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UNCLAS SECTION 01 OF 06 BUENOS AIRES 001725 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, DECEMBER 
1-19, 2008 
 
REF: BUENOS AIRES 1643 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period December 1-19, 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 
---------- 
 
-- GoA unveils US$3.9 billion stimulus package, expands 
public works plan to US$31 billion 
-- GoA reveals further details of auto sector stimulus program 
-- Senate approves bill to expropriate Flag Carrier 
Aerolineas Argentinas 
-- Argentine Congress approves Tax Moratorium and Capital 
Repatriation bill 
-- U.S. Court ruling on private pension funds' US$200 million 
assets in U.S. 
-- First private debt issuance since AFJP nationalization 
falters 
-- Congress approves Emergency Economic Law and Financial 
Transaction Tax 
-- November tax revenue disappoints 
-- Economist Miguel Kiguel: Argentine Economy "not as bad as 
it looks" 
 
------------------------- 
NEW GOA STIMULUS PROGRAMS 
------------------------- 
 
GoA unveils US$3.9 billion stimulus package, expands public 
works plan to US$31 billion 
--------------------------------------------- --------- 
¶2. (SBU) President Cristina Fernandez de Kirchner announced 
December 4 an ARP 13.2 billion (approx. US$3.9 billion) 
stimulus package to foster growth and employment.  This 
announcement followed her November 25 announcement of a tax 
incentive package and ARP 71 billion (approx. US$21 billion) 
public works program.  Under the announced program, the GoA 
plans to finance consumption loans (ARP 3.5 billion), trade 
financing for the industrial sector (ARP 1.3 billion) and the 
agricultural sector (ARP 1.7 billion), loans for first-time 
car buyers (ARP 3.1 billion), and a support package for 
small-and medium-sized enterprises (ARP 3 billion). 
President Kirchner stated that the package will be financed 
with the cash previously held in time deposits by the 
nationalized private pension funds (AFJPs), which were 
transferred on December 9 to the Social Security 
Administration (ANSES) December 9.  The President also 
unexpectedly announced a five percentage point reduction in 
the tax rate on wheat and corn exports, bringing them to 23% 
and 20%, respectively.  The GoA will grant a further export 
tax rate cut of 1 percentage point if wheat and corn 
production rise above average annual production of 13 million 
tons for wheat and 15 million tones for corn.  (Note: local 
press has reported rumors that the GoA is considering a 
separate 5 percentage point tax cut on both soy and sunflower 
exports, currently at 35% and 32%, respectively.) 
 
¶3. (SBU) On December 15, the GoA announced the expansion of 
its previously announced public works program from ARP 71 
billion to ARP 110 (roughly US$31 billion).  The main 
objective of the program is to preserve jobs and will be 
centered on infrastructure, energy, and housing projects. 
The GoA will implement this program over multiple years, 
beginning in 2009 US$16 billion outlay (about 4.4% of 
estimated 2009 GDP and almost double the amount expected to 
be spent on public works projects in 2008).  The GoA has also 
stated that about US$21 billion of the program is already 
financed, although it has not given details as to the source 
of this funding. 
 
¶4. (SBU) Bankers and business leaders have reacted 
cautiously, calling the various stimulus packages a step in 
the right direction, but lacking details on implementation. 
Banco Macro President Jorge Brito, known to have a close 
relationship with the government, stated: "The president aims 
to revive the economy in two ways, through credit to 
consumers and to producers.  The total sum is significant. 
 
BUENOS AIR 00001725  002 OF 006 
 
 
We'll want to read the fine print, but I see this as very 
positive on first glance."  However, many local and 
international analysts have voiced skepticism about the 
impact of the measures, since there is no new funding for 
this program.  The AFJP deposits were already part of the 
banking sector's funding base, so redirecting these monies to 
pay for the GoA's announced programs will result in an equal 
reduction in bank credit to the private sector. 
 
GoA reveals further details of auto sector stimulus program 
--------------------------------------------- --------- 
¶5. (SBU) On December 6, recently appointed Production 
Minister Debora Giorgi, along with ANSES Director Amado Bodou 
and Secretary of Industry Fernando Fraguio, provided further 
details on the ARP 3.1 billion (US$890 million) loan program 
to promote the purchase of new cars by first-time car buyers. 
 Minister Giorgi stated that the six main domestic automakers 
will each offer two models selling for ARP 30,000-40,000 
apiece, and stated that the purpose of the program is to 
"reorient funds from financial speculation to bolster the 
economy and maintain jobs in a vital industry for the local 
economy."  Carmakers participating in the scheme must promise 
to retain workers and restrain profit margins on the cars 
sold under this program.  Buyers can choose a pre-savings 
plan under which delivery times are determined by lottery, or 
they can take advantage of low-interest financing.  Payments 
will range at around ARP 800 (US$230) a month with a maturity 
of up to 60 months (this monthly installment assumes an 
interest rate of 11-12%).  The Minister estimated that the 
scheme could boost demand by 100,000 units a year. 
(January-November car production totaled 570,000 units.) 
 
