VZCZCXRO2271
PP RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHQU RUEHTM RUEHVC
DE RUEHBU #0506/01 1092033
ZNR UUUUU ZZH
P 182033Z APR 08
FM AMEMBASSY BUENOS AIRES
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INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 04 BUENOS AIRES 000506 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, APRIL 7 - 
18, 2008 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period April 7 - 18, 2008.  The 
unclassified email version of this report includes tables and 
 
SIPDIS 
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 
---------- 
 
-- March official CPI up 1.1% m-o-m, while private sector 
estimates 3% 
-- Inflation expectations top 30%; increasing concerns about 
wage/price spiral 
-- IMF and World Bank question Argentina's CPI 
-- GoA approves financial structure for over $3.5 billion 
high-speed train 
-- BCRA meets monetary target for 19th consecutive quarter, 
helped by Treasury FX purchases 
 
--------- 
Inflation 
--------- 
 
March official CPI up 1.1% m-o-m, while private sector 
estimates 3% 
--------------------------------------------- ----- 
¶2. (SBU) After delaying for almost a week past the normal 
April 6 reporting date, Argentine national statistics agency 
INDEC reported April 11 that headline consumer price 
inflation in March was 1.1% month-over-month.  While the 
announced inflation was in line with market expectations, the 
report was well below most independent analysts' estimates 
for actual or "true" inflation, which range from 2.5-3.5%. 
(Note:  The CPI is based on the Buenos Aires metropolitan 
area price survey.)  On a year-on-year basis, headline 
official CPI was 8.8%, slightly accelerating from 8.4% in 
February.  INDEC also reported that producer price inflation 
of 0.9% m-o-m in March, driven by higher agricultural primary 
product and manufactured good prices.  In y-o-y terms, 
producer price inflation was 15.5%. 
 
¶3. (SBU) According to INDEC, all nine sub-indexes of the CPI 
showed increases, albeit quite moderate in contrast with the 
popular perception of true inflation (see below) as reported 
by consumer defense organizations and independent 
consultants.  INDEC's measure of the food and beverages 
sub-index, which accounted for about 37% of the CPI in March, 
increased only 1.1% m-o-m.  This figure seems to take no 
account of the three-week agricultural strike in March, which 
caused food shortages and substantial price hikes in urban 
areas (especially for basic food such as meat, poultry, milk, 
fruits and vegetables).  During the strike, senior GoA 
officials blamed Argentine farmers for driving up food 
prices, and following INDEC's announcement of March 
inflation, several private commentators noted sarcastically 
that the GoA should apologize to farmers, since at least 
according to INDEC there had been no such spike in food 
prices. 
 
¶4. (SBU) Like food and beverages, housing, transportation and 
health show price increases of only 0.7 - 0.8% m-o-m, 
suspiciously low levels, given anecdotal reports of 
increasing prices in all three areas.  The largest increase 
was in education, up 7.6% m-o-m (and accounted for 25% of 
headline inflation).  Despite this comparatively large 
increase, private analysts still consider this figure 
excessively low, since March was the start of the school year 
and the press is reporting much higher increases in school 
fees.  Similarly, the 1.1% m-o-m increase in the price of 
entertainment (which includes tourism) sub-index appears to 
significantly understate the price increases that took place 
during the long Easter weekend. 
 
Inflation expectations top 30%; increasing concerns about 
wage/price spiral 
--------------------------------------------- ----- 
¶5. (SBU) On April 15, the Finance Research Center of Di Tella 
University reported that inflation expectations for the next 
twelve months increased to 33% in April, up from 26.8% in 
March.  The gap between Di Tella's inflation expectations 
survey and the BCRA consensus survey, which estimates the 
 
BUENOS AIR 00000506  002 OF 004 
 
 
next twelve months "official" inflation (INDEC-reported) at 
9.7%, widened to 23.1 percentage points.  Inflation 
expectations have risen by over 10 percentage points since 
the beginning of the year.  This rapid increase in 
expectations is understandable given that first quarter 
"true" inflation, annualized, is in the range of 30%, "true" 
March inflation annualized is in the range of 43%, and early 
estimates for "true" April inflation are in the range of 
2.5-3% m-o-m, or again nearing 40% on an annual basis. 
 
