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UNCLAS SECTION 01 OF 05 BUENOS AIRES 000245 
 
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 EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JANUARY 
28 - FEBRUARY 22, 2008 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period January 28 - February 
22, 2008.  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 
---------- 
 
-- Trade surplus reaches $11.2 billion: high export prices 
trump accelerating imports 
-- February 20 presentation by FIEL Chief Economist 
-- Former INDEC employees estimate 2007 CPI at 22-26%, almost 
three times official rate 
-- IMF questions INDEC on CPI calculation methodology 
-- UNCTAD report shows similar FDI performance in 2006 for 
Argentina and Brazil 
-- Mercedes Marco del Pont sworn in as new President of Banco 
de la Nacion 
-- ICSID tribunal appointed for Italian holdout bondholders' 
arbitration against the GoA 
-- GoA appoints first Director of new Civil Aviation Agency; 
day-to-day operations to remain unchanged 
 
----- 
Trade 
----- 
 
Trade surplus reaches $11.2 billion: high export prices trump 
accelerating imports 
--------------------------------------------- ----- 
¶2. (SBU) The value of Argentine exports grew 20% in 2007 and 
imports jumped 31%, according to GoA statistics agency INDEC. 
 Exports totaled $55.9 billion and imports were $44.8 billion 
in 2007, with a net trade surplus of $11.2 billion, down 9.4% 
from the 2006 surplus of $12.3 billion.  INDEC attributed 60% 
of the increased value of exports to higher goods prices, and 
40% to increased quantity.  On the export side, the increase 
was led by primary products, especially oilseeds (soy) and 
grains. 
 
¶3. (SBU) Total value of exports in those areas (including 
processed soy) rose from $13.4 billion in 2006 to just over 
$20.0 billion in 2007, roughly 70% of the total value 
increase of Argentina exports during the same period. 
Another $1.1 billion -- 40% of the increase other than soy 
and grains, and 12% of total 2007 export growth -- was 
attributed to increased automotive exports to Brazil, thanks 
to a bilaterally negotiated relaxation of restrictions on the 
export of Argentine finished cars and parts.  Hydrocarbon and 
energy exports, despite an 11% increase in price, fell 12% in 
total value to $6.8 billion due to expanded GoA export 
tariffs and administratively imposed local market preferences 
(resulting in a 20% reduction in the quantity of energy 
exports).  The largest value increase in imports was in the 
category of intermediate goods, which rose from $11.9 to 
$15.5 billion.  This was complemented by a 34% rise (to $5.1 
billion) in consumption goods, a 33% increase (to $2.7 
billion) in motor vehicles, and a 64% increase (up to $2.8 
billion) in imports of refined hydrocarbon fuels.  Imports of 
productivity-enhancing capital goods also increased, up 28% 
to $10.8 billion. 
 
¶4. (SBU) The increase in primary global agricultural 
commodity prices has contributed significantly to Argentina's 
trade surplus: the 2007 price increases for exports of 
Argentine primary products and agricultural-based 
manufactured goods accounted for $5.8 billion in increased 
exports, or 52% of Argentina's trade surplus.  Local analysts 
acknowledge that the trade surplus is shrinking, but do not 
believe it is at risk of disappearing soon.  However, a 
plunge in global agricultural commodity prices would have a 
severe, negative impact on the trade balance.  Equally 
important, any such price decline would also significantly 
reduce the GoA's revenue intake, since taxes on primary 
 
BUENOS AIR 00000245  002 OF 005 
 
 
commodity exports contribute a large share of the GoA's 
primary fiscal surplus. 
 
---------------- 
Economic Outlook 
---------------- 
 
February 20 presentation by FIEL Chief Economist 
--------------------------------------------- --- 
¶5. (U) Mission representatives attended a February 20 
presentation by FIEL Chief Economist Daniel Artana (Buenos 
Aires-based Latin American Economic Foundation -- FIEL -- is 
a highly regarded, independent Argentine think tank devoted 
to economic and social research on Argentina and Latin 
America).  FIEL's main points: 
 
¶6. (SBU) INDEC Statistics.  Manipulation of statistics goes 
beyond the CPI to include wholesale prices and industrial 
production indices.  Evidence of data manipulation is clear 
when analyzing time series, with seasonal variation of prices 
for core products -- especially food items -- disappearing 
over the last year. 
 
