcoming 
wage negotiations between unions and private companies, which 
generally begin in late-February and March.  Union leaders have 
stated to local media their intention to seek wage increases on the 
order of 20-30%, while private companies argue they can only afford 
increases below 20%.  A brief review of companies' expectations on 
2008 salaries follows.  These results are based on a survey that Sel 
Consultores (a think tank specialized on labor issues) conducted 
with one-hundred and twenty-eight companies operating in Argentina, 
employing one-hundred and eighty-four thousand workers. 
 
-- Fifty percent of the companies are preparing to negotiate wage 
increases during the first four months of the year.  Unions at these 
companies are demanding wage increases of 23%.  Although these 
companies state that they are willing to grant 17% pay increases, on 
average, they admitted in the survey that they expect to settle 
negotiations at about a 20% increase.  The companies want the GoA to 
propose a 16% increase guideline for 2008, although they anticipate 
that the GoA's guidance will be in the range of 18%.  In addition, 
35% of company respondents predicted that Unions would reject any 
GoA attempts to recommend guidelines for the negotiations.  For 
reference: in 2006 and 2007, wage bargaining agreements ended with a 
22% wage increase (for each year), taking into account increases in 
basic wages plus non-remunerative increases.  Prior to the 
negotiations, the GoA had suggested wage increase guidelines of 19% 
in 2006 and 16.5% in 2007.  [GoA statistical agency INDEC's latest 
release showed that the salary index (CVS - coeficiente de variacion 
salarial) increased 22% y-o-y in November.] 
 
-- Neither the companies nor unions considered the "official" CPI 
produced by INDEC as a reference for their negotiation.  (INDEC 
measured the 2007 CPI increase at 8.5% in 2007; however, private 
analysts estimate 2007 CPI increased in the range of 18-24%, more 
than double the official estimate.) 
 
-- Company respondents were generally of the opinion that the GoA 
had backed away from its stated plan to arrange a "Social Pact," in 
which the private sector and unions (with government guidance) would 
agree to salary increases for all sectors, and would also work to 
control price increases.  During the 2007 presidential campaign, 
then-candidate (now President) Cristina Fernandez de Kirchner 
announced the Social Pact as a pillar of her post-election economic 
policy program, although she never gave details of how it would be 
implemented, although she did refer to Spain's "Moncloa Pact" as a 
possible guide.  Companies surveyed clearly prefer to avoid the 
 
BUENOS AIR 00000070  002 OF 005 
 
 
Social Pact structure.  In the survey, they expressed a preference 
for the negotiation of sector-by-sector wage agreements. 
 
-- The majority of companies surveyed responded that they expect the 
negotiations will eventually result in salary at or near 2007 
levels, or about a 22% increase.  While this would represent a 
significant nominal increase in employee incomes, whether it would 
also entail higher real incomes depends on whether (actual) 
inflation stabilizes or continues accelerating at the pace it did in 
the second half of 2007. 
 
Argentine daily newspaper Cronista reported January 11 (without 
citing any source) that the GoA believes that the economy can handle 
a 20% salary increase without causing excessive inflationary 
pressures -- due to the productivity gains companies achieved last 
year.  This increase is in line with the companies' expectations as 
shown in the above survey, and is on the lower end of the range of 
the Unions' claims. 
 
---------------- 
Economic Outlook 
---------------- 
 
Tax revenues increase 39% in December, bringing full-year revenues 
to ARP 200 billion 
------------------------------------------ 
¶3. (SBU) December 2007 federal tax revenue increased 39% y-o-y to 
ARP 19.6 billion, above expectations of ARP 18.8 billion, bringing 
full-year revenues to a record of ARP 200 billion (up 33% y-o-y in 
nominal terms), or approximately $63 billion.  This strong yearly 
performance is mainly explained by strong collections of VAT (+33% 
y-o-y), income taxes (+27% y-o-y), and export taxes (+39% y-o-y), 
which together explain 75% of the tax collection.  The 
record-setting level of revenues collected, representing 25% of GDP, 
was due to a combination of factors: strong economic and consumption 
growth, better export performance (coupled with increased export tax 
rates, mainly on soy and soy-byproducts, mining, and fuels), 
improvement in tax compliance, and high inflation. 
 
