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UNCLAS SECTION 01 OF 05 BUENOS AIRES 000232 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, FEBRUARY 
16 - 27, 2009 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period February 16-27, 2009. 
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 achieves 80% participation rate in its PG swap 
-- GoA reduces 2009 financial needs by about ARP 7 billion 
-- GoA achieves 80% participation rate in its PG swap 
-- Argentina downgraded from "emerging" to "frontier" market 
-- BCRA may end 2009 in the red for first time in six years 
-- New allegations re INDEC manipulation of official 
statistics 
-- INDEC surprises, announcing 4.4% y-o-y decline in January 
industrial production 
-- FIEL foresees tough year for the Argentine economy in 2009 
-- Disappointing January primary fiscal surplus raises 
concerns on future performance 
-- Provincial Fiscal Accounts deteriorate in 2008; worse 
expected in 2009 
 
------- 
FINANCE 
------- 
 
GoA achieves 80% participation rate in its PG swap 
--------------------------------------------- ----- 
 
¶2. (SBU) Argentine Chief of Cabinet Sergio Massa announced 
February 27 that the second phase (or so-called 
"international tranche") of the debt swap of Prestamos 
Garantizados (PGs, or "Guaranteed Loans") achieved a 42% 
participation rate out of the ARP 8.5 billion (US$ 2.43 bn) 
total eligible debt.  PG holders tendered ARP 3.5 billion 
worth of loans in exchange for a  peso-denominated bond, the 
Bonar, due in 2014, which carries a 15.4% fixed coupon for 
the first year and a Badlar variable rate plus a spread of 
2.75% for the following four.  (Note: Badlar is the average 
interest rate for deposits larger than ARP 1 million.) 
 
¶3. (SBU) In its statements to the press, Massa noted that the 
GoA achieved an overall 80% participation rate in the PG debt 
swap, when taking into account both local and international 
phases of the transaction.  (The first -- or local -- tranche 
of the swap opened about January 22 and closed January 28.) 
PG holders tendered ARP 19.1 billion in the swap, out of a 
total of ARP23.8 billion (US$ 6.8 bn) in "eligible" PGs. 
(The swap covered four types of PGs, representing about 50% 
of total outstanding.)  The local phase of the PG swap 
achieved nearly a 100% participation rate.  Most analysts 
viewed these GoA liability management transactions as 
strongly positive for Argentina, as they eased GoA financial 
needs in 2009 by about ARP 7 billion (US$ 2bn).  According to 
Credit Suisse, the swap results in the postponement of about 
ARP 18 billion (US$ 5.15 bn) in debt obligations originally 
due 2009 - 2011. 
 
Argentina downgraded from "emerging" to "frontier" market 
--------------------------------------------- --------- 
 
¶4. (SBU) MSCI Barra equity index provider announced February 
18 that it will reclassify Argentina as a frontier market, a 
downgrade from its previous classification as an emerging 
market.  The change will enter into effect at the end of May, 
coinciding with MSCI Barra's publication of the May 2009 
Semi-Annual Index Review.  MSCI based the decision on the GoA 
and Argentine Central Bank's (BCRA) continued restrictions on 
inflows and outflows of capital to equity markets.  MSCI 
Barra will consider only Argentine companies with American 
Depositary Receipt (ADR) listings as eligible securities for 
inclusion in its Index. 
 
¶5. (SBU) Private analysts have been expecting this downgrade 
for the past four to five months.  They point out, therefore, 
that the market has already discounted the change and the 
official announcement will not have much impact.  Moreover, 
 
BUENOS AIR 00000232  002 OF 005 
 
 
most trading is carried out by domestic investors, who will 
not be swayed by this news. (Note: Frontier markets, which 
include Sri Lanka, Vietnam, Lebanon and Kazakhstan, are 
smaller and considered riskier than emerging markets and not 
sufficiently developed to be eligible for MSCI Barra's 
emerging markets index.) 
 
BCRA may end 2009 in the red for first time in six years 
--------------------------------------------- --------- 
 
¶6. (SBU) Prefinex Consulting (an Argentine economic 
consulting company) predicted in a recent report that the 
Argentine Central Bank's (BCRA) financial result (known as 
the "quasi-fiscal" balance) may turn negative in 2009 for the 
first time since 2002.  The quasi-fiscal balance is the 
difference between what a central bank earns on its assets 
and pays on its liabilities.  In this case, it is the 
difference between the interest the BCRA earns on official 
reserves (mainly invested in U.S. and European Treasury 
bonds) and the interest the BCRA pays on its peso-denominated 
liabilities, mainly Lebacs and Nobacs (BCRA letters and 
notes). 
 