¶7. (SBU) 2007 GDP growth overestimated.  The BCRA consensus 
survey estimates 2007 GDP growth at 8.6%, an overestimation 
of up to 0.5-0.7% due to the underestimation of the CPI.  GDP 
data through third quarter 2007 (latest released) appears 
relatively reliable, but FIEL has strong doubts about the 
input data used to calculate GDP during fourth quarter 2007 
and going forward.  FIEL's economists predicted that the GoA 
would ensure that 2008 real GDP growth remains in the 
8.5-8.7% range, if not through stimulative policies then 
through "methodological innovations," to use Citi's term. 
 
¶8. (SBU) Impact of international turbulence.  Argentina is 
increasingly dependent on high global commodity prices for 
its main exports for maintaining the twin surpluses (trade 
and fiscal).  However, the good news is that prices are 
expected to remain high even with growth decelerating in the 
US and Europe.  Growth in China (and the rest of Asia) should 
compensate for lower demand in U.S. and Europe, even if 
annual real growth in China falls (as the economists expect) 
from 11% to 8%.  This is also partly due to the appreciation 
of the Yuan, which has already appreciated 12% in 2008 
compared to only 6% in 2007, providing ample room for the 
dollar value of exports to remain high. 
 
¶9. (SBU) Macro Policy.  Fiscal and monetary policies remain 
extremely expansive, with primary expenditure still growing 
at a rapid pace and real interest rates still net negative. 
Even though primary fiscal expenditure is decelerating (from 
the 50% plus growth rate in 2007), it is still growing at 
about 35% nominally, which translates to about a 15-16% real 
growth rate assuming true inflation of 20%.  Economists from 
the entire political spectrum are calling for slower growth, 
even heterodox economists who support the GoA such as Eduardo 
Curia, Aldo Ferrer, and Roberto Frenkel. 
 
¶10. (SBU) Energy.  Two instruments that Argentina used to 
attenuate energy shortages in the past were to reduce natural 
gas exports to Chile and to import electricity from Brazil. 
However, these two instruments are no longer particularly 
useful, because Argentina barely exports any natural gas to 
Chile anymore (see below graph, measured in thousands of 
cubic meters)) and Brazil's recent dry weather will limit the 
amount of electricity Brazil can continue to export to 
Argentina.  Also unclear is whether Brazil will allow 
Bolivian natural gas to be diverted to Argentina.   (The 
recent energy summit held in Buenos Aires involving Brazilian 
President Lula da Silva and Bolivian President Evo Morales 
suggests that Brazil will not/not do so.)  On the positive 
side, two factors that should help the GoA manage the energy 
shortages this winter are: 1) the two new thermal generation 
plants that should come on line by May; and, 2) current 
forecasts indicate that the 2008 winter may not be as cold as 
the one in 2007, which was the coldest in decades. 
 
Former INDEC employees estimate 2007 CPI at 22-26%, almost 
three times official rate 
--------------------------------------------- ----- 
¶11. (SBU) A group of former INDEC technicians publicly 
 
BUENOS AIR 00000245  003 OF 005 
 
 
announced their calculation of the 2007 Buenos Aires 
metropolitan area CPI at about 22-26%, almost three times the 
official INDEC CPI of 8.5%.  These were mostly staffers fired 
by Secretary of Internal Trade Guillermo Moreno, who replaced 
many of the more capable and experienced INDEC employees in 
charge of calculating inflation and poverty statistics, after 
they reportedly refused to acquiesce to Moreno's demand that 
they "adjust" the data.  (Note: 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.  INDEC's internal union states that 14 
employees were removed from the agency and re-employed at the 
Ministry of Economy after they testified against GoA 
intervention of INDEC and CPI data manipulation. 
Additionally, the union argues that an unspecified number of 
statisticians and administrative employees have been demoted 
and replaced with employees willing to collaborate with the 
Moreno.) 
 
¶12. (SBU) The ex-INDEC employees mainly based their 
unofficial estimate of 22-26% on the inflation rate reported 
by the statistical agency of the province of Mendoza. 
Mendoza's inflation rate has been strongly correlated 
(99.75%) with the Buenos Aires CPI from 2003 to 2006. 
According to this report, food and beverage prices have been 
distorted the most.  For Mendoza, this subcategory of the 
index increased about 36-39%, compared to the official INDEC 
increase of only 8.6%.  (Note:  the Buenos Aires CPI is 
commonly used as the official Argentine inflation figure and 
is also used to construct the CER (coeficiente de 
estabilizacion de referencia), the CPI-linked index used to 
adjust peso-denominated debt.)  Unions have argued to the 
media that INDEC's CPI does not reflect true inflation, and 
are, therefore, requesting wage increases in the range of 
20-35% (depending on the union) in order to maintain the 
purchasing power of employees' salaries. 
 
