VZCZCXYZ0467
RR RUEHWEB

DE RUEHBU #0828/01 1692150
ZNR UUUUU ZZH
R 172150Z JUN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 1352
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000828 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EAGR ETRD EINV PGOV AR
SUBJECT: Argentina: Economic Impact of Farming Crisis 
 
Ref: Buenos Aires 803 and Previous 
 
This cable contains sensitive information - not for internet 
distribution. 
 
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Summary 
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¶1. (SBU) Argentine consumer confidence has declined markedly due to 
economic disruptions linked to the 100-day long agricultural sector 
strike. A just released measure of popular sentiment on the general 
economic situation, employment, family income and purchasing power 
was down for the fifth straight month to its lowest index level 
since October 2004.  While lags in GoA economic statistic reporting 
make it difficult to quantify the impact of the agricultural sector 
strike on the economy, respected local economists estimate that 
Argentina has already lost roughly 1% of GDP growth in 2008, 
equivalent to US$ 3+ billion in production. They note signs of 
economic deceleration that include declining rates of investment, 
broadly declining consumer purchasing power, and the lowest level of 
new employment generation in three years.  Such deterioration in 
economic activity and concern over the inability to resolve the 
agricultural strike, exacerbated concerns over inflation, appears to 
be leading to a slight loss in confidence in the domestic currency 
and deposit withdrawals from banks, and falling prices for Argentine 
financial assets.  More immediately, Embassy energy sector contacts 
confirm widespread shortages of refined petroleum products in the 
Greater Buenos Aires metropolitan area and northern and western 
Argentina.  Such shortages have been exacerbated by hydrocarbon 
sector labor disputes that have disrupted production and refining 
operations, and made much more serious by transportation blockages 
recently led by independent truckers upset by the prolonged 
agricultural strike.  All this said, even the most downbeat among 
local analysts continue to predict Argentina's 2008 GDP growth in 
the 5+% range, down substantially from the 8.9% GDP growth recorded 
in 2007 but still respectable.  End Summary 
 
--------------------------------------------- ------- 
Ag Strike Impact:  Deteriorating Consumer Confidence 
--------------------------------------------- ------- 
 
¶2. (U) According to the Argentine Catholic University's (UCA) 
monthly economic expectations report, fully half of Argentines 
consider the nation's economic situation as "bad."  A full 35% 
believe that the economy will worsen in coming six months vs. 22% 
who believe it will improve, the first time since 2004 that negative 
economic expectations have topped positive expectations.  UCA's 
leading indicator, the General Index of Economic Expectations, which 
measures popular sentiment of the general economic situation, 
employment, family income and purchasing power, dropped 6.7% in May 
2008 from prior month levels, its fifth straight month of decline 
and the lowest index level since October 2004.  Mostly strikingly, 
50% of those surveyed by UCA believe that this is a bad time to go 
forward with expensive goods purchases, a troubling sign of an 
economy whose growth over the past six years has been led by 
consistently strong consumer demand. 
 
--------------------------------------------- --- 
Broader Impact of Strike on GDP Growth Uncertain 
--------------------------------------------- --- 
 
¶3. (SBU) That the agricultural strike is having a significant impact 
on Argentina's economy is accepted by all embassy contacts at local 
economic think tanks, with most pointing to lower overall levels of 
domestic investment (and lower consumer spending) as an immediate 
consequence.  However, these analysts differ in their estimation of 
the strike's quantitative impact on broad GDP growth that, in turn, 
is influenced by a broad range of factors, including the impact of 
growing consumer uncertainty and inflation on real domestic 
consumption. 
 
¶4. (SBU)  Respected former Finance Secretary and now economic 
consultant Miguel Bein estimates that the now 100-day long 
agricultural sector crisis has already cost Argentina roughly 1% of 
GDP, some $3 billion of a projected $300 billion 2008 GDP.  He 
continues to project 2008 GDP growth in the 7.5% range, on the 
assumption that agricultural exports currently withheld from the 
market will eventually make their way to overseas buyers later this 
calendar year.  oted economic consultant Miguel Angel Broda 
likewise projects the strike's cost to date at 1% of GDP, lowering 
his previous projection of 6.8% GDP growth in 2008 to the 5.8% 
level. 
 
¶5. (SBU) Local consulting firm Ecolatina takes a significantly 
harsher view of the economic impact of current uncertainties and 
projects 2008 GDP growth down sharply to 5.5%.  They note current 
signs of economic deceleration, including the lowest level of new 
employment generation in three years, declining rates of growth of 
benchmark supermarket sales, and slowing increases in electricity 
consumption.  Ecolatina also notes broadly declining purchasing 
power, with the value of total nominal wages up only 5.1% in the 
first quarter of 2008, less than half y-o-y rate of increase due to 
a combination of increased inflation and lower levels of employment 
creation. 
 