¶6. (SBU) Increasing inflationary expectations will likely 
complicate ongoing wage negotiations, and may also force 
Unions to seek additional wage increase later in the year or 
even to demand some form of automatic increases (Note: 
directly indexing wages to inflation is illegal under 
Argentine law.)  Local economists are increasingly concerned 
about the acceleration of inflation, expectations, and wages, 
which increase the chances that the economy will experience a 
hard landing when commodity prices soften. 
 
IMF and World Bank question Argentina's CPI 
------------------------------------------- 
¶7. (SBU) Despite having expressed doubts in private to the 
GoA about the quality of Argentina's CPI, the IMF included in 
the April 10 release of the World Economic Outlook CPI 
estimates of 9.2% for 2008 and 9.1% for 2009, in line with 
official INDEC estimates.  However, the IMF cautioned that 
"most private sector analysts believe that actual inflation 
is considerably higher than reflected in official data." 
(Note:  This is almost the exact caveat that Post included in 
the Investment Climate Statement, released March 5, 2008.) 
In February, when local press reported that IMF staff had 
sent a letter to INDEC questioning its inflation-measuring 
methodology, there was local speculation that the IMF would 
exclude Argentine data from the report.  According to 
Argentine daily "Cronista Comercial," a senior IMF source 
stated April 9 that "if the situation does not change and 
(the Argentine government) does not make more transparent the 
indices and methodologies with which it calculates CPI, the 
next IMF report (to be released in six months) will probably 
not include official GoA statistics." 
 
¶8. (SBU) In contrast, Augusto de la Torre, World Bank Chief 
Economist for Latin America and the Caribbean, opted to 
exclude Argentina from a presentation he gave during the 
spring IMF/World Bank meetings, showing inflation statistics 
for the region.  When later queried by a Cronista reporter 
about inflation in Argentina, he diplomatically responded, 
"The only thing I can tell you is that we understand that the 
Argentine government is preparing a new inflation index with 
an updated methodology and qualitative changes.  We are going 
to wait to see the new data."  Cronista also reported that de 
la Torre subsequently admitted that he did not include 
Argentine inflation numbers "so as to not have to respond to 
questions about it." 
 
------- 
Finance 
------- 
 
GoA approves financial structure for over $3.5 billion 
high-speed train 
--------------------------------------------- ----- 
¶9. (SBU) On April 4, the GoA published in the Official 
Gazette Resolution N178, approving the financial structure to 
pay for the politically controversial project of building a 
high-speed train between the cities of Buenos Aires, Rosario, 
and Cordoba.  Under the resolution, the GoA will issue two 
bonds to finance the construction of the train by French 
company Alstom.  The first bond for Euros 430 million will be 
a 30-year, amortizing, dollar-denominated bond with a fixed 
coupon for the first 17 years and a variable coupon of Libor 
plus a spread for years 18-30.  (Note: the Economy Ministry 
will determine the spread nearer the launch date, expected in 
May or June 2008.) 
 
¶10. (SBU) The GoA expects to issue the second bond for Euros 
2.0 billion in several tranches from 2009-2011.  Argentina's 
Congress must approve this second bond as part of the overall 
2009 Budget Law (prior to January 31, 2009).  This second 
bond will be a thirty-year, amortizing, dollar-denominated 
bond with a fixed coupon.  Interestingly, these bonds will be 
issued under English law, which will require the GoA to 
engage in a sophisticated legal structure to avoid attachment 
from "holdout" bondholders.  Also, the GoA will pay French 
corporate and investment bank Natixis a 3% and 1% fee (on the 
principal amount) to structure and underwriting the 
 
BUENOS AIR 00000506  003 OF 004 
 
 
transaction, respectively.  Interestingly, under the terms of 
the agreement with Alstom, the GoA's financing obligation is 
independent of the performance or completion of the project, 
meaning it will be obliged to issue these bonds even in the 
face of construction delays or cost increases.  Local media 
has independently reported that Natixis' package could be 
refinanced by French export credit agency COFACE if/when the 
GoA settles on its Paris Club arrears. 
 
