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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001389 
 
SENSITIVE 
SIPDIS 
 
Ref: A) BUENOS AIRES 1374, B) BUENOS AIRES 1312, C) BUENOS AIRES 
1277 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL PGOV AR
SUBJECT: Argentine Congress' Budget Review Clouded by Global 
Uncertainty 
 
------- 
Summary 
------- 
 
¶1. (SBU) The Argentine legislature is set to amend the 2008 budget 
and pass the 2009 budget in the face of a deteriorating external 
environment and increasing anxiety about its impact on Argentina's 
economy and finances.  The 2008 bill increases expenditures in 2008 
by about US$11.5 billion due to higher than expected revenues, and 
also amends the Central Bank Charter to allow use of reserves to pay 
the Paris Club.  Although GoA presentation of both bills was more 
open and transparent than in previous years, the 2009 budget 
continues the GoA practice of lowballing economic assumptions for 
GDP growth (4%) and inflation (8%), both below most private 
estimates.  However, the gap between the budget assumptions and 
reality may well be much smaller this year, as we expect analysts to 
continue marking down expectations for 2009 growth due to fallout 
from the financial crisis.  The 2009 budget also includes 
assumptions for a primary fiscal surplus of 3.27% of GDP and a trade 
surplus of US$12 billion that appear optimistic in light of 
decelerating growth, the dramatic fall in commodity prices, and 
slowing world demand.  The opposition has criticized GoA budget 
decisions to retain emergency powers to realign spending at will and 
expand its ability to borrow from government-owned Banco Nacion and 
the Central Bank.  These moves could prove useful to the GoA in 
possibly dark economic days ahead.  It appears likely, however, that 
the GoA will face tough 2009 mid-term elections with tighter 
finances and less leeway to use spending to win political support. 
End Summary. 
 
----------------------------------------- 
Global Uncertainty Looms Over Budget Vote 
----------------------------------------- 
 
¶2. (SBU) In the context of the global financial crisis, high 
volatility and increasing uncertainty in Argentine markets, and 
predictions of a sharp world economic slowdown, the Argentine 
legislature is set to act next week on two key budget laws that will 
direct the GoA's fiscal policies during the turbulent period to 
come: amendment of the 2008 budget and passage of the 2009 budget. 
Ruling party Senator Luis Alberto Viana, Chairman of the Senate's 
important economic and investment committee, reassured Ambassador 
October 2 that the legislature will accept the amended 2008 budget 
and rapidly pass the 2009 bill without major changes.  However, it 
is clear that the difficult external environment is causing 
increasing anxiety in both Congress and the GoA (see Ref A) with 
regards to the fallout on Argentine economic growth and GoA 
finances. 
 
--------------------------------------------- ---------- 
2008 Budget Amendment: funding for subsidies/Paris Club 
--------------------------------------------- ---------- 
 
¶3. (SBU) President Cristina Fernandez de Kirchner (CFK) signed on 
September 15 her first ever "Urgent Necessity Decree" (DNU), 
amending the 2008 budget to increase expenditures by 36 billion 
pesos (or roughly US$11.5 billion).  The estimate for expenditures 
in the original 2008 budget was 161 billion pesos (about US$51 
billion).  The GoA will finance the expenditures from higher than 
expected revenues, the result of the GoA's underestimation of both 
growth and inflation in the original 2008 budget bill.  Also a 
common budget practice during Nestor Kirchner's Presidency, the GoA 
underestimated 2008 growth at 4%, compared to private estimates of 
7%, and CPI inflation at 7.3%, when most analysts expect inflation 
to end the year at about 20%. 
 
¶4. (SBU) The GoA has announced it will direct these additional 
revenues to cover higher than expected expenditures in 2008 for 
transport, energy and food subsidies.  CFK likely used the DNU 
because it is faster than drafting legislation, is the equivalent of 
law, and goes into effect after approval in a special bicameral 
committee.  (In theory, both the Chamber of Deputies and Senate must 
then submit the DNU to floor vote, but in practice this usually 
happens months later with no debate.) 
 
