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UNCLAS SECTION 01 OF 05 BUENOS AIRES 000816 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JUNE 6 - 
13, 2008 
 
REF: BUENOS AIRES 782 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period June 6 - 13, 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 
---------- 
 
-- President Kirchner launches social redistribution program 
with proceeds from increase in soy export tax revenue, 
raising fiscal concerns.  Farm strike resolution still 
elusive. 
-- Private sector deposits fall ARP 6 billion; financial 
sector's worst month since October 2001. 
-- GoA unveils new inflation index; underreporting continues 
and market underwhelmed. 
-- Consumer expectations lowest since October 2004; inflation 
expectations balloon to 36.5%. 
-- GoA public debt totaled $144.7 billion at the end of 2007, 
similar to pre-default levels, but decreasing in terms of GDP. 
 
----------- 
Agriculture 
----------- 
 
President Kirchner launches social redistribution program 
with proceeds from increase in soy export tax revenue, 
raising fiscal concerns.  Farm strike resolution still 
elusive. 
--------------------------------------------- ----- 
 
¶2. (SBU) President Cristina Fernandez de Kirchner announced 
June 9 during a speech in the Casa Rosada that the GoA would 
use the distribution of the marginal increase of the soy 
export tax (all tax collection above 35%) to finance a social 
redistribution program.  (This followed the GoA's May 26 
unilateral amendment on the export tax sliding scale, which 
attempted to solve the conflict between the GoA nd the 
farming sector triggered by the imposition on March 11 of the 
export tax sliding scale -- for background see April 4 and 
May 30 Econ/Fin Reports.) 
 
¶3. (SBU) According to the Presidential Decree (N904) 
published June 10 in the Official Gazette, expected revenue 
from the increase of soy export taxes above 35% is $800 
million in 2008 and $1.3 billion in 2009.  The GoA will use 
these funds to will finance the social redistribution 
program, administered by the Ministries of Planning, Economy 
and Health and focusing on building hospitals (60%), housing 
(20%), and rural roads (20%).  It is unclear (as it is not 
mentioned in the Decree) how these funds will be allocated 
among the provinces, which has aroused speculation in the 
press that Governors with a close relationship to the current 
administration will be the main beneficiaries.  Following the 
speech, in statements to the press, farmers' representative 
stated that the rural organizations support the GoA's 
effort's to tackle poverty, but argued that it was unfair 
that the rural sector alone had to pay for the GoA's new 
infrastructure programs. 
 
¶4. (SBU) Investment Bank's reaction to the President 
announcement: 
 
-- According to HSBC, the call to dialogue and the tone of 
the speech were positive. Still, the fact that additional 
resources will not be saved but rather spent is a concern to 
credit markets.  Nevertheless, if the conflict is actually 
defused - or moderated - the balance is positive, as 
normalization of activity is a "necessary condition to revert 
the ongoing re-dollarization process" (see next item under 
Finance).  HSBC also expects the GoA to announce additional 
measures favoring farmers, such as widening the definition of 
small producers to 1000 from 500 tons, thereby increasing 
those qualifying for compensation (subsidies). 
 
-- For CSFB, Cristina's speech was not conciliatory; in its 
view, her remarks about the farmers were quite harsh.  She 
argued that the farmers were currently reaping very large 
 
BUENOS AIR 00000816  002 OF 005 
 
 
profits while investing "little capital" and hiring very few 
workers.  She continued that despite having so much, the 
farmers are unwilling to share with those who have very 
little.  She justified the GoA's decision to hike the tax 
rate on soy exports by noting that it was impossible to 
reduce poverty in Argentina without taxing those with high 
incomes.  Interestingly, she mentioned that farmers had 
benefited from the GoA's weak peso policy during recent 
years, which she claimed had cost the GoA $12 billion. 
 
-- According to Citi, Cristina's announcement sought not to 
solve the conflict with farmers, but to gain the support of 
the population, mayors, and governors because the execution 
of the program will be decentralized, with procedures under 
the supervision of governors and mayors (the same 
decentralization applies to 93% of the current public works 
projects, according to the President).  (HSBC also emphasized 
this issue, noting that this initiative results in previously 
non-shared tax revenue being shared on the margin.  Debate 
over export tax revenues exclusion from the 
"co-participation" tax sharing arrangement between the 
central and provincial governments had intensified over the 
course of the Ag conflict.) 
 