¶11. (U) Background:  In May 2006, the GoA announced plans to 
develop the first high-speed rail line in South America, 
stretching 310 km from Buenos Aires to Rosario, with a 
further 400-km line proposed for a 160km/h operation between 
Rosario and Cordoba.  In May 2006, the GoA held an open 
tender for the contract to build the project.  Four European 
firms presented as bidders: Alstom (French), Siemens 
(German), CAF (Spanish) and Impregilo (Italian).  The total 
cost of the Buenos Aires)Rosario)Cordoba line was 
calculated at $4 billion.  When technical and financial bids 
were due in March 2007, only the Veloxia grouping of Alstom, 
Isolux Corsan, Iecsa and Emepa came forward, and the GoA 
selected this consortium as the preferred bidder in June 
¶2007.  President Cristina Fernandez de Kirchner officially 
announced in January 2008 that Alstom and its partners had 
been awarded the project.  She also discussed the project 
during her April 7 meeting in Paris with French President 
Sarkozy.  The two governments and Alstom have reportedly 
agreed to sign the final contract in late April. 
 
-- Travel Time:  The Buenos Aires to Cordoba trip will take 
three hours, compared to the current 10 hours by automobile. 
According to the project, the journey will be served by eight 
double-decker high speed trains, each with a capacity of 500 
passengers, operating nine return trips/day at speeds of up 
to 320 km/hour. 
 
-- Infrastructure. The project requires construction of seven 
stations and 780 kilometers of tracks, an electrical network, 
signaling apparatus, the supply of rolling stock, and 
maintenance.  Alstom will provide overall management and 
engineering, the supply of rolling stock, signaling, 
communications, electrification, and maintenance.  Alstom 
will manufacture the trains in France and assemble them in 
Argentina.  IECSA and Isolux Corsan will be in charge of 
civil works, and EMEPA will join Alstom in constructing the 
rail line. 
 
-- Passengers.  Analysts estimate that three million 
passengers per year will use the high-speed line for the 
Buenos Aires ) Rosario line, and an additional 500,000 
passengers will use the Rosario-Cordoba line. 
 
¶12. (SBU) Concerns:  Aside from the high cost, critics of 
this deal point to a number of problems that complicate this 
project:  1) Argentina will be going from a "Lada to a 
Lamborghini," and does not have in place the necessary 
expertise to operate the project -- requiring an expensive 
management contract.  2) The country is already facing 
electricity capacity issues, and this project will require a 
large and reliable supply of power.  3) Ticket prices likely 
will exceed most Argentines' capacity to pay, limiting the 
number of passengers that will use the train, or requiring 
significant ongoing GoA subsidies, or more likely both. 
(According to an EU study, a high-speed train requires six 
million passengers/year to justify the investment and nine 
million passengers/year to be profitable.) 
 
-------- 
Monetary 
-------- 
 
BCRA meets monetary target for 19th consecutive quarter, 
helped by Treasury FX purchases 
--------------------------------------------- ----- 
¶13. (SBU) The BCRA announced April 14 that for the 19th 
consecutive quarter it had fulfilled its monetary target in 
first quarter 2008.  The BCRA's 2008 Monetary Program targets 
M2, which is defined as cash in circulation plus private and 
public sector sight-accounts (savings and checking). 
According to preliminary BCRA data, the average M2 level 
during the quarter was ARP 149.8 billion, ARP 1.0 billion 
below the base scenario of ARP 150.7 billion established in 
the 20087 Program, and ARP 3.5 billion above the lower limit 
of ARP 146.3 billion.  Nominal growth of M2 reached a strong 
18.2% y-o-y, but still below the upper growth target of 22.5% 
and below the nominal growth of GDP.  Independent economists 
note that, in Argentina's increasingly inflation driven 
 
BUENOS AIR 00000506  004 OF 004 
 
 
economy, M2 growth becomes a less reliable measure of 
inflationary pressures as consumers choose to limit   cash 
balances to avoid depreciation carrying losses. 
 
¶14. (SBU) During the quarter, the GoA Treasury (under the 
Economy Ministry) purchased $1.5 billion foreign exchange. 
This had a contractionary impact on monetary aggregates, both 
on the monetary base and M2, since the Treasury used pesos 
already in circulation to make the purchases (as opposed to 
the BCRA's issuance of new pesos to purchase FX).  The 
Treasury purchases also helped offset the expansionary effect 
of private sector purchases of foreign exchange (to hedge 
against high inflation and concerns about a possible 
depreciation of the peso) and the increase in private sector 
credit.  Also, in March the agricultural strike, which mostly 
halted agricultural commodity exports, reduced dollar inflows 
to exporters.  The combination of these factors supported the 
BCRA's effort to prevent the nominal appreciation of the 
peso, and alleviated the burden of sterilizing its foreign 
exchange purchases (estimated by private analysts at $2.9 
billion for the quarter). 
 
 
 
 
WAYNE