¶5. (SBU) Senator Viana told Ambassador that Congress would treat 
this DNU as a full law and approve it through floor votes.  However, 
he conceded that Argentina needs to get away from using DNUs, which 
made more sense following the 2001/02 crisis when the country was in 
disarray and the GoA needed to act quickly.  CFK has boasted in the 
past that she has not issued one DNU since entering office, whereas 
 
BUENOS AIR 00001389  002 OF 004 
 
 
the opposition severely criticized her husband Nestor Kirchner for 
relying heavily on them during his presidency. 
 
¶6. (SBU) The 2008 budget amendment includes an understated article 
amending the Central Bank (BCRA) Charter to allow use of official 
reserves to pay the Paris Club (reported reftel).  The article 
establishes an exemption to the BCRA prohibition on long-term 
lending to the GoA.  The exemption will allow the BCRA to issue a 
loan to the GoA for the purpose of paying public debts as specified 
under the decree issued September 3, 2008, declaring the GoA's 
intention to pay 100% of debts owed to Paris Club creditors.  By 
including it as a minor article in an eighteen-article DNU, the GoA 
kept press attention to a minimum. 
 
--------------------------------------------- --- 
Greater Transparency in unveiling of 2009 Budget 
--------------------------------------------- --- 
 
¶7. (SBU) Also on September 15, President CFK signed the 2009 Budget 
Bill and sent it to Congress for approval.  As evidence of the GoA's 
willingness to show greater transparency and openness under new 
Cabinet Chief Sergio Massa, Economy Minister Carlos Fernandez, 
Finance Secretary Hernan Lorenzino, and Massa himself all 
participated in lengthy presentations on aspects of the budget and 
submitted to detailed question and answer sessions with both 
Congress and the press.  In contrast, former Economy Minister Miguel 
Peirano refused to entertain any questions after presenting the 2008 
budget bill in October 2007. 
 
--------------------------------------------- ----- 
2009 Budget Highlights: lowball assumptions may turn out to be 
overly optimistic 
--------------------------------------------- ----- 
 
¶8. (SBU) The 2009 bill continues the previous government's trademark 
practice of underestimating key economic assumptions in order to 
benefit later from having higher than expected revenues.  However, 
given the deteriorating global economic climate and also most 
private analysts' estimates of rapidly decelerating economic 
activity in Argentina, many of the following estimates may prove 
accurate or even optimistic. 
 
-- The bill estimates GDP growth in 2009 of 4%, conservative 
compared to BCRA consensus survey estimates of 5.4%.  However, this 
prediction is in line with many of the more conservative private 
estimates, and exceeds Citi's latest pessimistic predictions of 2-3% 
GDP growth. 
 
-- 2009 CPI is estimated at 8%, well below private estimates of 20% 
or higher for 2009.  Independent economic analysts have interpreted 
the GoA's budgeted CPI as an indication that the GoA will continue 
to "intervene" in national statistics agency INDEC's inflation 
calculations well into 2009. 
 
-- An average exchange rate of 3.19 ARP/USD.  (The private sector 
expects greater depreciation of the currency, with the BCRA 
consensus estimate for 2009 at 3.35 ARP/USD, and some private 
analysts recently predicting 3.5 ARP/USD.) 
 
-- Primary fiscal surplus of 3.27% of GDP, compared to the primary 
surplus of 3.15% of GDP included in the 2008 budget.  (Due to higher 
revenue growth than expected and slower growth rate of expenditures, 
some economists have predicted the GoA could end 2008 with a 
3.5%/GDP primary surplus.  However, the 2009 estimate looks 
optimistic giving rapidly decelerating economic activity and falling 
commodity prices.) 
 
-- A trade surplus of US$11.9 billion, as a result of exports for 
US$78 billion and imports for US$66 billion.  The trade surplus in 
2007 was US$11.2 billion and it is estimated at US$10.6 billion for 
¶2008.  However, private estimates of the trade surplus in 2009 are 
sharply lower, at US$8.2 billion, reflecting rapid increases in 
imports and falling commodity prices. 
 
-- A three billion peso reduction in GoA subsidy payments, primarily 
to the energy and transportation sectors, equivalent to an almost a 
10% drop from 2008 subsidies estimated at 35 billion pesos (about 
US$11 billion). 
 
