VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1643/01 3372026
ZNR UUUUU ZZH
R 022026Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2604
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS BUENOS AIRES 001643 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, NOVEMBER 2008 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering November 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 announces plan to foster growth, employment, 
capital repatriation 
--GoA on the Verge of Expropriating Aerolineas Argentinas? 
--Congress set to extend the Emergency Economic Law and Financial 
Transaction Tax (FTT) 
--Congress approves 2009 Budget Bill 
--October Trade surplus at $1.1 billion, flat versus a year ago 
--GoA responds to summer season's first power outages with natural 
gas tariff increases 
--INDEC underreporting continues despite slowing inflation: October 
CPI up 0.4% m-o-m, the lowest increase of the year 
--Industrial production decelerates in October 
--FIEL foresees a dark and tough future for Argentina's economy 
 
---------------------- 
NEW GOA FISCAL PROGRAM 
---------------------- 
 
President Kirchner announces plan to foster growth, employment, and 
capital repatriation 
--------------------------------------------- --------- 
¶2. (SBU) In a November 25 presentation before the powerful UIA 
(Argentine Industrial Union), President Cristina Fernandez de 
Kirchner announced plans to submit a bill to Congress proposing tax 
incentives to foster job creation and encourage the repatriation of 
funds held by Argentine individuals and companies abroad (estimated 
at over US$130 billion).  The GoA sent this package of measures to 
Congress the same day.  Highlights: 
 
-- Companies creating new jobs will receive a 50% tax break on labor 
contributions for each new hire in the first year; 
-- Companies regularizing "informal" employees will be forgiven past 
tax owed on these employees; 
-- Companies or individuals declaring funds held abroad to the local 
tax authorities (AFIP) but choosing to keep them abroad would be 
charged an 8% tax rate, whereas repatriated funds will face a 6% tax 
if the funds are put in the local financial system without any 
specific investment allocation, or 3% tax if the funds are invested 
in bonds, or 1% tax if the funds are invested in real estate, 
infrastructure, or agricultural or industrial ventures. 
-- Splitting off a new Ministry of Production from the existing 
Ministry of Economy and Production.  The new Ministry will focus on 
the promotion of Argentine production and exports.  (The President 
subsequently appointed current Production Minister for Buenos Aires 
Province, Debora Giorgi, as the new Minister of Production.) 
 
¶3. (SBU) Later on November 25, during a dinner presentation at the 
Argentine Construction Chamber, the President announced the 
launching of a 71 billion peso (roughly US$ 21bn or about 6% of 
estimated 2008 GDP) public works program, designed to stimulate the 
economy and mitigate the effects of the global financial crisis on 
the local economy.  The President predicted that the plan would more 
than double the number of jobs in the construction sector, and said 
complete details will be unveiled December 15.  According to local 
press, the plan will be implemented over three to five years. 
 
¶4. (SBU) Industrial and construction leaders loudly applauded the 
announcements, and several of Post's contacts among economists and 
bankers who are normally critical of GoA economic policies praised 
the pro-business tone of the President's initiatives.  Nevertheless, 
most foreign and domestic analysts appear skeptical of their impact, 
predicting in their published critiques that the measures will have 
limited affect on economic activity and are not sufficient to 
counteract the precipitous fall in demand and production.  They also 
questioned how the GoA will finance the public works plan, given 
that it has no access to credit and is facing the prospect of lower 
than expected revenues in 2009.  Many analysts also emphasized that 
the measures do no address the main challenge facing the economy, 
namely the lack of credibility of GoA economic policies. 
 
-------------- 
CIVIL AVIATION 
-------------- 
 
GoA on Verge of Expropriating Aerolineas Argentinas? 
--------------------------------------------- ------- 
¶5. (SBU) According to press reports and industry representatives, 
the ruling party in Congress is preparing the legislative groundwork 
for the expropriation of Spanish-owned flagship airline Aerolineas 
Argentinas (AA) and sister carrier Austral.  A vote could come 
before the end of the year.  The press quotes the draft bill as 
stating "We cannot accept that public air transport in Argentina 
continues in the hands of a company that operates with notable 
incompetence," and also declaring the company "of public utility and 
subject to expropriation." 
 