¶6. (SBU) The president of the car dealers association, 
Ernesto Baldassare, questioned the idea of promoting 
automobile purchases in the middle of a crisis, arguing that 
the GoA could have a bigger impact on workers incomes by 
reducing the income tax.  The car dealer association's 
vice-president, Abel Bonrad, further cautioned that the GoA 
plan to stimulate car sales would not be a panacea for the 
auto companies or car dealers. 
 
Senate approves bill to expropriate Flag Carrier Aerolineas 
Argentinas 
--------------------------------------------- --------- 
¶7. (SBU) On December 17, the Argentine Senate voted 42 to 21 
in favor of a bill to expropriate the troubled national 
airline, Aerolineas Argentinas, and its smaller carrier 
Austral, marking the end of almost two decades of Spanish 
control.  (See Nov. 28 Financial and Economic Review for 
background.)  The Senate's action took place after months of 
unsuccessful negotiations between the carrier's Spanish 
owners (Madrid-based Marsans Group) and the GoA.  The bill 
declares the service provided by the carriers to be a vital 
public service, given the vast size of the country and the 
carrier's duty to serve even unprofitable routes.  Ousted 
owners Marsans, a Spanish travel company, confirmed that it 
would pursue international arbitration via the International 
Center for the Settlement of Investment Disputes (ICSID -- 
allowed for under the Spain-Argentina Bilateral Investment 
Treaty), since it considers the takeover "arbitrary and 
illegitimate."  Aerolineas and Austral control about 80% of 
the domestic air market, but reportedly operate all of their 
33 routes at a loss.  President Cristina Fernandez de 
Kirchner is expected to sign the bill into law before the end 
of the year. 
 
Argentine Congress approves Tax Moratorium and Capital 
Repatriation bill 
--------------------------------------------- --------- 
¶8. (SBU) Following a ten-hour debate, and facing stiff 
resistance from opposition party members, the Argentine 
Chamber of Deputies approved on December 10 the GoA's bill to 
provide tax incentives to foster job creation and encourage 
the repatriation of funds held abroad (estimated at over 
US$130 billion).  The Argentine Senate followed suit December 
18, with the GoA easily garnering sufficient votes for the 
bill, although again in the face of strong criticism from 
opposition parties. (Note: President Cristina Fernandez de 
Kirchner submitted the law to Congress November 25.  For 
details, see November 28 Economic and Financial Report).  The 
bill spawned a major debate in the Congress and in the press 
over whether it may facilitate money laundering, and the 
Financial Action Task Force sent a letter to the GoA asking 
for details on the draft law and emphasizing the need to 
include provisions to "verify the origin of the money or 
other assets that may be introduced into the financial system 
as a result of this act."  (The FATF letter leaked to local 
 
BUENOS AIR 00001725  003 OF 006 
 
 
press December 16).  During the Senate debate, the opposition 
predicted that the bill will turn Argentina into "a paradise 
for money laundering." 
 
¶9. (SBU) Aside from concerns over money laundering, there is 
also disagreement over whether the bill will have any real 
impact.  For example, well-known local economist Miguel Bein 
estimates that the new measures could resultp`:OQzpital, with the 
other half from other corporate tax breaks included in the 
bill, related to adding new workers and formalizing informal 
sector employees.)  However, many other analysts discount the 
impact.  For example, Credit Suisse analysts argue that the 
tax amnesty will not result in a significant amount of funds 
being repatriated as long as the GoA maintains its current 
policies, pointing out that the market's complete lack of 
confidence in the Argentine economy, institutions, and 
financial system has resulted in large-scale capital 
outflows.  (Capital flight during the first three quarters of 
2008 totaled over US$16 billion, followed by a spike in 
outflows of US$4.5 billion in October.) 
 