-- An estimated 25% increase in public pension payments, 
representing an increase in expenditures of about 10 billion pesos. 
 
BUENOS AIR 00001389  003 OF 004 
 
 
(This follows from the Pensioners Mobility Law, ordered by the 
Supreme Court and pending approval in Congress.) 
 
-- A new appropriation of 600 million pesos per year (about 50 
million pesos per month) to cover operational expenditures of the 
recently nationalized airlines Aerolineas and Austral (Ref B). 
Private estimates of the funding necessary to keep the airlines 
afloat are three times higher. 
 
-------------------------------- 
GoA retains superpower authority 
-------------------------------- 
 
¶9. (SBU) Contrary to media speculation that the GoA might use the 
2009 Budget bill to end its reliance on the so-called "Superpowers" 
Act, the draft sent to Congress retains it.  These "superpowers" 
gives the Chief of Cabinet broad discretion to redistribute spending 
without prior Congressional approval.  In previous years, the 
underestimation of growth and inflation has resulted in significant 
levels of excess revenues.  Opposition Deputy Claudio Lozano 
estimates that from 2003 to 2008 the GoA managed about 85 billion 
pesos (roughly US$27 billion) without Congressional oversight. 
Lozano predicts that the GoA will have an additional 15 billion 
pesos in excess revenue to spend in 2009, though this will not be 
the case if growth decelerates more rapidly than the GoA expects, as 
many private economists now anticipate. 
 
--------------------------------------------- ---- 
GoA expands access to Banco Nacion and BCRA funds 
--------------------------------------------- ---- 
 
¶10. (SBU) The 2009 Budget bill includes two controversial articles 
increasing the GoA's ability to borrow from the largest Argentine 
bank, state-owned Banco de la Nacion (BNA) and also from the BCRA. 
The bill changes the BCRA's Charter to allow it to provide 
short-term lending for the GoA to use for any foreign currency 
payments, whereas before these funds could only be used to debts to 
international financial institutions.  This means that the GoA could 
use BCRA funds to pay sovereign debt obligations coming due in 2009, 
which are estimated much higher than in previous years.  The bill 
amends BNA's Charter to allow the GoA to borrow funds to finance 
capital expenditures and debt repayments up to a limit of 30% of the 
GoA deposits held at the BNA.  This type of financing is currently 
prohibited under the BNA's Charter.  The opposition has criticized 
both initiatives, arguing that they undermine the independence and 
potentially the strength of the two financial institutions' balance 
sheets, and is vowing to fight to excise the provisions from the 
bill.  (Comment:  While these are questionable moves, the greater 
access to BCRA and BNA financing may prove highly useful to the GoA 
in the event that the global economic downturn and consequent 
economic deceleration in Argentina prove sharper than expected.  End 
Comment.) 
 
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Comment 
------- 
 
¶11. (SBU) Since CFK submitted both budget bills to Congress, 
Argentina's stock market has plunged 11%, Argentine country risk has 
jumped over 400 basis points to a post-crisis record of 1232 bps, 
10-year sovereign bond yields have increased on average to 23% (from 
17%), the Peso has depreciated 4% from 3.07 ARP/USD to 3.23, prices 
for Argentina's main agricultural and hydrocarbon commodity exports 
have fallen 25-30%, and the banking system is seeing early signs of 
dollarization of deposits and capital flight.  There were already 
concerns about the impact of the financial crisis on Argentina, and 
the news of the last three weeks has exacerbated these concerns. 
CFK and other GoA officials have touted Argentina's twin surpluses 
(trade and fiscal) and high reserve levels as an umbrella protecting 
Argentina against external shocks.  However, private analysts are 
rapidly ratcheting down their estimates for Argentine growth, 
exports, and fiscal balance. 
 
¶12. (SBU) For the first time under the Kirchners, the assumptions in 
the budget that Congress passes over the next few weeks will likely 
turn out to be overly optimistic.  With important interim 
congressional elections set for 2009, this could prove an 
uncomfortable check for a government hoping to use excess revenues 
for purposes of political patronage, as it has in recent elections. 
 
 
 
BUENOS AIR 00001389  004 OF 004 
 
 
Wayne