¶6. (SBU) AA's owner, Spanish travel group Marsans, agreed in 
principle July 17 to sell both airlines to the GoA, after which the 
GoA took over operational control (with formal transfer pending 
resolution of the purchase price).  The press reports that the GoA 
has since spent about $220 million to pay Aerolineas and Austral's 
payroll and operating expenses.  As part of the July agreement, each 
side pledged to determine a value for the companies, or submit to 
third party review if they could not agree on the purchase price. 
The GoA's Valuation Tribunal estimated the value at negative US$ 832 
million.  Marsans contracted Credit Suisse to assess the airlines' 
value, which it established at US$ 330-540 million.  Congress 
subsequently disallowed any third-party review, and indicated that 
it alone would fix the price.  Leading members of Congress were 
quoted in the press stating the GoA should not pay anything for the 
carriers, or even that Marsans should pay the GoA for taking it 
over. 
 
¶7. (SBU) Money hemorrhaging continues: Aviation analysts and media 
reports estimate AA's daily losses at about US$ 1.5 million, or 
about US$ 700 million annually.  These same analysts say that AA's 
9,200 employees represent an employee per plane ratio of about 344, 
far higher than the industry average of about 60-100.  Media and 
Embassy industry contacts report that in the run-up to the 2009 
congressional elections, the GoA may hire even more.  AA has been 
plagued by workers' strikes, flight delays, and cancellations for 
months, and the GoA says it has a debt load of nearly US$ 900 
million.  AA was on the verge of bankruptcy in 2001 when Marsans 
bought it from Spanish holding company SEPI.  AA and Austral operate 
about 80% of domestic flights in Argentina. 
 
------ 
FISCAL 
------ 
 
Congress set to extend Emergency Economic Law and Financial 
Transaction Tax (FTT) 
--------------------------------------------- --------- 
¶8. (SBU) The Argentine Chamber of Deputies passed the one-year 
extension (until Dec. 2009) of the controversial Economic Emergency 
Law November 26 (134 positive votes against 95 opposed) over strong 
criticism from the opposition.  This law delegates legislative 
powers to the executive branch and allows the President to enact a 
wide range of economic policies by decree (e.g., debt and utility 
tariff renegotiation, extend social assistance plans, implement 
measures to foster employment and growth).  Background: the Economic 
Emergency Law was first approved in January 2002 during President 
Duhalde's administration and has since been extended five straight 
years, despite opposition arguments that after five consecutive 
years of over 8% real GDP growth the country is no longer in a state 
of emergency.  This year, however, the GoA cited the deteriorating 
international economic environment in its justification of the 
extension. 
 
¶9. (SBU) Along with the Emergency Economic Law, the lower house also 
approved a one-year extension (also until Dec. 2009) of the FTT 
(financial transactions tax) on November 26, and forwarded it to the 
Senate for approval.  The FTT 2009 annual collection is budgeted at 
ARP 22 billion, of which 70% goes for the federal Treasury and the 
remaining 30% to the provinces.  Opposition Deputies called for the 
equal sharing of the tax with provinces.  Background: the FTT was 
first introduced in 2001 by then-Minister of Economy Domingo Cavallo 
and since then been extended every year, despite criticism that it 
discourages financial intermediation in an already undersized 
domestic financial market.  However, the GoA highly values this tax 
for its ease of monitoring and collection, and the extension is a 
priority for the GoA given expectations that overall tax revenues 
will decline significantly in 2009 due to the decelerating economy 
and lower sliding commodity prices.  The Senate Budget Committee 
started debating both bills December 2, with Senate approval 
expected around the middle of the month. 
 
Congress approves 2009 Budget Bill 
---------------------------------- 
¶10. (SBU) After an eight-hour debate, the Senate overwhelmingly 
approved the 2009 budget bill on November 5 (48 positive votes vs. 
14 negative ones) without amendments and over the strong criticism 
from the opposition (which argued that the bill does not reflect the 
current economic reality).  The Chamber of Deputies had already 
approved the bill October 16, also without making changes to the 
version the Executive sent to Congress on September 15.  The law was 
published in the Official Gazette on November 21 and entered into 
force by the end of the month. 
 
