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DE RUEHBU #1750/01 3591747
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P 241747Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 2780
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001750 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, DECEMBER 
19 - 24, 2008 
 
REF: BUENOS AIRES 1643 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period December 19 - 24, 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 announces Ag Sector stimulus program 
-- GoA ups payments to low-income workers and retirees 
-- Congress amends income tax legislation to promote 
consumption and growth 
-- Congress approves Tax Moratorium and Capital Repatriation 
bill 
-- Fitch downgrades Argentina's sovereign credit rating 
-- ANSES auctions long-term deposits to banks 
-- Consumer confidence index decreases 2.2% m-o-m, down 28% 
for year 
-- GoA 2009 Financial Program manageable, according to local 
analysts 
 
---------------------------------- 
New GoA Economic Stimulus Programs 
---------------------------------- 
 
President announces Ag Sector stimulus program 
--------------------------------------------- - 
¶2. (SBU) On December 22, President Cristina Fernandez de 
Kirchner continued her recent trend of making one major 
government stimulus plan announcement each week, this time 
presenting a package of measures to support the agricultural 
sector (and also increasing payments to low-income workers -- 
see next item).  This followed her December 15 decision to 
expand her previously announced public works program from US$ 
21 billion to approximately US$ 31 billion and increase 
payments to retirees (see next item), her December 4 
announcement of US$ 3.9 billion in credit subsidies and 
export tax cuts, and her November 25 announcement of a tax 
incentive package and the original public works program. 
Details of the December 22 proposal: 
 
-- The President confirmed her December 4 proposal to reduce 
the export tax on wheat and corn by five percentage points 
each (to 23% for wheat and 20% for corn).  In addition, she 
announced that when historical production averages are 
exceeded (13 million tons for wheat and 15 million tons for 
corn), export taxes will decrease by one additional 
percentage point for large producers (2,500 tons of wheat, 
5,000 tons of corn), two points for medium-size producers 
(500-2,500 tons wheat; 1,000 - 5,000 tons corn), and five 
points for small producers (up to 500 tons wheat and 1,000 
tons corn) for each additional million tons produced.  (Note: 
Producers are unlikely to see these further cuts, as grain 
production is expected to fall significantly during this 
marketing season due to the drought, export restrictions, and 
maximum prices.) 
-- Dairy bull calves: the GOA will build five feed-lot 
operations capable of servicing a total of 200,000 head to 
produce 100,000 tons of beef for the export market. 
-- Fruit and Vegetables: the export tax for pears, apples, 
peaches, citrus fruit, grapes, blueberries, strawberries, 
onions, frozen potatoes, beans, and pulses will be reduced by 
50% (fresh deciduous fruit and stone fruit currently pay a 
10% export tax, and citrus fruit and vegetables, 5%). 
-- Financial assistance: $230 million will be devoted to 
producers who were affected by the recent drought. 
 
¶3. (SBU) Ag Sector Reaction: Producers expected a reduction 
of the export tax on soybeans, but were disappointed when 
oilseeds (including soybeans and sunflower) were not included 
in the announcement.  The Liaison Commission (representing 
the four main farmer organizations) strongly criticized the 
announcements and threatened "direct action" (i.e., protests 
on the highways).  Road blockages occurred this week in the 
Province of Entre Rios, and producer protests are being 
organized by farm organizations throughout the country for 
the post-holiday period. 
 
