VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1667/01 3401836
ZNR UUUUU ZZH
R 051836Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2643
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001667 
 
SIPDIS 
SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: ECON EINV EIND ETRD EAGR PGOV AR
SUBJECT: Argentina Announces Economic Stimulus Package 
 
REF: (A) Buenos Aires 1643 
      (B) Buenos Aires 1443 
 
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Summary 
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¶1. (SBU) One week after announcing a 71 billion public works plan 
(Ref A), President Cristina Fernandez de Kirchner (CFK) unveiled an 
additional ARP 13.2 billion (US$3.9 billion) "economic incentives" 
package, designed to "revive and stimulate production, investment, 
jobs, and consumption, and alleviate the impact on Argentina's 
productive sectors of the international economic crisis."  Before a 
cast of national ministers, governors, business, finance, and labor 
leaders, she detailed a package of soft credits and incentives for 
consumers, producers and exporters.  Particular targets are small- 
and medium-sized businesses, auto producers, farmers, and producers 
of household goods, with the intention of "jumpstarting industry to 
avoid a cooling down of the economy and more layoffs."  Consumer and 
industrial credits are to be financed by private banks that will bid 
for and on-lend subsidized GoA deposits sourced from recently 
nationalized private pension funds and from the GoA social security 
system.  Businesses accessing these credits must agree to forego 
layoffs of permanent employees.  The President also announced five 
percentage point export tax reductions for wheat and corn.  While 
the GoA is following the Keynesian lead of many nations in unveiling 
stimulus packages, local analysts caution that, by using 
nationalized pension fund resources to offer subsidized consumer and 
industrial credits, the GoA is confirming earlier suspicions that 
its focus is less on establishing a foundation for long-term growth 
and more on pump priming with an eye to October 2009 mid-term 
elections.  End Summary. 
 
--------------- 
Package Outline 
--------------- 
 
¶2. (U) CFK, in the presence of an all-star cast of ministers, 
governors, and business and labor leaders, unveiled her second 
"economic incentives" package in as many weeks.  This package 
follows CFK's November 25 announcement of an ambitious 71 billion 
peso (US$ 21 billion) public works program and tax incentives to 
foster job creation and encourage the repatriation of funds held by 
Argentine individuals and companies abroad (ref A).  CFK emphasized 
that the goal of this further initiative is to fortify the two 
pillars of the GoA's economic model, consumption and exports.  She 
said the program will "stimulate production, investment, jobs, and 
consumption," alleviate the effects of the international economic 
crisis, and "rebuild capital markets to provide greater access to 
credit for productive sectors." 
 
¶3. (U) Full details of this stimulus package are yet to be released, 
but from CFK's speech it appears the GoA's idea is to deposit a 
portion of national pension fund assets in the financial system at 
an 11% rate (significantly below current market deposit rates in the 
18% range), allocating them among private banks via an auction 
mechanism that favors bank that commit to charge the lowest interest 
rate to borrowers.  The president announced that the US$ 3.9 billion 
package would be allocated as follows: 
 
-- Consumer loans: US$1 billion in consumers credits for the 
purchase of consumer white goods, such as refrigerators, air 
conditioners, and washing machines.  Individual credits will be for 
up to $1,500 with a target of 700,000 individual loans. 
 
-- Car purchases: To address a precipitous drop in new cars sales 
over the past two months, a plan to stimulate the sale of 100,000 
new low-end cars to first time purchasers via US$ 912 million in 
financing support. 
 
-- Small and medium-sized enterprises: $882 million for pre-export 
financing and working capital for smaller companies. 
 
-- Industry and manufacturing financing: $368 million for pre-export 
financing and working capital. 
 
-- Agricultural sector support: $500 million for pre-export 
financing and working capital. 
 
----------------------------- 
Strings attached - no layoffs 
----------------------------- 
 
¶4. (U) In the case of credits for industry and SMEs, the plan comes 
with a condition: companies tapping these credits must forego 
layoffs of permanent employees.  CFK said: "To access any of these 
credit lines...companies must agree to maintain their workers.  Any 
company that fires any employee will be not able to access this type 
of financing.  What is important is to preserve jobs." 
 