¶11. (SBU) During the Senate debate, opposition criticism focused on 
three issues: 1) the outdated macroeconomic assumptions of the 
budget, which for the first time in five years may prove overly 
optimistic, particularly with regards to GDP growth, inflation, and 
prices of Argentina's main commodity exports; 2) the granting of 
so-called "superpowers" to the GoA, which they argued renders the 
budget meaningless, given that it allows the Chief of Cabinet to 
reallocate expenditures without Congressional approval; and 3) the 
failure to include the revenues the GoA will receive as a result of 
the nationalization of the private pension fund system (which the 
Senate approved November 20 and will enter into force in early to 
mid-December).  Highlights of the 2009 budget bill: 
 
-- GDP growth of 4%, which may prove accurate or even optimistic, 
given most private analysts' estimates of rapidly decelerating 
economic activity in Argentina. (Note: in past years the GoA has 
estimated growth of 4%, whereas actual growth has exceeded 8%.  This 
serial underestimation has lead to large inflows of unbudgeted tax 
revenues, which the GoA has been able to redirect with minimal 
congressional oversight using "superpowers.") 
-- CPI of 8%, compared to private estimates of about 20%; 
-- An average exchange rate of 3.19 ARP/USD, already outdated given 
the current exchange rate of 3.35 ARP/USD.  (Many private analysts 
estimate the peso will end 2009 in the range of 3.80-4.00 USD.) 
-- Primary fiscal surplus of 3.27% of GDP, compared to the primary 
surplus of 3.15% of GDP included in the 2008 budget.  The budgeted 
primary fiscal surplus may be difficult to obtain, given the 
expected deceleration of revenues and falling commodity prices of 
Argentina's key exports. 
-- A trade surplus of $12 bn, the result of $78 bn exports and $66 
bn imports.  (The 2007 trade surplus was $11.2 bn and is estimated 
at $12 bn for 2008, according to the latest BCRA consensus survey.) 
However, private estimates of the 2009 trade surplus are sharply 
lower, ranging from zero to $6-8 bn, reflecting rapid increases in 
imports and falling commodity prices. 
-- An ARP 3 billion cut in subsidies (over a 10% drop compared to 
2008 subsidies of about ARP 35 billion). 
-- An estimated 25% increase in pension payments, representing 
increased expenditures of about 10bn pesos. 
 
¶12. (SBU) The bill includes two controversial articles, which 
increase the GoA's ability to borrow from state-owned Banco de la 
Nacion (BNA) and from the Argentine Central Bank (BCRA).  The change 
to the BCRA's Charter allows short-term lending to the GoA for 
foreign currency payments, whereas before these funds could only be 
used to pay debts to international financial institutions.  In 
theory, the GoA can now use BCRA funds to pay sovereign debt 
obligations coming due in 2009/2010.   The amendments to the BNA's 
Charter 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 was previously 
prohibited under the BNA's Charter. 
 
----- 
TRADE 
----- 
 
October Trade surplus at $1.1 billion, flat versus a year ago 
--------------------------------------------- --------- 
¶13. (SBU) Official GoA statistics released November 25 show that 
Argentina's goods trade surplus in October 2008 was virtually 
identical to the surplus in October 2007, despite substantial 
month-on-month growth in the surplus throughout the first nine 
months of 2008.  The October 2008 surplus, according to statistics 
agency INDEC, was $1.133 billion, just 0.8% more than the $1.124 
billion surplus in October 2007.  This contrasts sharply with total 
surplus growth in 2008, which - including October - had risen 38% 
y-o-y.  The September 2008 trade surplus of $1.67 billion was 95% 
higher than the surplus one year before.  Imports and exports in 
October were both up y-o-y (16.6% and 13.4%, respectively), but by 
less than rates earlier in the year. 
 