------- 
Finance 
------- 
 
U.S. Court ruling on private pension funds' US$200 million 
assets in U.S. 
--------------------------------------------- --------- 
¶10. (SBU) U.S. District Court Judge Thomas Griesa of the 
Southern District of New York issued December 11 an opinion 
noting that about US$200 million in deposits in the United 
States of the private pension funds recently nationalized by 
the GoA and currently managed by ANSES, are subject to 
attachment to satisfy the claims of holdout creditors. 
Specifically, Judge Griesa concluded that he had jurisdiction 
over ANSES, that ANSES's assets are subject to attachment and 
execution to the same degree as the assets of the Republic of 
Argentina, and that the assets of the ten Argentine private 
pension funds were used for a commercial activity within the 
waiver of sovereign immunity found in the Foreign Sovereign 
Immunities Act (FSIA).  In response, the GoA promised to 
dispute this decision in the U.S. Court of Appeals.  (This 
legal opinion followed a previous ruling October 31, in which 
the Judge issued a temporary restraining order freezing the 
transfer of the assets of ten Argentine private pension funds 
to ANSES in response to lawsuits filed by holders of 
untendered, defaulted Argentine government bonds.) 
 
First private debt issuance since AFJP nationalization falters 
--------------------------------------------- --------- 
¶11. (SBU) The market has closely monitored the effort by an 
Argentine cement company, Minetti, to become the first to try 
to issue debt since the GoA nationalization of the AFJPs sent 
local equity and fixed income markets into a tailspin. 
Minetti, which is 72% controlled by Spanish company Holcim, 
was scheduled to close its ARP 100 million issuance of ONs 
(tradable debt instruments) on December 5.  However, it was 
forced to extend the debt subscription period untilDecember 
12 when ANSES unexpectedly decided to withdraw its purchase 
orders for the issue just minutes before closing.  According 
to local press reports, ANSES authorities had previously 
confirmed to the company that it would back and participate 
in this transaction.  Minetti planned to issue ARP 100 
million in ONs with a 36-month maturity and a variable rate 
pegged to BADLAR (the average interest rate paid on time 
deposits of more than ARP 1 million).  On December 12, 
Minetti announced it would extend the debt subscription 
period a second time, to December 19.  Local press quoted 
stock brokers stating that Minetti's failure to close the 
issuance sent a "bad signal" to the private sector, which has 
few other sources of large-scale debt financing besides 
ANSES. 
 
------ 
FISCAL 
------ 
 
Congress approves Emergency Economic Law and Financial 
Transaction Tax 
--------------------------------------------- --------- 
¶12. (SBU) On December 10, the Senate approved the extension 
of the Economic Emergency Law and Financial Transaction Tax 
(FTT) until December 2009.  Given that the Chamber of 
 
BUENOS AIR 00001725  004 OF 006 
 
 
Deputies had already approved both bills (see Nov. 28 
Economic and Financial Review), they will enter into force 
after publication in the Official Gazette.   The Economic 
Emergency 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).  The FTT's 2009 
annual collection is budgeted at ARP 22 billion (about US$6.4 
billion), of which 70% goes to the federal Treasury and 30% 
to the provinces. 
 
November Tax Revenue Disappoints 
-------------------------------- 
¶13. (SBU) The GoA announced December 3 that November tax 
revenues increased 18% y-o-y to ARP 21.7 billion, below 
market expectations of ARP 24.5 billion and less than half 
the 37.5% growth rate seen in October.  For comparison, from 
January trough October, tax collection increased 38.5% y-o-y. 
 Tax collection fell in real terms, when using actual or 
"true" estimates for inflation, which according to most 
private analysts is approximately 20% (compared to the 
official INDEC estimate of 8%).  The worse-than-expected 
November tax receipts is the result of the sharp economic 
slowdown, which affects income taxes and VAT, as well as 
lower international commodity prices, which reduced GoA 
export tax collection.  During November, labor contributions 
rose 55% y-o-y, VAT revenues increased 16% y-o-y, and income 
tax revenues increased 13% y-o-y.  Export trade tax revenues 
actually decreased 0.5% y-o-y.  VAT collected on imports also 
fell on lower growth in consumer spending and investment, and 
import restrictions implemented by the GoA.  In the first 
eleven months of the year, tax revenues reached ARP 246 
billion, ARP 28 billion below the Argentine Central Bank's 
consensus forecast of ARP 274 billion. 
 
¶14. (SBU) Analysts expect tax revenue growth to continue to 
decline, as the slowdown in economic activity deepens and 
commodity prices remain depressed.  Analysts also raise the 
possibility that tax revenues will further decline due to 
reduced compliance, as taxpayers turn to the common local 
practice of withholding tax payments during rough times. 
According to JPMorgan, November's lower tax collection stands 
in sharp contrast with seasonal patterns (November is usually 
a high revenue month) and flashes a warning for fiscal 
performance.  JPM further estimates that the subset of 
activity-linked taxes (VAT, FTT, export taxes) have 
contracted in real terms, suggesting that economic growth is 
likely to decelerate further.  (JPM predicts a 1% GDP 
contraction in 2009, but with increasing downside risks.) 
 