¶4. (SBU) AFIP (equivalent to the U.S. IRS) released a special report 
on income tax revenues in 2007, which showed that revenues from 
financial intermediation service providers (mainly banks) and the 
construction sector increased 94% and 70% y-o-y, respectively, 
followed by real estate activities (up 44% y-o-y).  The income tax 
is the second highest collecting tax (after VAT), providing 21% of 
the tax collection in 2007.  AFIP also noted that the full-year's 
increase in export tax collection (+39% y-o-y) is explained by both 
higher quantities of exports (8%) and higher prices for exported 
goods (9%).  In terms of tax collection on agricultural exports, the 
products showing the highest increases in 2007 were: soybeans 
(+100%), corn (+93%), soy-oil (+70%), pellets (+50%) and wheat 
(+33%). 
 
GDP growth estimated to reach 8.5% y-o-y in 2007, leaving a strong 
push for 2008 
------------------------------------------ 
¶5. (SBU) In the first quarter of 2007, GDP increased 8% q-o-q, 
slightly decelerating from 4th quarter 2006, when it increased 8.6%. 
 However, in the second quarter of 2007, GDP accelerated again, 
increasing 8.7% q-o-q, pushed on the supply side mainly by the 
agricultural sector, which enjoyed a record year in 2007.  On the 
demand side, consumption was the growth engine -- a result of 
significant increases in 2005 and 2006 in real incomes, as well as 
increases in disposable incomes in 2007 following cuts in income 
taxes and increased pension payments in GoA transfers to families 
(asignaciones familiars).  Even though third quarter GDP data is not 
yet available, the EMAE (the economic activity index), a reliable 
indicator of GDP, increased 9.4% y-o-y in October, indicating that 
growth is still running strong.  The BCRA consensus survey is 
estimating 2007 GDP growth at 8.5% y-o-y (similar to 2006 GDP 
growth), which would set a high floor (roughly a 3.3% statistical 
drag) for 2008 GDP, which the BCRA consensus survey estimates at 
6.9%. 
 
Industrial production expected to grow 7.2% y-o-y ? one percentage 
point below 2006 
------------------------------------------ 
¶6. (SBU) The industrial sector appears to have closed 2007 on a 
strong note, with current estimates for annual growth in the sector 
of 7.2% y-o-y, after having decelerated strongly during the winter 
months (June-August ? the coldest months) due to energy shortages 
 
BUENOS AIR 00000070  003 OF 005 
 
 
and restrictions.  Since September, however, the industrial 
production (IP) index returned to a robust pace; in November (the 
latest data available), the index increased 9.9% y-o-y. 
Nevertheless, after November's IP release, some private analysts 
expressed concerns or doubts about the credibility of this index, 
given that INDEC, which is allegedly tampering with CPI statistics, 
also produces the IP index (See Nov 19, Oct 26, Oct 5, Sep 20, Sep 
4, and Feb 2 Econ/Fin reports). 
 
Year of the Auto:  Argentine car production hits a record in 2007 
------------------------------------------ 
¶7. (SBU) In 2007, the domestic car industry had its best year in 
history, with production reaching 544,647 units, up 26% from 2006. 
Automotive exports reached 316,410 units, also an all-time record, 
and comprising about 58% of total production.  In 2007, the 
automotive industry accounted for almost 20% of Argentina's 
manufacturing output and 36% of all manufacturing exports, measured 
by value.  The Argentine auto association ADEFA (Asociaci"n de 
F bricas de Automotores) predicts that the auto industry will mark 
another record year in 2008, with estimated production in the range 
of 620.000 units (a 14% y-o-y increase), with exports projected at 
about 400,000 units. 
 