¶7. (SBU) In its base-case scenario, Prefinex estimates that 
the BCRA will end 2009 with a deficit of ARP 3.1 billion, 
compared to an estimated surplus of ARP 680 million in 2008 
(no more updated number), due to the increasing rate 
differential between U.S. Treasuries and BCRA instruments. 
(Prefinex expects Argentine interest rates to rise during 
2009 as the BCRA and local banks attempt to prevent deposit 
withdrawals, while at the same time Treasury yields are 
nearing zero.)  However, Prefinex analysts point out that 
further peso depreciation could mitigate this trend somewhat. 
 (Depreciation reduces the expected BCRA quasi-fiscal deficit 
by increasing the value of foreign currency reserves measured 
in terms of pesos.  As of February 20, BCRA reserves totaled 
ARP 166 billion, or US$ 47 bn, while outstanding Lebacs and 
Nobacs totaled ARP 38 billion.)  As a result, avoiding a 
quasi-fiscal deficit is one argument in favor of allowing the 
peso to continue depreciating (the other arguments are to 
improve competitiveness and increase GoA tax collection).  It 
is important to note that the GoA is one of the beneficiaries 
of a strong BCRA balance sheet, because each year the BCRA 
transfers a portion of its annual earnings to the GoA 
Treasury, boosting the GoA fiscal surplus.  Note: the peso is 
currently trading at 3.58 - 3.62 ARP/USD and most analysts 
expect it to depreciate to about 4.00 ARP/USD by the end of 
¶2009. 
 
------------- 
MACRO OUTLOOK 
------------- 
 
New allegations re INDEC manipulation of official statistics 
--------------------------------------------- --------- 
 
¶8. (SBU) Economists from the well-known economic consulting 
firm Latin-Source recently alleged that the statistical 
manipulation that started in early 2007 with tampering of the 
CPI has now extended to other indicators.  They noted that 
national statistics agency INDEC's release of preliminary GDP 
figures indicated growth of 4% y-o-y in Q IV, with annual 
growth of 7% y-o-y.  This estimate contrasts sharply with 
most analysts' view that the economy expanded at a much 
slower pace during the year.  Latin-Source estimates growth 
for the entire year at only 4%, following a sharp contraction 
in Q IV.  Analysts note that the manipulation is so blatant 
that other statistical measurements, e.g., shopping mall and 
supermarket sales, do not square with the GDP estimates.  One 
anecdotal example cited is cement production, which usually 
tracks closely with overall economic activity, but has 
recently completed divorced its trend from that of GDP 
growth.  Another example is that the Latin America Research 
Foundation FIEL's privately calculated production index (the 
IPI), which decreased 7.4% in Q IV 2008, completely diverges 
from the INDEC production index (EMI), which increased 2.4% 
for the same period.  (Note: INDEC surprised with a better 
estimate for January 2009; see next item.) 
 
¶9. (SBU) In protest of the "poor quality and statistical 
anomalies observed in various indicators produced by INDEC," 
FIEL announced February 24 that it will limit its 
participation in the BCRA's market consensus survey (the 
REM).  FIEL will no longer provide forecasts for five of the 
twenty-three economic variables included in the survey:  CPI, 
 
BUENOS AIR 00000232  003 OF 005 
 
 
industrial production index (EMI), monthly economic activity 
index (EMAE), GDP, and unemployment.  (Note: The Central Bank 
survey gathers data from fifty-seven economic forecasters 
including banks, brokerages, consultancies, think tanks and 
universities.) 
 
¶10. (SBU) Subsequent to FIEL statement, local consulting 
firms Prefinex and Delphos Investment also announced that 
they would reduce their participation in the BCRA survey. 
Both said they would cease estimating the variables they 
believe INDEC has distorted.  Other prominent consulting 
companies, including Abeceb.com, RSH Consulting, and Economia 
and Regiones, also stated that they are reviewing internally 
whether to continue participating in the BCRA survey, while 
Castiglione, Tiscorni and Asociados noted that they ended 
their participation over a year ago.  In general, analysts 
who participate in the survey acknowledge that their goal for 
the BCRA survey is to estimate what INDEC will announce, 
while separately providing "true" economic estimates to their 
clients. 
 
INDEC surprises, announcing 4.4% y-o-y decline in January 
industrial production 
--------------------------------------------- --------- 
 
¶11. (SBU) INDEC surprised most analysts February 23, 
announcing that industrial production (the EMI) declined 4.4% 
y-o-y in January, compared to the BCRA consensus survey's 
negligible decrease of 0.2%.  As noted in the previous item, 
the BCRA survey represents the private sector predictions of 
INDEC reports, not the "true" estimates they provide clients 
-- which in this case were still much larger than INDEC's 
estimate.  For example: FIEL issued its own industrial 
production index (the IPI), in which it estimated a decrease 
of 11.4% y-o-y.  Prominent Argentine economist Orlando 
Ferreres meanwhile estimated a drop of 9.1% y-o-y for the 
same period.  INDEC explains that the fall in industrial 
production -- the first officially reported year-on-year 
decline since October 2002 -- was due to plunging automobile, 
steel, tires, and textiles output.  Some optimistic analysts 
interpreted INDEC's January EMI estimate as a positive 
indication that the GoA is trying to bring the data more in 
line with reality. 
 