¶14. (SBU) Planning Minister Julio De Vido announced the same day new 
GoA trade estimates for 2009 predicting that exports will decline 
16% in value terms compared to 2008 (to an estimated $56 billion) 
and the overall trade surplus will fall to $7 billion.  He 
attributed the declines to lower commodity prices.  The total trade 
surplus through October 2008 was $11.4 billion, after a surplus of 
$11.1 billion for all of 2007.  Private analysts' 2009 trade surplus 
estimates range from flat to a surplus of $8 billion, with this 
latter figure seeming optimistic compared to the GoA's own estimate 
of $7 billion.  The latest BCRA consensus survey estimates a $12 
billion and $6 billion trade surplus for 2008 and 2009, 
respectively. 
 
------ 
ENERGY 
------ 
 
GoA responds to summer season's first power outages with natural gas 
tariff increases 
--------------------------------------------- --------- 
¶15. (SBU) Once again, the first heat wave of summer has exposed 
Argentina's fragile energy situation.  People turning on their air 
conditioners to deal with the high temperatures increased 
electricity demand and strained the power grid, triggering blackouts 
in several areas of Greater Buenos Aires.  Power cuts last week 
affected approximately 45,000 people and even led to street protests 
in Buenos Aires against the GoA.  Planning Minister Julio De Vido 
publicly apologized for the electricity cuts and said the GoA would 
initiate investigations through the energy regulatory agency to 
impose sanctions on the energy firms (presumably distribution 
companies) that failed to fulfill their distribution contracts. 
 
¶16. (SBU) According to local press reports, De Vido also made a 
number of announcements on November 28, including an ARP 1.4 billion 
cut in the subsidies on natural gas (the main input for the 
generation of Argentine electricity) and a retroactive increase in 
natural gas rates charged to the biggest industrial, commercial, and 
residential users.  (Energy subsidies totaled approximately US$ 12 
billion in the Jan-Sep 2008 period.)  De Vido said that the increase 
would be 10% for industrial and commercial users and would only 
affect 1.5% of companies.  In the case of residential users, the 
increase would be between US$ 3 and US$ 31 per month, and would only 
affect the top 36% of consumers (households consuming over 1000 
cubic meters per year).  This announcement followed a 20% increase 
in natural gas transportation and distribution rates in September 
2008, and is the fourth increase in natural gas tariffs in the last 
four months.  De Vido also stated that the increases would be passed 
through to natural gas well-head prices to promote investment in 
exploration and production, which will also result in higher royalty 
collection for producing provinces.  (The press reported that De 
Vido estimated potential new investment in the range of US$ 250 
million.) 
 
--------- 
INFLATION 
--------- 
 
INDEC underreporting continues despite slowing inflation: October 
CPI up 0.4% m-o-m, the lowest increase of the year 
--------------------------------------------- --------- 
¶17. (SBU) National statistics agency INDEC announced November 11 
that October CPI was 0.4% m-o-m, the lowest of the year, but still 
below market expectations of 0.6% m-o-m as measured in the BCRA 
consensus survey.  The CPI decelerated slightly to 8.4% y-o-y in 
October from 8.7% y-o-y in September.  The 0.4% increase is due 
mainly to price increases for home appliances, clothing, 
transportation, and leisure activities.  According to INDEC, the CPI 
accumulated an increase of 6.5% for the first ten months of the 
year, compared to private estimates of 15-20%.  Private estimates 
for 12-month inflation (through October) are in the 15-20% y-o-y 
range, compared to the official INDEC estimate of 9.3% y-o-y. 
Anecdotal evidence suggests inflation is easing due to the slowdown 
in economic activity; and thus, the difference between "published" 
INDEC data and "true" inflation is likely shrinking.  However, even 
with inflationary pressures easing, "true" monthly inflation still 
remains above the figure reported by INDEC.  For the moment, there 
are no signs that the GoA will take advantage of this new scenario 
to make a smooth convergence to the true inflation of official CPI. 
INDEC also reported that Wholesale prices (WPI) increased 0.5% m-o-m 
in October, accumulating an increase of 9.4% in the first ten months 
of 2008. 
 