------ 
Energy 
------ 
 
GoA ban on fuel exports forces energy companies to drop domestic 
retail prices 
------------------------------------------ 
¶8. (SBU) On January 7, the GOA announced a new decision to prohibit 
exports of gasoline and diesel, and accompanied the declaration by 
strongly urging downstream energy companies to return retail prices 
at their gas stations to October 31, 2007 levels.  Beginning shortly 
after the October 10 elections, fuel prices have been increasing 
steadily and unevenly throughout the country, due in part to the 
holiday season and higher crude international prices, but also a 
clear effort of oil companies to increase pump prices from the low 
levels prevailing in Argentina.  According to a local energy 
specialist, in November the domestic gasoline price before taxes was 
almost 50% of the average price prevailing in Brazil, Chile, or 
Uruguay.  In the case of diesel, it was almost 60% cheaper.  With 
these prices and 2007 record-high sales of new cars, gasoline 
consumption increased to 4.9bn liters in 2007, up from 3.5bn liters 
in 2006.  Before the ban was announced, there were fuel shortages in 
several provinces, with cars having to wait in long lines to get 
fuel and often with gas stations limiting amounts and refusing to 
accept credit card payments.  Provincial authorities therefore took 
measures to guarantee the supply of diesel and gasoline in their 
territories, which included police inspections of gas stations. 
 
¶9. (SBU) Interior Commerce Secretary Guillermo Moreno, known as the 
GoA's price-control czar and the mastermind behind manipulation of 
INDEC statistics, announced the ban on behalf of the government.  He 
publicly based his decision on the so-called Supply Law (ley de 
abastecimiento), enacted in 1974 during the last Juan Peron 
government, which allows the GoA to take emergency measures to 
ensure the adequate domestic supply of just about any product.  The 
ban was transmitted verbally to the main refineries, and was 
reported in the press, but was never published as a regulation. 
 
¶10. (SBU) On Friday, January 11, the state news agency (Telam) 
reported that three oil companies -- Repsol YPF, ESSO, and Petrobras 
-- which combined provide about two-thirds of the gasoline and 
diesel in the country, had "agreed" to roll down the prices of 
liquid fuels back to their October 31, 2007 levels.  As a quid pro 
quo, the GoA agreed to withdraw the ban on these companies' fuel 
exports.  [Shell reportedly refused to lower its pump prices, and is 
also reportedly still subject to the export ban.]  Neither 
government officials nor the oil companies specified by how much 
gasoline or diesel prices would drop due to this accord.  Private 
analysts estimate that it could potentially result in a 15-20% cut 
from the prices prevailing in late 2007.  Some analysts also said 
that a negotiated outcome was expected, since the fiscal impact of 
the ban due to the reduction in fuel export taxes revenues would 
have amounted to an estimated $1.35 billion in 2008.  Year to 
November, refined fuels exports increased 14% with respect to the 
same period of 2006, to US$3.4 billion, largely thanks to a 100% 
y-o-y jump in November.  This November increase helped to prevent a 
deeper fall in external energy sales, which decreased 12% in the 
period. 
 
BUENOS AIR 00000070  004 OF 005 
 
 
 
------- 
Finance 
------- 
 
BCRA presents 2008 Monetary Program to the Senate 
------------------------------------------ 
¶11. (SBU) BCRA President Martin Redrado presented December 26 the 
Central Bank's 2008 Monetary Program to the Argentine Senate Budget 
and Economy Committees.  During the presentation, he noted that 
Argentina will face a more hostile international environment 
(compared to previous years) due to the deceleration in the U.S. 
economy.  However, he assessed that Argentina (as well as Latin 
America as a region) is well prepared to manage negative external 
shocks.  He further estimated that global prices of Argentina's 
commodity exports will remain high and help the country's economy in 
¶2008.  He summarized that the 2008 monetary program will be based on 
three pillars: financing the extraordinary Argentine growth, 
strengthening the financial system, and reducing the system's 
vulnerabilities.  Redrado took advantage of the opportunity to 
highlight for the Senate the BCRA's accomplishments in 2007, 
particularly its success in limiting the impact on the domestic 
market of the international financial turmoil that started in July. 
 
 
¶12. (SBU) The 2008 program estimates GDP growth of 7.2% (almost 
twice the Budget's forecast of 4% and also higher that the BCRA 
consensus estimate of 6.9%), an inflation range of 7-11% (on the 
lower side of the Budget's 7.3% assumption, and significantly lower 
than private sector estimates of about 20%), investment reaching 23% 
of GDP (the highest level in the last decade), and M2 growth rate of 
18% (below the nominal GDP growth rate and slightly decelerating 
from the 18.3% M2 growth rate estimated for 2007).  The program also 
assumes that the GoA will increase the primary fiscal surplus, the 
trade surplus will reach about $9 billion (compared to the $10.2 
surplus estimated for 2007), and salaries will continue an upward 
trend in the context of strong demand for labor.  [As reported in 
the Dec 21 Econ/Fin report, with the higher primary fiscal surplus, 
the Treasury will reportedly purchase $3-5 billion in the foreign 
exchange market, helping the BCRA to fulfill its 2008 monetary 
program and also helping the BCRA to maintain the peso at the 
current artificially low level of 3.15 ARP/USD.] 
 