¶5. (SBU) General Market reaction: concern over impact on 
fiscal accounts.  Markets were already concerned about 
strength of fiscal accounts for the following reasons, and 
this new plan has generated further uncertainty: 
 
-- Questions over how the apparent deceleration of the 
economy will impact revenue collection; 
-- The dependence on export taxes and vulnerability to 
international commodity prices; 
-- The worrying trend in subsidies, which so far in 2008 are 
rising at an annual rate of about 103% (y-o-y in the first 
quarter), with little prospect that the GoA will reduce them 
soon (for details see May 30 Econ/Fin report); 
-- Pressure to increase public sector wages and pensions due 
to rising inflation 
 
¶6. (SBU) NOTE: In June 10 statements to the press, Chief of 
Cabinet Alberto Fernandez clarified that expenditures 
generated by this announcement were not included in the 2008 
Budget, as the GoA had not included the tax collection 
generated by the export tax sliding scale.  According to 
Embassy calculations, when including this new social 
expenditure of $800 million, the 2008 primary fiscal surplus 
will decline from an estimated ARP 36.0 billion (or 3.6% of 
GDP) to ARP 33.4 billion (or 3.4% of GDP). (Note: this 
estimate is based on the BCRA market consensus survey, as of 
May 2008.) 
 
¶7. (SBU) For reference: the GoA Primary Fiscal Surplus is 
still at an historically high level in terms of GDP, albeit 
lower than the post-crisis high of 3.9% of GDP set in 2004. 
For the first four months of 2008, accumulated primary 
expenditures reached ARP 53 billion (up 39% y-o-y), while 
accumulated revenues stood at ARP 65 billion (up 44% y-o-y). 
This resulted in an accumulated primary surplus of ARP 11.6 
billion.  According to Argentine consulting company "Economia 
y Regiones," if revenue and expenditure growth dynamics 
continue as they have through April, the GoA's 2008 primary 
fiscal surplus may reach as high as 4% of GDP.  This would be 
significantly above the official 2007 primary fiscal surplus 
of 3.2% of GDP (equivalent to ARP 25.7 billion or $8.1 
billion).  (Note:  The 2008 estimate appears even stronger 
compared to 2007 when taking into account that the 2007 
primary surplus was only 2.5% of GDP when excluding the 
one-time transfer of about ARP 7.5 billion that resulted from 
the 2007 pension system reform.) 
 
¶8. (SBU) Going Forward: When does the conflict end?  Most 
local analysts and commentators seem to agree that the 
President's announcement erodes the farmers' public support 
and undermines their ability to continue their protest. 
However, opinions are still divided on whether the conflict 
will now subside or continue at current levels.  From 
contacts with farm groups, the Embassy is seeing few signs 
that the producers are tired of the dispute and ready to give 
in.  If anything, the debate seems to be over whether to take 
stronger measures.  However, Embassy financial sector 
contacts expect it will gradually diminish in strength, but 
will continue as a low-intensity conflict for a long time to 
come.  The latest wild card is that groups of truck drivers 
are blocking roads, demanding that the GoA and farmers 
resolve the strike.  This has intensified concerns over 
possible food and fuel shortages and over the possible 
 
BUENOS AIR 00000816  003 OF 005 
 
 
escalation of social tensions. 
 
------- 
Finance 
------- 
 
Private sector deposits fall ARP 6 billion; financial 
sector's worst month since October 2001. 
--------------------------------------------- ----- 
 
¶9. (SBU) Political uncertainty, accelerating inflation, and 
the Ag conflict created a move towards the dollar in May at 
the expense of private peso deposits. 
 
¶10. (SBU) Private sector deposits dropped ARP 5.8 billion 
(almost $1.8 billion) or 4% of total private sector deposits 
during May, resulting in the worst month for the financial 
sector since October 2001.  Furthermore, an Embassy banking 
sector contact estimates that total capital outflow (capital 
flight) in May was $3.5 billion, compared to the $2.5 billion 
outflow in April.  During the month, savings accounts had the 
worst performance, falling by 8% m-o-m (ARP 3 billion), 
followed by current accounts falling by 4% (ARP 1.7 billion). 
 The first three weeks of May saw a rapid and constant 
drainage of private sector deposits.  This partially reversed 
during the last week of May (see last graph below) helped by 
rising interest rates and BCRA measures to ease liquidity 
constraints (for reference see May 30 Econ/Fin report). 
 
¶11. (SBU) According to Argentine daily "Cronista Comercial," 
retail investors continue withdrawing deposits, while 
institutional investors are attracted by the high returns and 
are beginning to increase deposits.  Meanwhile, the Badlar 
interest rate (the reference rate for one-month time deposits 
over ARP 1 million) reached a high of 17.9% on May 29 (the 
highest level since February 2003).  The Badlar rate eased 
slightly to end the month at 16.9%, but still representing a 
huge spike from the 9% levels at the beginning of May. 
 