IMF questions INDEC on CPI calculation methodology 
--------------------------------------------- ----- 
¶13. (SBU) Buenos Aires daily Cronista reported February 6 
that the IMF asked GoA statistics agency INDEC, in a 
seven-page written request, to clarify the methodological 
changes introduced in 2007 to the CPI calculation, as well as 
to explain the impact of those changes.  This IMF information 
request takes into account concerns among economists and 
statisticians over the reliability of the CPI data, for which 
there is much disagreement.  INDEC reports 2007 CPI at 8.5% 
y-o-y, while private analysts and former INDEC employees 
estimate "true" inflation in the range of 22-26%. 
 
¶14. (SBU) The IMF reportedly also asked for explanations on: 
1) the reported layoffs of INDEC employees, who resisted the 
alleged data manipulation; and, 2) if it were true that INDEC 
had revealed to GoA officials the identity of the retailers 
it surveys to measure the CPI, which would be a breach of 
confidentiality.  According to Cronista, the IMF alerted the 
 
SIPDIS 
GoA about the possibility of removing the Argentine inflation 
statistics from its publications (such as the World Economic 
Outlook report, the so-called WEO) if they fail to meet UN 
standard's in compiling its statistics.  (Comment: Post 
understands from IMF sources that the letter included no such 
threat, although the Cronista report is otherwise mostly 
correct.) 
 
UNCTAD report shows similar FDI performance in 2006 for 
Argentina and Brazil 
--------------------------------------------- ----- 
¶15. (SBU) Contrary to common belief that Argentina is not 
receiving sufficient FDI when compared to other countries and 
especially in comparison Brazil, a recent UNCTAD report finds 
similarities between Argentina and Brazil and other LatAm 
countries in terms of FDI.  According to the report, inward 
FDI flows to Argentina reached $4.8 billion in 2006, while 
outward FDI flows totaled $2.0 billion, resulting in a net 
inflow of $2.8 billion.  In comparison, Brazil received FDI 
flows of $18.8 and outflows of $28.2 billion.  (For 
reference, Latin-America and Caribbean as a whole received 
FDI inflows of $83.7 billion and outflows of $49.1 billion.) 
Even though Argentina's FDI inflows are small compared to 
Brazil's in dollar terms, when measured as a percentage of 
gross fixed capital formation, Argentina's FDI inflows 
 
BUENOS AIR 00000245  004 OF 005 
 
 
represent 9.6% of 2006 gross fixed capital formation, while 
Brazil's inflows are only a slightly higher 10.5%.  Also, 
when comparing FDI stock as a percentage of GDP, Argentina 
performs better than Brazil.  In 2006, Argentina's FDI stock 
reached $58.6 billion, or 27.4% of GDP, while Brazil stock 
reached $221.9 billion, or 20.8% of GDP. 
 
¶16. (SBU) The UN report ranks countries' FDI flows relative 
to the size of their economies.  The report presents the 
Inward FDI performance Index, which is the ratio of a 
country's share in global FDI inflows to its share in global 
GDP, and the Outward FDI performance Index, which is 
calculated as the ratio of a country's share in global FDI 
outflows to its share in global GDP.  In 2006, Argentina 
ranked 83 on the Inward FDI Performance index (losing one 
position compared to the previous year), better than Brazil 
(which ranked 93), almost similar to Mexico (ranked 82), but 
much worse than Chile (ranked 30).  However, in the Outward 
Performance Index, even though it gained two positions 
compared to 2005, it ranked 54, worse than Chile (ranked 31), 
Brazil (ranked 36), and Mexico (ranked 49). 
 