¶13. (SBU) Redrado noted that in an effort to provide higher 
certainty, the 2008 monetary program will introduce "private M2" as 
an additional target to total M2 [total M2 is defined as cash in 
circulation plus private and public sector sight-accounts (savings 
and checking); private M2 is equal to total M2 minus the public 
sector sight-accounts].  The introduction of private M2, even as an 
annual target (compared to total M2, monitored quarterly), should be 
interpreted as good news.  It prevents the BCRA from using gimmicks 
to achieve its monetary targets, as it has done in the past by 
shifting public sector deposits from sight accounts to time 
deposits.  [Note: the BCRA argues that the Argentine financial 
sector is not developed enough for the Central Bank to engage in 
inflation targeting, and instead targets monetary aggregates.  The 
BCRA's monetary program targeted the monetary base from 2003 to 
2004, but began targeting total M2 in 2005.] 
 
¶14. (SBU) With 18% expected growth of M2, it is a stretch to call 
the BCRA's policies restrictive or contractionary in 2008, since 
maintaining the M2 growth rate below the nominal GDP growth rate 
does not guarantee either stable or low inflation.  Coupled with the 
BCRA's policy of maintaining negative real interest rates, many 
analysts agree that overall BCRA policies are at least 
accommodating, if not fully stimulating, domestic consumption. 
 
¶15. (SBU) Argentine bonds slightly positive in December, supported 
by local investors 
------------------------------------------- 
The performance of Argentine dollar-denominated bonds (Discount and 
Par bonds from the 2005 debt exchange) improved slightly in 
December, as measured by JPMorgan's Emerging Market Bond Index Plus 
(EMBI+).  The Argentine EMBI rating tightened nine basis points 
versus a 26 bps tightening in the general index, and 22, 29, 43 and 
18 bps tightening in the cases of Brazil, Ecuador, Venezuela and 
Mexico, respectively.  For comparison, Argentine inflation-adjusted 
peso bonds traded an average 7% higher, compared to a 2% increase 
for the dollar bonds.  This positive trend for the peso bonds is 
mainly explained by the private sector insurance companies (AFJPs), 
which have started to bring in funds from Brazil and invest them in 
 
BUENOS AIR 00000070  005 OF 005 
 
 
Argentine assets.  [Note: due to a regulation change, AFJPs are 
expected to repatriate roughly $2.5 billion of investments in the 
Mercosur area by December 2008 ? reported Oct 26 Econ/Fin report.] 
 
 
EMBI     Dec 26 Tightening in December 
EMBI General Index 220  -26 
Argentina   389  -9 
Brazil   200  -22 
Ecuador   587  -29 
Venezuela   481  -43 
Mexico   129  -18 
 
¶16. (SBU) Financial analysts and traders consider that Argentine 
bonds started to perform badly early in 2007 following the GoA's 
initial intervention into INDEC's inflation calculations (starting 
February, with January's CPI release, and worsening thereafter with 
each month's CPI release), and also due to the deterioration over 
the course of 2007 of macro fundamentals (e.g., inflation, the 
election-year spending boom's adverse effect on the primary fiscal 
surplus, and energy shortages).  Although private financial sector 
contacts held out some hope for change (or at least, "gradual 
fine-tuning") following the October 2007 presidential election, 
since taking office on December 10 the new administration has 
pursued a policy of "continuity" on economic policies.  According to 
Embassy financial sector contacts, foreign financial sector 
investors remain in a "wait-and-see" mode, hoping for positive 
economic policy signals that convince them to bring funds into the 
country.  The market is segmenting, with foreign investors only 
cautiously purchasing Argentine financial assets (and generally with 
an extremely short-term horizon) and local investors, such as 
pension funds, purchasing Argentine financial assets because they 
have no alternatives. 
 
WAYNE