 
BUENOS AIR 00001750  002 OF 004 
 
 
GoA ups payments to low-income workers and retirees 
--------------------------------------------- ------ 
¶4. (SBU) In addition to the Ag sector measures, the President 
also announced December 22 an ARP 200 (US$ 58) lump sum 
payment for all private and public employees earning the 
minimum salary (ARP 1240 or US$ 360 per month), to be 
implemented before January 6, 2009.  This measure will impact 
more than 600,000 employees.  In addition, the GoA will 
increase welfare payments by ARP 150 (US$ 43) to Family 
Program beneficiaries and disabled pensioners, and ARP 100 
(US$ 29) to Head of Households Program beneficiaries.  This 
program will affect approximately 2.1 million people, and the 
GoA will implement it before December 29.  Local press has 
reported rumors that some in the GoA believe that provincial 
governments should help fund these salary and welfare benefit 
increases.  In addition, the President announced December 15 
that the over six million retirees in Argentina will receive 
an ARP 200 US$ 58) lump-sum payment, on top of year-end 
bonuses.  This will increase public expenditures by 
approximately US$ 350 million in December 2008, as estimated 
by Economist Miguel Angel Broda in his weekly report, "Carta 
Economica."  The GoA hopes recipients will devote the ARP 200 
entirely to consumption, thereby sustaining domestic demand. 
However, many analysts believe the measure will have a 
limited impact, dissipating by mid-January. 
 
------ 
Fiscal 
------ 
 
Congress amends income tax legislation to promote consumption 
and growth 
--------------------------------------------- ----- 
¶5. (SBU) In an unusually rapid procedure, the Argentine 
Senate  unanimously approved the GoA's proposed amendments to 
income tax legislation on December 18, one day after the 
lower house had unanimously passed it, and only three days 
after the GoA sent the bill to Congress.  The bill modifies 
the so-called "Tablita de Machinea," named after Economy 
Minister Machinea, who introduced the scheme in 2000.  (Note: 
 the "tablita" established the legal income tax deductions 
available for taxpayers.  Available deductions decreased as 
income levels increased, with zero deductions allowed for 
annual incomes over ARP 221,000, or about US$ 64,000.  The 
occasional result was that after-tax income for taxpayers 
earning over the maximum amount could be lower than for some 
earning less, creating a distortion in the labor market.) 
The approved amendment lowers the effective income tax rate, 
mainly for middle and higher income employees, since it 
removes the provision that limits income tax deductions. 
 
¶6. (SBU) Private analysts estimate the measure will reduce 
income tax collection by ARP 2.5 billion per year (US$ 725 
million).  While the GoA took this action to foster greater 
consumption, private analysts argue that higher earners are 
inclined to save or purchase foreign currency instead of 
consuming.  Therefore, they expect it will not have much 
effect, and suggest instead finding ways to increase the 
disposable income of low-earners -- for example, by lowering 
the VAT -- who have a higher propensity to consume.  Economia 
y Regiones, a think tank specializing on provinces, notes 
that the amendment will reduce GoA automatic transfers to 
provinces by about US$ 380 million per year, since income tax 
revenue is almost equally shared between the GoA and 
provinces, under Argentina's "co-participation" laws. 
Interestingly, not one congressional representative from the 
provinces mentioned or objected to this during floor debates. 
 
 
Congress approves Tax Moratorium and Capital Repatriation bill 
--------------------------------------------- -- 
¶7. (SBU) On December 18, the Senate approved the GoA's bill 
to provide tax incentives to foster job creation and 
encourage the repatriation of funds held abroad, with a vote 
of 42 in favor and 27 against.  Given that the Chamber of 
Deputies had already approved the bill (see November 28 and 
December 10 Economic and Financial Review for further 
details), it will enter into force after publication in the 
Official Gazette.  A prominent element of this law is the 
Capital Repatriation chapter, which has generated concern 
both locally and internationally over whether it may 
facilitate money laundering.  The bill as approved exempts 
any party taking advantage of this opportunity from having to 
verify the origin of the money or assets repatriated into the 
local financial system.  (Note:  however, Article 40 of the 
law does state that the law does not relieve financial or 
non-financial entities from their legal obligations under 
 
BUENOS AIR 00001750  003 OF 004 
 
 
Argentina's anti-money laundering or counter-terrorism 
finance laws.) 
 