------- 
Finance 
------- 
 
Mercedes Marco del Pont sworn in as new President of Banco de 
la Nacion 
--------------------------------------------- ----- 
¶17. (SBU) On January 30, Chief of Cabinet Alberto Fernandez 
swore in Mercedes Marco del Pont as President of the 
state-owned Banco de la Nacion Argentina (BNA).  Marco del 
Pont, who replaces Gabriela Ciganotto, stated that she will 
work to promote credit to small-and medium-size enterprises 
(SMEs), to reduce nominal interest rates, and to improve 
income distribution, as well as finance the government as 
necessary (although she clarified that the 2008 GoA financial 
program is manageable without BNA help).  She stated that the 
BNA is committed to current monetary and foreign exchange 
policies, making it clear that BNA will complement the BCRA's 
efforts to purchase foreign exchange to maintain an 
undervalued peso.  Regarding interest rates, she mentioned 
the need to reduce interest rates for SMEs as well as to 
extend local currency loan tenors beyond current ceilings of 
about five years.  It remains to be seen whether the BNA will 
play a role in the GoA announced strategy to create a 
national development bank similar to the Brazilian BNDES 
(providing long-term credit, possibly at subsidized interest 
rates, in order to promote economic development). 
(Background: BNA is entirely state-owned with roughly 500 
branches in Argentina and other countries.  A main goal of 
BNA is to serve as the financial agent of the federal 
government:  it receives public deposits and makes payments 
on behalf of the government.  Of late, BNA has concentrated 
on SME lending as well as on serving under-banked sectors of 
the population (e.g. lower income individuals and from 
isolated towns of Argentina).) 
 
ICSID tribunal appointed for Italian holdout bondholders 
arbitration against the GoA 
--------------------------------------------- ----- 
¶18. (SBU) On February 4, the World Bank appointed Swiss 
citizen Robert Briner as the presiding Judge of the ICSID 
(International Center for Settlement of Investor Disputes) 
arbitral tribunal that will rule on the complaint filed 
against the GoA by Task Force Argentina (TFA).  TFA is 
defending about 195,000 Italian investors that did not 
participate in the 2005 GoA debt restructuring and still hold 
defaulted debt totaling about $4.4 billion (and are claiming 
payment of face value plus interest arrears on the defaulted 
bonds).  The TFA is basing its suit on the failure of 
Argentina to respect the 1990 Italian-Argentine bilateral 
treaty. 
 
¶19. (SBU) TFA representatives celebrated the designation of 
the judge as it overcame the GoA's attempts to block the 
registration stage of the case and then, when that was 
unsuccessful, block the appointment of the presiding judge. 
(The tribunal is composed of three judges, one chosen by each 
party and the third jointly agreed upon.  The GoA named 
Georges Abi-Saab of Egypt and TFA named Albert Jan van der 
 
BUENOS AIR 00000245  005 OF 005 
 
 
Berg of the Netherlands, but the World Bank directly 
appointed Briner following the GoA's objection to the 
appointed third judge.) 
 
-------------- 
Civil Aviation 
-------------- 
 
GoA appoints first Director of new Civil Aviation Agency; 
day-to-day operations to remain unchanged 
--------------------------------------------- ----- 
¶20. (SBU) Former Mendoza Governor Rodolfo Gabrielli was sworn 
in on January 29 as the GoA's first Director of the 
newly-created civil aviation agency, ANAC (National Civil 
Aviation Administration), the organization that will 
eventually take full and formal control of Argentina's civil 
aviation structure.  This appointment is a small but 
important step in the GoA's road towards civilian control of 
civil aviation in Argentina. 
 
¶21. (SBU) Presently, Argentina civil aviation largely falls 
under the control of two state bodies: the Ministry of 
Defense's Air Regions Command, and the Secretary of 
Transportation's Under Secretary of Commercial Air Transport. 
 ANAC will formally replace both bodies and their functions. 
 
¶22. (SBU) ANAC's structure and responsibilities have slowly 
been defined as a result of three GoA decrees over the past 
year.  Although ANAC's general role and director are now 
known, these same decrees also mandate that ANAC will only 
take full legal control of Argentine civair once the GoA 
updates certain other aviation codes and other relevant 
legislation, which the GoA has mandated will occur no later 
than May 29, 2008.  In fact, many observers think that ANAC 
will not likely be a truly functional civair agency even 
then, and the process could take another one to three years, 
if not longer.  Meanwhile, Argentine civair will continue to 
be run, on a day-to-day basis, by the Air Regions Command and 
the Secretary of Transportation (the Under Secretary of 
Commercial Air Transportation's role was legally terminated 
this month). 
 
¶23. (SBU) Rodolfo Gabrielli is the former Peronist Governor 
of Mendoza province (1991-1995), and son of another Mendoza 
Governor, Francisco Gabrielli.  (The Mendoza airport is named 
after his father Francisco).  Gabrielli was Mendoza's 
Minister of Economy from 1987-1991, a national congressman 
from 1995-1999, Interior Minister under former President 
Adolfo Rodgriguez Saa, president of the state satellite 
company ArSat under President Nestor Kirchner, as well as a 
Director of the national airports regulator, ORSNA. 
Observers concur that Gabrielli's considerable political 
skills will come in handy in managing the diverse and 
conflictive world of Argentine civil aviation. 
KELLY