¶15. (SBU) Local media has reported rumors that the head of 
AFIP (IRS-equivalent) Claudio Moroni will soon be replaced. 
Moroni was appointed Head of AFIP in May to complete the term 
of prior AFIP-head Alberto Abad.  Moroni's appointment 
expires December 10, and the press quotes unnamed "senior GoA 
officials" stating that the GoA will give Moroni a temporary 
renewal, through about March-May 2009, so that he will take 
the blame for decreasing tax collection and for any fallout 
from defending the GoA's tax moratorium and capital 
repatriation bill (currently pending in the Senate).  Ricardo 
Echegaray, currently Head of the ONCCA (Oficina Nacional de 
Control Comercial Agropecuario, National Agriculture Trade 
Office), is considered a possible replacement.  The name of 
Sergio Montoya, the head of Buenos Aries province tax 
collection entity ARBA, has also been floated as a potential 
replacement. 
 
------------- 
Macro Outlook 
------------- 
 
Economist Miguel Kiguel:  Argentine Economy "not as bad as it 
looks" 
--------------------------------------------- --------- 
¶16. (SBU) This item summarizes Economist Miguel Kiguel's 
December 10 conference call for his domestic and foreign 
clients.  Kiguel is the Director of Econviews, an 
Argentine-based economic think tank.  He is a well-respected 
economist who was Undersecretary of Finance at the end of the 
1990s. 
 
-- Overview: While arguing that negative perceptions of 
Argentina's economy and outlook are worse abroad than in 
Argentina, Kiguel acknowledged that pessimism is widespread, 
as reflected in Argentine debt spreads at default levels. 
For example, Kiguel noted that the 5-year CDS (credit default 
 
BUENOS AIR 00001725  005 OF 006 
 
 
swap) reached 4,091 basis points on December 12, compared to 
462 bps at the end of 2007.  This reflects the market's 
nervousness about Argentina's capacity and willingness to pay 
its debts (especially the latter).  Kiguel said it is 
critical to monitor: 1) the peso exchange rate, the evolution 
of deposits, and BCRA international reserves levels; 2) the 
economic slowdown; 3) the GoA financial program; 4) commodity 
prices and the external accounts. 
 
-- The exchange rate and deposit levels: Kiguel noted that a 
sharp, rapid depreciation of the peso to levels of 3.80 
ARP/USD or higher, as the industrial sector has called for 
(in order to keep pace with the depreciation of the Brazilian 
Real), could generate a run on deposits.  Thus, the Central 
Bank (BCRA) prefers to pursue a gradual and managed 
depreciation, while using tighter capital controls and "moral 
suasion" tactics with financial institutions to limit dollar 
purchases (and minimize peso-denominated deposit outflows). 
Kiguel explained that the banking sector has already 
experienced two mini-runs on the peso: first at the height of 
the farm crisis in April-May, and recently in October, when 
the GoA announced its decision to nationalize the AFJPs in 
the midst of the global credit crunch's intensification. 
(Note: private peso denominated deposits plunged 5.2% in 
October, compared to the 4.4% drop in May, the worst month of 
the farm crisis.)  Largely due to the BCRA and GoA regulatory 
agencies' unorthodox methods of limiting dollar trading, 
deposits have recovered and stabilized.  He predicted that 
real interest rates will have to remain positive throughout 
2009 to maintain deposit levels.  Kiguel estimates that the 
peso will end 2008 in the range of 3.45-3.50 ARP/USD, but 
will further depreciate to about 4.10-4.20 by the end of 
¶2009.  He expects the BCRA to continue with its crawling peg 
policy and avoid large jumps in the currency.  (Post Comment: 
 According to press and other sources, one negative 
consequence of the gradual depreciation is that is creates 
incentives for exporters to delay repatriation of foreign 
currencies and for debtors to delay payments to creditors.) 
 
-- BCRA reserves: Kiguel stated that the BCRA reports 
reserves at about US$46 billion, but net of BCRA borrowing 
from the Bank for International Settlements are more in the 
range of US$40-41 billion.  Kiguel still considers this a 
solid level, giving the BCRA sufficient means to defend the 
peso. 
 