------- 
Finance 
------ 
 
Fitch downgrades Argentina's sovereign credit rating 
--------------------------------------------- ------- 
¶8. (SBU) On December 18, Fitch Rating Agency downgraded 
Argentina's long-term local currency issuer rating to "B 
minus" from "B," its country ceiling to "B" from "B plus," 
and its performing bonds in foreign and local currency 
governed by Argentine law to "B minus" from "B."  Fitch cited 
challenging fiscal and external financing requirements and 
Argentina's limited options to deal with them, as well as 
decelerating real GDP growth and falling commodity prices, as 
reasons for the downgrade.  Fitch acknowledged that the 
recent nationalization of the private pension funds will help 
the GoA cover debt obligations over the next twelve to 
eighteen months, but argued that it will also increase 
long-term costs.  Fitch further warned of even greater 
challenges for policy makers in the event of a sharper than 
anticipated economic slowdown or increased capital flight. 
 
¶9. (SBU) The Fitch downgrade is just the latest from the 
credit agencies.  On October 31, S&P lowered Argentina's 
foreign and local currency sovereign credit ratings to B-/C 
from B/B with stable outlook.  This followed S&P's August 
downgrade for both foreign and local currency ratings from B 
to B.  Also in August, Moody's changed the outlook on 
Argentina's B3 foreign and local currency government bond 
ratings from positive to stable.  In late October, Moody's 
expressed concerns over the GoA's nationalization of the 
private pension system, but noted that this would not impact 
Argentina's B3 rating because it already reflects a high 
probability of financial distress.  Rating agencies have also 
downgraded their debt ratings for several Argentine provinces 
and private companies over the course of 2008. 
 
ANSES auctions long-term deposits to banks 
------------------------------------------ 
¶10. (SBU) On December 16, GoA social security agency ANSES 
successfully auctioned ARP 600 million in deposits to banks 
operating in Argentina.  Through the auction mechanism, banks 
bid on fixed-term deposits from ANSES at 11% for one year. 
In return, the winning bidders pledged to lend the funds at 
below-market rates to small- and medium-sized businesses at 
14.2%, to consumers at 15.4%, and to car buyers at 16.25%. 
This compares to average market interest rates of 35%, 33%, 
and 22%, respectively.  This initiative is part of a broader 
plan to auction a total of about US$ 2.5 billion in 
fixed-term deposits from the stock of private sector pension 
funds (AFJPs) that the GoA recently nationalized.  Chief of 
Cabinet Sergio Massa and ANSES Director Amado Boudou 
described the auction as a success, since demand was almost 
three times the auctioned amount (ARP 1.6 billion).  However, 
the majority of participating banks were state-owned, and 
they walked away with 80% of the allocated funds.  The GoA's 
stated strategy is to foster lower interest rates and 
stimulate lending to individuals and small companies in order 
to mitigate the local credit squeeze and promote increased 
spending and investment.  ANSES is scheduled to hold the next 
auction, for an additional ARP 600 million, this week. 
 
------------- 
Macro Outlook 
------------- 
 
Consumer confidence index decreases 2.2% m-o-m, down 28% for 
year 
--------------------------------------------- ------- 
¶11. (SBU) Di Tella University's consumer confidence index 
slid for the third consecutive month in December, decreasing 
5.3% m-o-m to 37.1 points.  The index accumulated a decrease 
of 28% for the whole year, after starting January at 55.0 
(shortly after President Cristina Fernandez de Kirchner took 
office).  It dipped to 40 in June in the middle of the farm 
conflict and looks to close the year at a level not seen 
since December 2002.  In December, all three index components 
declined: 1) consumer willingness to purchase durable goods 
and real estate decreased 6.7%; 2) consumer sentiment towards 
the macroeconomic environment decreased 3.5%; and 3) 
consumers' perception of personal economic well-being 
decreased 6.3%.  According to analysts, this sharp 
deterioration in consumer sentiment reinforces the view that 
the economy will continue to slow rapidly in the months 
 
BUENOS AIR 00001750  004 OF 004 
 
 
ahead, despite recent GoA measures designed to promote 
consumption and credit.   (Note: The index is based on 
surveys of individuals and consumers' willingness to purchase 
durable goods, houses and cars.) 
 