------------- 
MACRO OUTLOOK 
------------- 
 
Industrial production decelerates in October 
-------------------------------------------- 
¶18. (SBU)INDEC reported November 21 that Industrial production (IP) 
in October decreased 1.9% m-o-m, seasonally adjusted, and increased 
2.6% y-o-y.  The announcement disappointed the market, which had 
anticipated a 4.6% y-o-y increase.  In the first ten months of the 
year, the IP increased 5.9% y-o-y compared to 7% during the same 
period last year.  According to private analysts, the soft and 
disappointing October reading was the result of domestic and 
international factors, including tighter credit conditions, a 
stronger currency compared to trading partners, sustained capital 
flight and uncertainty, slower global growth, and sliding commodity 
prices.  According to the last release of the BCRA consensus, IP is 
estimated to increase 7.1% in 2008 and fall by almost half to 4.2% 
in 2009.  Within the index, four out of the twelve sub-sectors 
measured decreases, with the hardest hit being plastics (down 11% 
y-o-y) and textiles (down 10% y-o-y), while the sub-sectors with the 
largest increases were non-metallic minerals (cement, glass, and 
other construction materials, up 10% y-o-y), tobacco (up 9% y-o-y) 
and food and beverages (up 7% y-o-y). 
 
FIEL foresees a dark and tough future for Argentina's economy 
--------------------------------------------- --------- 
¶19. (SBU) This item outlines the main points from the FIEL Chief 
Economist's monthly presentation (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). 
 
-- Recession: FIEL's own IP index dropped 2.5% y-o-y in October, 
compared to the official report of a 1.9% decrease (see above item). 
 This, according to FIEL's analysis of the numbers, is an indication 
that the risk of recession in 2009 is growing. In the first ten 
months of 2008, FIEL's IP index increased 4.3%, with only three 
sectors (autos, food and beverage, and metals) contributing almost 
90% of the increase.  FIEL expects two of these sectors -- autos and 
metals -- to decline rapidly due to the fall in external and 
domestic demand. 
 
-- Unemployment: contrary to the GoA's claim that the unemployment 
rate fell to 7.8% in the third quarter, from 8.1% in QIII 07 and 8% 
in QII 08, FIEL believes that there has not been any employment 
creation since the beginning of the year.  FIEL estimates that 
unemployment will once again exceed 10% in 2009. 
 
-- Inflation Decelerating: FIEL estimates that the CPI decelerated 
to an annual level of 19% as of October, (compared to levels above 
25% in March), and it continued decelerating as of the first two 
weeks of November, which showed an annual rate of 18%. 
 
-- Trade Balance: FIEL estimates that the trade surplus will fall to 
$8 billion in 2009, compared to its estimate of $13 billion for 
2008, the result of falling commodity prices and sharp increase in 
imports.  FIEL predicts the GoA will pursue all means possible, 
especially using non-tariff barriers, to limit imports, particularly 
from Brazil and China.  The three key items to monitor, in order to 
assess the direction of Argentina's economy and exports, are: 1) 
Brazil's GDP (since Brazil's growth impacts Argentine exports, 
especially of autos); 2) the Brazilian Real, which has sharply 
depreciated making Argentine exports to Brazil less competitive; and 
3) the price of soy (Argentina's single largest export). 
 
-- Devaluation: the GoA does not appear willing to let the peso 
depreciate rapidly (as neighboring countries have done) from its 
current level of around 3.35 ARP/USD for fears of: 1) pass through 
to prices; and 2) a bank run on deposits.  However, FIEL believes 
the BCRA may decide to let the peso slide, since it would help the 
GoA finance primary expenditures (due to increases in peso revenues 
from export taxes).  Also, a large, one-time devaluation would help 
stop (or reduce) capital flight (by making the dollar more 
expensive).  FIEL's economists argued that not letting the peso 
depreciate, or managing a gradual devaluation, will result in a 
sharper recession.  Either alternative, they believe, will be costly 
in political terms. 
 
WAYNE