¶6. (SBU) Longer term, local analysts are projecting 2009 GDP growth 
in the 3.5 - 5.5% range.  Variations among analysts are largely a 
function of differing estimates on  how quickly domestic consumption 
will slow due to inflation, the impact of likely energy shortages on 
industrial production, and the potential of a strengthening US 
dollar (given indications that the US Fed will raise interest rates 
to address domestic inflation issues) to  diminish the 
competitiveness of Argentine industrial production given the 
Argentine Central Bank's de facto linkage of nominal peso exchange 
rates to U.S. dollar values. 
 
¶7. (SBU) The Central Bank's (BCRA) response to volatility in the 
local financial sector -- attributed to the agricultural sector 
conflict and spiking inflation in February and March -- is also 
serving as a brake on growth.  In order to reverse the run on the 
peso that started in March, the BCRA has forcefully intervened in 
currency markets by selling dollars, with sales of $1.7 billion in 
May alone (BCRA reserves have dropped from over $50.5 billion before 
the crisis to $48.3 billion on June 6).  The intervention largely 
succeeded in stabilizing and even strengthening the peso, with the 
retail peso/dollar exchange rate ending May at about 3.1 ARP/USD, 
compared to the 3.2 ARP/USD level of April 30 and the high of 3.25 
ARP/USD on May 9.  The BCRA's intervention also resulted in a sharp 
increase in domestic interest rates, with the Badlar rate (the 
reference rate for one-month time deposits of over ARP 1 million) up 
from about 9% in early May to 17.9% on May 29 (the highest level 
since February 2003).  Higher interest rates have led to sharply 
reduced bank lending, especially to industry, and the stronger 
nominal exchange rate is cutting into the competitiveness of 
Argentine industry. 
 
--------------------------------------------- - 
Continuing Declines in Private Sector Deposits 
--------------------------------------------- - 
 
¶8. (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 and first week of June helped by rising 
interest rates and BCRA measures to ease liquidity constraints. 
According to banking sector contacts, retail investors continue 
withdrawing their money from banks and/or converting peso deposits 
into dollar deposits.  However, institutional investors are 
attracted by the high returns and are increasing deposits in pesos. 
 
 
¶9. (SBU) At the same time, the great uncertainty created by the 
agricultural sector strike and inflation concerns have encouraged 
institutional investors to lower exposure to other Argentine 
financial assets.  The Argentine stock market has fallen about 6.3% 
so far in June.  Likewise, Argentine bond prices have plunged. 
Argentina's high sovereign risk premium over equivalent maturity 
U.S. Treasuries is near all-time highs (as measured by JP Morgan's 
EMBI Plus Index) and also by Argentina's Credit Default Swaps 
spread, which are also near their all time high.  Reacting to events 
over this last weekend, GoA bond prices fell an additional 2-4% 
(depending on the instrument) from June 13 to close of business June 
¶17. 
 
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Energy Shortages Begin to Bite 
------------------------------ 
 
10.(SBU)  While electricity supplies remain normal (thanks in part 
due to improved water levels at hydroelectric generation plant 
sites) Embassy energy sector contacts report widespread shortages of 
refined petroleum products in the Greater Buenos Aires metropolitan 
area and the northern and western regions of Argentina.  These 
shortages are exacerbated by significantly increased demand (due to 
GoA-influenced below market prices), hydrocarbon sector labor 
disputes that have disrupted production and refining operations, and 
of particular impact in the northern and western provinces 
transportation blockages caused of late by independent truckers 
upset that the agricultural strike has cut their incomes.  Following 
a very cold week in Argentina, some rationing of natural gas to 
industrial clients in the Greater Buenos Aries area has been 
reported as well. 
 
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Comment 
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¶11. (SBU) With GoA economic statistics reported with a lag, it 
remains dfficult to quantify the absolute impact on the economy of 
disruptions to national commerce, industrial production related to 
the now 100-day long agricultural strike.  Revenue losses from 
foregone export tariffs appear largely temporal:  It seems safe to 
assume that significant export tax revenues - at whatever export 
tariffs levels are eventually negotiated between the GoA and farmers 
- will eventually flow into GoA coffers. 
 
¶12. (SBU) More troubling than temporal export tax revenue lags are 
declines in consumer confidence detailed here that will inevitably 
impact consumer spending, a principal driver of Argentina's rapid 
economic growth over the past six years.  Deterioration in the 
political landscape and in economic activity, exacerbated by 
inflation concerns, appear to be leading to a loss in confidence in 
the domestic currency and deposit withdrawals from banks.  Yet even 
the most downbeat among local analysts continue to predict 
Argentina's 2008 GDP growth in the 5+% range, down substantially 
from the 8.9% recorded in 2007 but still respectable.  How nervous 
consumers adapt to slower growth and how they respond to growing 
uncertainties about the GoA's ability/willingness to take needed 
steps to deal with political turmoil and to control inflation will 
determine much about Argentina's near-term economic prospects. 
 
WAYNE