GoA 2009 Financial Program manageable, according to local 
analysts 
--------------------------------------------- ------- 
¶12. (SBU) High yields in Argentine sovereign bonds (over 40% 
for dollar-denominated short duration bonds, and close to 50% 
for peso-denominated short duration bonds) reflect market 
concerns over the GoA's capacity and willingness to pay its 
debts.  Post surveyed three well-known private economic 
consultancies to get their views on the GoA's ability to meet 
2009 financial obligations.  Despite minor differences in 
their estimates, all three groups consider the GoA's 2009 
financial program to be manageable, with the GoA's financing 
gap ranging from a low of $1.2 billion to $3.5 billion, 
depending on macro and available refinancing assumptions.  In 
the opinion of these analysts, the market is overreacting to 
the possibility of an Argentine default.  Highlights of the 
analysis from FIEL (Fundacion de Investigaciones Economicas 
Latinoamericanas), Bein Asociados, and Miguel Kiguel's 
Econviews follow: 
 
-- Primary surplus: FIEL estimates the primary surplus at US$ 
9.8 billion, or about 3% of GDP (including the roughly US$ 4 
billion in annual inflows to ANSES derived from the recent 
nationalized private pension funds, AFJPs, but excluding 
potential extra tax collection from the tax amnesty approved 
in Congress December 18).  This is in line with Bein's 
estimate of US$ 10.2 billion, also about 3% of GDP (and again 
including AFJP flows), but lower than Kiguel's base case 
scenario of 3.5% of GDP.  (It is noteworthy that all three 
analysts include the new ANSES/AFJP expected inflows as part 
of the primary surplus, even though in theory they belong to 
ANSES and the GoA can only access them via issuing debt to 
ANSES.) 
-- Debt obligations: FIEL estimates the GoA's 2009 financial 
needs at US$ 19.9 billion, excluding short-term intra-public 
sector debt.  The other two include such debt, which accounts 
for their higher estimates in the range of US$ 21 to 21.5 
billion. 
-- Debt repurchase: This is a required obligation stemming 
from the GoA's 2005 debt restructuring.  FIEL estimates that 
the GoA must buy back US$ 1.7 billion in 2009, whereas Kiguel 
estimates it at US$ 2 billion and Bein estimates US$ 2.5 
billion.  All three expect the GoA to fulfill this 
requirement by rolling over ANSES holdings of GoA bonds. 
-- Roll-over from ANSES: FIEL estimates the GoA will 
roll-over an additional US$ 1 billion in bonds, held 
originally by ANSES or by the AFJPs.  This is slightly lower 
than Bein's estimate of US$ 1.4 billion and Kiguel's estimate 
of US$ 1.5 billion. 
-- Financing Gap: FIEL estimates the resulting financing gap 
at US$ 3.2 billion.  This assumes that the GoA will do a debt 
swap with local holders of the "Prestamos Garantizados" (PG 
-- guaranteed loans), thus reducing amortizations by US$ 2 
billion in 2009.  It also assumes the International Financial 
Institutions roll-over debts of $2.2 billion.  Bein estimates 
a financing gap of only US$ 1.2 billion, assuming a PG swap 
resulting in reduced payments of US$ 2.6 billion and IFI 
refinancing of US$ 2.2 billion.  Kiguel has a slightly higher 
estimate of US$ 3.5 billion financing gap, but this excludes 
the possibility of a PG swap or IFI refinancing.  All three 
expect the GoA to cover the gap via borrowing from the 
Argentine Central Bank or largest state-owned bank, Banco de 
la Nacion. 
 
 
WAYNE