--------------------------- 
Agriculture Sector Stimulus 
--------------------------- 
 
¶5. (U) The President also announced cuts in the export tax rate on 
wheat and corn by five percentage points to 20% and 23% respectively 
to encourage production in the face of lower anticipated 2008/9 
season yields.  Analysts report that the anticipated cost of export 
tax revenues forgone will be in the ARP 500 million (US$150 million) 
range. She also announced new "Wheat Plus" and "Corn Plus" plans: 
for every million tons produced above an annual production average, 
the GOA will further lower export taxes by an additional one 
percentage point. 
 
------------------------------------------- 
Criticizing International Economic Analysts 
------------------------------------------- 
 
¶6. (SBU) CFK began her speech with harsh criticism of "consultants 
and international organizations" who disparage the GoA economic 
model.  After listing the GoA's economic accomplishments in recent 
years (i.e., high growth, falling unemployment and poverty), she 
said that "we were dedicating ourselves to growth when this crisis 
hit, and this obliges us to announce this plan to face this crisis, 
which was unthinkable for the big rating agencies and economic 
analysts." 
 
------------------------------------ 
Initial reactions mixed and measured 
------------------------------------ 
 
¶7. (SBU) In subsequent interviews with local media, the presidents 
of the powerful Argentine Industrial Union (UIA) and Argentine 
Banking Association (ADEBA) both expressed support for the 
initiative.  UIA President Juan Carlos Lascurain said the measures 
"are important for the productive sectors; for our businesses, we 
have to do our part to maintain employment."  ADEBA President Jorge 
Brito said the measures "will reactivate the economy in two ways: 
via credit and consumption on one hand, and production on the 
other."  Meanwhile, Agriculture Federation President Eduardo Buzzi 
called the measures "insignificant," and Rural Society President 
Alfredo de Angeli called a five percentage point export tax 
reduction "a joke."  Largest circulation daily Clarin reported 
heated debate in the president's circle over the political cost of 
lowering 
wheat and corn tariffs following the GoA's bruising early 2008 
battle with the agricultural sector over a variable export tax 
proposal.  Media reports that the President of Argentine 
Confederation of Medium-sized Enterprises (CAME), Osvaldo Cornide, 
said that the plan "will permit Argentina to weather the storm," but 
also said that it will depend on how it is applied." 
 
¶8. (U) Fiat Argentina President Cristiano Rattazzi also expressed 
support.  Regarding the sensitive issue of auto sector employment, 
he said that "for now" the local auto industry, despite some recent 
limited layoffs and reduced hours, will be able to maintain the 
general level of employment -- as long as there is not a major 
decline in sales.  On the same day, the auto manufacturer's 
association ADEFA announced that November 2008 was the worst month 
since 2003 for the auto sector, with a fall in production (-28.1%), 
exports (-24.6%) and sales (26.1%) in comparison with November 2007. 
 In one of the first comments from foreign analysts, Goldman Sachs 
took a more negative view, predicting the measures will not be 
sufficient to avoid a recession in 2009, and pointing out that they 
do not deal with the main challenges facing the country: 
"uncertainties and concerns related to the exchange rate outlook, 
the inflation outlook, the outlook for public finances and the 
overall business environment, including the government's commitment 
to respecting property rights and maintaining a stable set of rules 
of the game." 
 
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Comment 
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¶9. (SBU) This announcement of the second phase of the GoA's stimulus 
package comes as the Argentine economy is showing increasing 
evidence of a sharp slowdown.  The $4 billion economic stimulus 
package totals a little over 1% of GDP and effectively represents a 
re-deployment of nationalized private pension fund resources that 
had previously supported similar consumer and industrial financing. 
While it is far too early to know what economic impact, if any, this 
initiative will have, the GoA is following the Keynesian lead of 
many nations around the world in unveiling stimulus packages to 
boost consumer and industrial confidence.  Local analysts caution 
that, by using nationalized pension funds to offer subsidized 
consumer and industrial credits, the GoA is confirming earlier 
suspicions that its focus is less on establishing a foundation for 
long-term growth and more on pump-priming with an eye to October 
2009 mid-term elections  -- and doing so at the expense of future 
pensioners. 
 
KELLY