¶12. (SBU) The fall in deposits and the skyrocketing interest 
rates represent the flip side of the BCRA's dollar sales in 
the FX market to satisfy the private demand for dollars 
(mainly from retail depositors) and keep the peso stable. 
The peso/dollar retail exchange rate ended May at around 
3.10, compared to the 3.20 ARP/USD level of April 30 and the 
high of 3.25 ARP/USD on May 9.  The peso has strengthened 
further in June, with the retail rate at 3.05 ARP/USD on June 
¶12. 
 
¶13. (SBU) The BCRA seems to have set its new "ceiling" level 
for the peso at about 3.10 ARP/USD.  Market analysts 
speculate that the BCRA continues to sell dollars and 
strengthen the peso to prove that it can set the exchange 
rate at the level it desires (following the minor run on the 
peso over the last few months, and in the face of 
accelerating inflation -- estimated at an annual rate of 
25-30% for 2008) and to assuage the markets' fears of a large 
peso devaluation (as indicated by the current one-year 
Non-Deliverable Forward (NDF) rate of 3.34 ARP/USD). 
(Comment:  A mid-level BCRA currency trader stated to the 
Embassy that BCRA traders believe the objectives of the 
continued dollar sales are at least in part to punish: 1) 
speculators; 2) the Ag sector; and 3) the industrial sector 
(for refusing to sign the President's Social Pact, or 
"Bicentennial" agreement,  before the GoA had resolved the Ag 
conflict).  During May, the BCRA sold $1.7 billion reserves, 
leaving BCRA reserves standing at $48.6 billion as of May 30, 
according to BCRA data.  According to the June 5 report from 
Argentine consultancy "Broda y Asociados," the estimate for 
private sector dollar demand surged to $7.7-9.0 billion in 
the period April-May. 
 
------------------------------------- 
Inflation and Consumer's Expectations 
------------------------------------- 
 
GoA unveils new inflation index; underreporting continues and 
market underwhelmed. 
--------------------------------------------- ----- 
 
¶14. (SBU) Argentina's national statistics agency INDEC 
introduced its new CPI methodology with the publication of 
May headline CPI inflation.  Using the new system, INDEC 
reported that May inflation was 0.6% m-o-m (0.4% for goods 
and 0.9% for services) or 9.1% y-o-y (7.6% for food and 11.3% 
for services).  The 0.6% monthly increase was due to some 
prices increasing due to seasonal reasons by 1.2% m-o-m, 
 
BUENOS AIR 00000816  004 OF 005 
 
 
regulated prices increasing 0.8% m-o-m and the rest (also 
referred as "core" inflation) increasing 0.4% m-o-m.  Private 
sector estimates of May inflation were at over 1%. 
 
¶15. (SBU) The new CPI methodology (see May 23 Econ/Fin Report 
for background) includes a new CPI basket that was based on 
INDEC's Greater Buenos Aires expenditure survey of 2004/5 
(replacing the previous 1996 survey), which resulted in new 
weights for the CPI formulas.  The new weights have not been 
disclosed publicly.  "Broda y Asociados" wrote in their 
weekly report that lack of information on the new weights 
prevents the private sector from determining (and analyzing) 
the incidence of each product's price on total inflation. 
For example, from now on, there will be no possibility to see 
how the price of beef, a key element for the average 
Argentine's consumption basket, will affect total inflation. 
However, INDEC did say that "Goods" account for 62% of the 
new basket (up from 53% in the previous one), while 
"Services" are 38% (down from 47%).  This is a strange 
development, as for most economies high economic growth is 
accompanied by an increase in the share of service 
consumption by individuals.  However, this could have been 
the result of INDEC only considering consumption from the 
lower-middle-class to determine the new CPI basket. 
 
¶16. (SBU) The last expenditure survey also resulted in a 
reduction of the number of goods included in the monthly CPI 
calculation, down to 440 items from the 818 previously 
considered.  The new list of goods was not published, nor was 
the reasons for the reduction in the number of items. 
 
¶17. (SBU) The CPI formulas (basically, Laspeyres-based) did 
not change with the new method.  INDEC maintains the same 
nine price sub-indices.  The innovation is that, within each 
price sub-index, INDEC will use variable weights for the 
goods and services whose prices exhibit large seasonal 
variations, or volatility due to quality changes, among other 
reasons.  Well-known Argentine economist Ernest Kritz said to 
Argentine daily "La Nacion" on June 11 said that the use of 
variable weights will result "in the institutionalization of 
political discretion into the CPI," if this is not coupled 
with periodic surveys on new consumption patterns, providing 
grounds for the changing weights. 
 