-- Economic slowdown: the economy is showing obvious signs of 
rapid deceleration (e.g., falling construction, cement, and 
car production, plummeting car sales) and he considers 
recession likely in 2009.  He estimates a 1% GDP contraction 
for 2009, and notes that this will have significant adverse 
consequences for the fiscal accounts and GoA financial 
program. 
 
-- GoA financial program: Although the GoA's financing needs 
increase almost 50% in 2009, Kiguel believes the GoA has 
sufficient sources of funding to make payment.  Giving as an 
example a 3% of GDP primary surplus for 2009 (which he noted 
may be optimistic due to the slowdown and falling tax 
collection), Kiguel believes the GoA will relatively easily 
fulfill its financing needs of about US$9 billion.  (Note: 
Kiguel's estimates for primary surplus include the GoA 
accessing the roughly US$4 billion in annual pension flows to 
ANSES resulting from the AFJP nationalization.)  The amount 
is reduced by US$3.5 billion after taking into account the 
GoA's enhanced ability to rollover debt with ANSES, now that 
it has taken on AFJP assets of about US$25 billion.  (Note: 
Kiguel predicted that the GoA can rollover US$2 billion of 
mandatory debt buybacks and US$1.5 billion of amortizing 
bonds previously held by AFJPs.  Other Economists have higher 
estimates for both the buybacks and bonds coming due.). 
Kiguel considers the resulting US$5.5 billion manageable, 
particularly since he expects the GoA to attempt a debt swap 
for the "P^Ls, financial needs would 
reach US$7 billion, or only US$3.5 billion after taking 
advantage of the newly acquired AFJP assets to rollover debt 
with ANSES.  Under the more pessimistic scenario of a 2.5% of 
GDP primary surplus, financial needs would increase to US$11 
billion (or US$7.5 billion after rollovers with ANSES), which 
Kiguel still considers easily manageable.  Kiguel 
optimistically expects the GoA to show prudence in managing 
expenditures during 2009 (based on his assessment of past GoA 
 
BUENOS AIR 00001725  006 OF 006 
 
 
fiscal prudence).  He estimates that the GoA will increase 
expenditures by only about 16% in nominal terms, by limiting 
nominal increases in salaries and pensions to only about 
10-12%. 
 
-- Commodity prices: While they have fallen sharply since the 
second quarter of 2008, Kiguel noted that they still remain 
at relatively high levels compared to the average of the last 
fifteen years. 
 
-- External accounts:  Kiguel predicted a US$6 billion trade 
surplus in 2009, compared to his estimate for 2008 of US$12 
billion.  His 2009 estimate is based on expectations of a 
US$10 billion decline in exports and US$5-6 billion decline 
in imports.  The current account will be close to zero in 
2009, which along GoA payments abroad and capital flight 
should result in a US$8 billion decline in international 
reserves (with BCRA reserves ending 2009 at about US$32 
billion.) 
 
-- Concerns and Downside Risks: 
 
(a) Under the outlook as depicted above, Kiguel believes 
Argentina's economic situation is manageable.  However, he 
acknowledged that the GoA has made many mistakes in the past, 
and noted that many observers believe the Kirchner 
administration is prepared "to do anything to maintain 
power." This uncertainty about GoA policies and actions 
undermines confidence in the financial sector, and could lead 
to accelerating capital flight. 
 
(b) Kiguel noted that 2009 is an election year, and in normal 
times the Kirchners would look to increase spending leading 
up to the October elections (as the GoA did prior to the 
October 2007 presidential elections).  However, Kiguel argued 
that the GoA has little ability to pursue counter-cyclical, 
stimulative policies, given that it does not have access to 
sufficient financing to increase spending and lower interest 
rates stemming from stimulative monetary policies would 
likely trigger capital outflow and higher inflation.  (Note: 
Kiguel said that the inflation rate is decelerating, but will 
still end 2008 around 20% and will not fall below the 
mid-teens in 2009.) 
 
(c) Argentina is facing a difficult international 
environment, with high financial volatilityand falling 
commodity prices.  Nevertheless, Kiguel argued that the 
current situation is different from that of 2001-2002, when a 
crisis in Argentina was all but unavoidable.  In particular, 
Kiguel highlighted the following differences to the 2001 
situation: 1) BCRA reserves are currently high and can be 
used, unlike in 2001 when they had to back the monetary base; 
2) the BCRA has a role as lender of last resort, since the 
banking system works in pesos; 3) GoA financial needs are 
much lower; 4) the exchange rate can serve as escape valve 
and is not overvalued; 5) export prices are still at 
reasonable levels. 
 
WAYNE