FIEL foresees tough year for the Argentine economy in 2009 
--------------------------------------------- --------- 
 
¶12. (SBU) This item outlines the main points and alternative 
scenarios from FIEL'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). 
 FIEL Macro Overview: 
 
-- GDP: FIEL estimates that GDP declined 1.5 - 2% y-o-y in 
QIV 2008, similar to other private analysts' estimates, but 
in sharp contrast to INDEC's official preliminary estimate of 
a 4.9% y-o-y expansion in QIV.  FIEL estimates that GDP will 
contract 2% in 2009. 
 
-- Inflation: FIEL estimates that inflation increased 1.7% 
m-o-m in January, compared to the official INDEC increase of 
only 0.5%.  FIEL predicts inflation will end 2009 in the 
range of 15%, decelerating from 2008 inflation, which FIEL 
estimates was about 20-21%. 
 
-- Confidence indicators are deteriorating rapidly, as 
reflected in Torcuato di Tella University and Fundacion 
Capital's indexes.  However, FIEL notes that confidence 
levels are still not as low as they were prior to the 
2001-2002 crisis.  (Note: The established and reputable index 
of leading indicators that di Tella publishes shows that the 
economy is now flirting with a recession. The index is 
constructed along the same lines of the U.S. Conference Board 
index and provides signals about turning points in activity. 
In the January reading, the index dropped 20.6% y-o-y and has 
now recorded thirteen consecutive months of y-o-y declines. 
On a m-o-m basis the index dropped 1.3% from December, the 
eighth monthly drop during the last year.) 
 
-- Banking System: Deposits recovered sharply in recent 
months, after a tough year that saw two mini-crises devastate 
the financial system (the March-July Agricultural conflict 
and October-November panic provoked by the worsening of the 
international financial crisis and the GoA's nationalization 
 
BUENOS AIR 00000232  004 OF 005 
 
 
of private pension funds).  Banks are highly liquid and are 
not facing any run on deposits.  However, they are reluctant 
to lend, and loans to the private sector are declining. 
 
-- Fiscal: Tax revenues performed poorly in January, 
increasing only 11% y-o-y, with export and import taxes 
falling 27% y-o-y, the Financial Transactions Tax (FTT) 
dropping by 7% y-o-y and the income tax flat.  (These 
calculations are in nominal terms, and the decline is more 
severe when accounting for inflation.)  The sharp 
deceleration of the economy is reflected in the fall of FTT 
and VAT tax collections in real terms (when deflated with 
"true" CPI).  Import tax revenues have also fallen sharply, 
as imports have fallen along with decelerating growth. 
Export tax revenue has been hard hit by lower commodity 
prices, lower export volumes (due to lower world demand), 
reduced sales resulting from the ongoing drought, and farmers 
efforts to withhold crop sales in protest of GoA agricultural 
policies.  According to the 2009 Budget, the GoA assumed that 
tax revenues and expenditures would each increase by 15% in 
nominal terms, resulting in a primary fiscal surplus of US$ 
11.5 billion (3.6% of GDP).  However, FIEL predicts that the 
GoA will have difficulty controlling expenditure growth in 
the run up to the October 2009 mid-term elections, and also 
expects revenues to continue to decelerate sharply in the 
coming months.  FIEL, therefore, estimates the primary fiscal 
surplus will end 2009 at US$ 8.1 billion (2.5% of GDP). 
 
-- Capital Flight: according to BCRA data, capital flight 
decelerated from previous months to US$800-900 million in 
January.  If capital flight during 2009 is maintained at that 
average monthly level and the GoA does not "over-borrow" from 
the BCRA or Banco Nacion, FIEL believes that the BCRA can 
manage the gradual depreciation of the peso.  FIEL estimates 
that the peso will end the year at about 3.80-3.90 ARP/USD. 
FIEL officials comment that even though the BCRA can manage 
the pace of the depreciation, it cannot avoid the consequence 
of its policy: a harder economic contraction than if it were 
to effect a large and rapid devaluation (increasing 
competitiveness and boosting fiscal revenues). 
 
¶13. (SBU) FIEL's view on possible scenarios: 
 
A)    If the GoA increases expenditures 22%, the GoA will 
need to borrow about US$7 billion from BCRA reserves and/or 
from Banco Nacion. 
 
B)    If the political situation deteriorates and the GoA 
compensates by increasing expenditures 27%, it will need to 
borrow about $10 billion from the BCRA and Banco Nacion. 
Although this could raise concerns in the market and provoke 
deposit outflow and capital flight, FIEL still believes the 
BCRA would be able to manage a gradual depreciation of the 
peso under this scenario (and more easily under Scenario A). 
 