¶18. (SBU) INDEC has not disclosed the new methodology in 
detail in any official document yet, nor have they provided a 
disaggregation of the May outcome by product or group of 
products, which makes the CPI figure less transparent and 
contributes to confusion. 
 
Credit Suisse said that in their view, the new CPI continues 
to understate significantly the "true" level of inflation, 
which is probably in the 25%-30% range on a y-o-y basis. 
JPMorgan's alternative proxies for the CPI suggest that true 
inflation was advancing in at an annual rate of between 22.6 
- 27.2% in May, reflecting a "very mild acceleration".  Local 
consultancy "Evaluadora Latinoamericana" has its own 
inflation survey, and estimates that CPI grew 0.9% in May 
m-o-m, and 21.5 y-o-y. 
 
Consumer expectations lowest since October 2004; inflation 
expectations balloon to 36.5% 
--------------------------------------------- ---- 
 
¶19. (SBU) The index of consumers' economic expectations 
published by TNS Gallup and Argentina's Universidad Catolica 
(UCA) fell sharply in May to 94 from 100 in April, bringing 
the index to its lowest point since October 2004.  May was 
the fifth consecutive monthly drop in the index, reflecting 
consumers' concerns about high inflation and the 
unsatisfactory handling of the situation with farmers and 
truckers.  All sub-indices that make up this index fell in 
May relative to April.  The largest declines came from the 
sub-indices tracking consumers' perceptions about the current 
economic situation, which fell to 107 in May from 115 in 
April, and the sub-indices tracking consumers' intention to 
purchase durable goods, which fell to 101 in May from 109 in 
April. 
 
¶20. (SBU) A key factor affecting consumer sentiment is high 
inflation, as demonstrated by the public's increasing 
expectations.  Torcuato Di Tella University's index on 
consumers' inflation expectations for the next 12 months 
jumped 3.7 percentage points (pp) in May over April, reaching 
36.5%.  This is a record high for the time series started in 
August 2006.  Higher inflation expectations come from all 
over the country; no region is exempt from this trend.  The 
 
BUENOS AIR 00000816  005 OF 005 
 
 
consensus forecast published by the BCRA, known as REM and 
which averages approximately 50 organizations estimates of 
inflation in Argentina for the next 12 months is 9.3% or 27.2 
pp lower than consumers' expectations. 
 
---- 
Debt 
---- 
 
GoA public debt totaled $144.7 billion at the end of 2007, 
similar to pre-default levels, but decreasing in terms of GDP. 
--------------------------------------------- ------- 
 
¶21. (SBU) In the fourth quarter of 2007, the GoA debt stock 
(excluding the so-called "holdouts," or bondholders who did 
not participate in the 2005 debt restructuring) increased 
$7.6 billion to $144.7 billion, or 56% of GDP.  This was due 
to $3 billion in GoA bond issuances, an $825 million increase 
in IFI lending (mainly IDB), and $3.2 billion in short-term 
financing to the GoA (from the BCRA and other public sector 
agencies).  When including holdout debt, currently totaling 
about $28.8 billion, the public debt stock rises to $173.6 
billion, almost 67% of GDP. 
 
¶22. (SBU) Many analysts have criticized the GoA for the fact 
that current debt levels are similar and even slightly exceed 
the pre-default level of $144.2 billion (as of December 
2001).  However, it is worth noting that while the GoA debt 
stock has increased in dollar terms since the 2005 debt 
restructuring, it has decreased in terms of GDP every year 
since 2002 (with or without including holdouts).  Compared to 
other Latin-American borrowers, Argentina's debt to GDP ratio 
is slightly lower than Brazil's, but higher than Colombia, 
Peru, Mexico, and Chile.  However, Aldo Abram, Director of 
the Argentine Institutions and Markets Research Centre at 
Eseade business school points out that the worry is not the 
nominal amount of debt (or that is decreasing in terms of 
GDP) but that Argentina does not have access to credit.  The 
GoA is essentially barred from issuing bonds in international 
capital markets, a consequence of holdout lawsuits, and has 
been forced to rely increasingly on financing from Venezuela 
and Argentine public agencies (such as the tax authority ) 
AFIP ) and Social Security Agency ) ANSES). 
 
WAYNE