C)    In the extreme ("nothing to lose") case, where the 
current administration expects to perform poorly in the 
October elections, FIEL believes the GoA may go for BCRA 
reserves in a big way in order to finance efforts to build 
political support.  FIEL officials consider this scenario 
unlikely, but note that it would provoke financial panic, 
major capital outflow, and an even sharper economic 
contraction.  This March will be the turning point, according 
to FIEL, as the administration will begin to receive the 
results of early voter surveys. 
 
------ 
FISCAL 
------ 
 
Disappointing January primary fiscal surplus raises concerns 
on future performance 
--------------------------------------------- --------- 
 
¶14. (SBU) On February 19, the GoA reported that the GoA 
primary fiscal surplus fell 41% y-o-y, from ARP 3.4 billion 
in January 2008 to ARP 2 billion in January 2009, lower than 
private analysts' estimate of ARP 2.4 billion.  This was the 
result of weak tax collection, which increased only 12% 
y-o-y, and higher expenditures, which increased 25% y-o-y. 
Within expenditures, transfers to the provinces increased 
150% y-o-y to ARP 1 billion and infrastructure spending 
increased by 42% y-o-y to ARP 3 billion, while subsidies 
contracted 3% y-o-y to ARP 3 billion.  (Subsidies in 2008 
totaled ARP 31 billion.) 
 
BUENOS AIR 00000232  005 OF 005 
 
 
 
¶15. (SBU) The decline in the primary fiscal surplus would 
have been 82% when excluding the revenues derived from the 
nationalized private pension funds.  After interest payments, 
the overall fiscal surplus for January was ARP 1.0 billion. 
(This compares to a fiscal surplus of ARP 2.4 billion in 
January 2008.)  Private analysts estimate the 2009 primary 
surplus at about 1.7-2.0% of GDP, compared to the 2008 
primary fiscal surplus of 3.1% of GDP, and also much lower 
than the unrealistic 2009 budget estimate of a 3.27%/GDP 
primary fiscal surplus.  The risk is to the downside, with 
the lower-than-expected January tax revenues and increasing 
fragility of the economy spurring many analysts to consider 
lowering their 2009 forecasts. 
 
Provincial Fiscal Accounts deteriorate in 2008; worse 
expected in 2009 
--------------------------------------------- --------- 
 
¶16. (SBU) Economia y Regiones (ER), a local think-tank 
specializing in provincial issues, estimates that the 2008 
provincial financial balance would post a deficit of ARP 3 
billion, compared to a deficit of ARP 700 million in 2007. 
(Provincial fiscal data is released with a large lag; the 
final annual data is often released well after the beginning 
of the first quarter of the following year.)  ER predicts 
that the provincial primary fiscal balance (the balance 
before interest payments) will be negative in 2008 for the 
first time since 2003.  They predict the primary deficit will 
reach ARP 140 million, compared to a primary fiscal surplus 
of ARP 1.7 billion in 2007.  Another prominent Argentine 
consulting company, Delphos Investment, has announced even 
more pessimistic forecasts: an ARP 600 million primary fiscal 
deficit in 2008 and an ARP 3 billion or higher overall fiscal 
deficit. 
 
¶17. (SBU) The deteriorated provincial fiscal performance in 
2008 was mainly the result of two factors: 1) an average 24% 
increase in provincial civil service salaries, which explains 
almost two-thirds of the increase in expenditures; and 2) a 
deceleration in GoA automatic co-participation transfers 
(which represent on average almost 50% of provincial income) 
due to lower federal tax collection resulting from the 
slowdown in economic activity. 
 
¶18. (SBU) The 2008 provincial fiscal result was not evenly 
distributed among provinces.  Fourteen provinces likely ended 
the year with a financial surplus, four provinces will 
probably post a primary surplus but an overall deficit, while 
six provinces will post a primary and fiscal deficit.  The 
laggards of this latter group are the Province and City of 
Buenos Aires, which jointly will post an ARP 2.1 billion 
primary deficit and an ARP 3.3 billion financial deficit in 
¶2008.  (In 2007, the combined provincial primary fiscal 
deficit was ARP 565 million and overall fiscal deficit was 
ARP 1.6 billion.) 
 
¶19. (SBU) The private sector expects the provincial financial 
situation to deteriorate even further during 2009. 
Consulting company Abeceb.com predicts the provincial primary 
fiscal deficit in 2009 will be ARP 700 million and expects 
the fiscal deficit to jump to over ARP 4 billion.  Even this 
is optimistic compared to Ecolatina's forecast of an overall 
fiscal deficit as high as ARP 12 billion in 2009, depending 
on the size of an expected nationwide increase in civil 
servant salaries. 
WAYNE