VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #0331/01 0792228
ZNR UUUUU ZZH
R 202228Z MAR 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3365
INFO RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000331 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ETRD PGOV AR
SUBJECT: Argentina: GoA Ups Ante on Export Tax Debate - Announces 
Partial Revenue Sharing with Provinces 
 
Ref: (A) Buenos Aires 314 
     (B) '08 Buenos Aires 1549 
 
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Summary 
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¶1. (SBU) President Kirchner announced March 19 that, via emergency 
decree, the GoA will share 30% of export tax proceeds on soybeans 
with provincial governments and municipalities.  These funds, 
roughly US$ 1.8 billion per year at current commodity prices, are to 
be earmarked for "social infrastructure" spending, including 
hospitals, schools, and water systems.  Agricultural groups have 
portrayed the revenue-sharing announcement as an attempt to buy the 
support of cash-strapped provincial Governors in advance of mid-term 
elections, likely to be held on June 28.  They reject the GoA's 
description of the initiative as an effort to boost provincial 
welfare, and have called for more roadblocks, some of which were 
reportedly put in place just hours after Kirchner's speech.  Local 
analysts speculate that the GoA's revenue-sharing announcement, 
which will reduce the federal primary fiscal surplus, will prompt 
further depreciation of the peso, already under pressure due to 
Argentines' concerns over a decelerating economy and uncertainties 
generated by the GoA push to advance elections.  The President's 
announcement is clearly an effort by the Kirchner administration to 
fragment the alliance of agricultural producers and governors of 
rural provinces who favor of a reduction in GoA export taxes.  End 
Summary. 
 
------------------------------------ 
GoA Emergency Revenue-Sharing Decree 
------------------------------------ 
 
¶2. (SBU) In a hastily convened ceremony the evening of March 19 at 
the presidential residence that included the full cabinet and 
governors of major provinces, President Cristina Fernandez de 
Kirchner (CFK) announced that, via emergency decree, the GoA will 
share 30% of export tax proceeds on soybeans (including soybean meal 
and soybean oil) with provincial governments and municipalities. 
(Export taxes have traditionally not been shared with the provinces, 
with 100% going to the federal treasury.)  In her remarks, the 
President estimated that this revenue-sharing will, at current soy 
prices, provide provinces an additional US$ 1.8 billion annually 
(approximately 0.5% of GDP), boosting their federal revenue-sharing 
income by roughly 11% per year. 
 
¶3. (SBU) The GoA published decree N 206 March 20, creating a special 
"Federal Solidarity Fund" to channel the 30% revenue share to the 
provinces.  The funds will be earmarked for "social infrastructure" 
spending, including hospitals, schools, water systems and other 
projects.  According to the decree, state-owned Banco de la Nacion 
will daily and automatically transfer the funds to the provinces 
(divided according to the normal "co-participation" distribution 
formulas that apply to GoA transfers).  Provincial governments will 
then be obligated to automatically distribute 30% of what they 
receive to their own municipal governments.  This will leave the 
provincial governments with approximately US$1.2 billion stemming 
from this new measure, which enters into force April 1. (Note: Main 
soy-producing provinces -- Buenos Aires, Cordoba, Santa Fe, Entre 
Rios, Santiago del Estero, and Chaco -- will still receive less than 
what they provide to the solidarity fund.  Under the existing 
revenue sharing "co-participation" system, those six provinces 
receive 52% of GoA revenue-sharing funds, whereas they contribute 
over 90% of soy export tax revenue.) 
 
¶4. (SBU) This GoA move follows on the heels of two recent 
developments that have raised the temperature of the year-long 
conflict between the GoA and the agricultural sector over what the 
latter sees as a lack of GoA support in the face of lower 
agricultural commodity prices and damage sustained by the sector due 
to the worst drought in 50 years.  The first development was an 
inconclusive meeting on March 17 -- the fourth in four weeks -- of 
GoA Production Minister Giorgi and Interior Minister Randazzo with 
agricultural sector association leaders who seek a reduction in the 
35% soy export tariff (Ref A).  The second was the March 19 failure 
of opposition parliamentarians -- in the face of ruling party 
intransigence -- to muster a quorum to have export tariffs debated 
by the full lower house. 
 
-------------------------------- 
Impact on Primary Fiscal Surplus 
-------------------------------- 
 
¶5. (SBU) In her remarks, CFK admitted the measure "means a 
diminution of the nation's fiscal surplus, but we believe that 
sustaining the nation's accounts also means sustaining provincial 
and municipal accounts."  According to official statistics, export 
 
taxes provided roughly 13% of total GoA revenues in 2008, and taxes 
on soy exports are a significant percentage of this total, so the 
proposed sharing of soy export tax revenues has the potential to 
impact the primary fiscal surplus. (Exact figures are unavailable, 
but export tax revenues from soybeans are estimated to comprise up 
to 75% of total revenues from exports of the main grains and 
oilseeds crops, which make up a large majority of total export tax 
revenue.) 
 
¶6. (SBU) While the measure will reduce GoA revenues by $1.8bn per 
year, analysts expect the GoA to compensate by reducing 
discretionary transfers to the provinces.  These discretionary 
transfers reached 1.5% of GDP in 2008; before this announcement, 
analysts had expected (and had included in their 2009 fiscal surplus 
estimates) that discretionary transfers would have risen to 2% of 
GDP (or roughly US$6 billion).  If the GoA instead maintains 
discretionary  transfers at the 2008 percentage level, the net 
impact is minimal. 
 
¶7. (SBU) The GoA reported March 19 that the central government's 
primary fiscal surplus dropped to just US $1.6 billion in February, 
down 20% from January levels and down 50% y-o-y.  While the GoA's 
2009 budget targets a primary fiscal surplus of 3.3% of GDP, there 
is growing concern that declining tax revenues (due to lower global 
commodity prices, significant declines in export volumes, and a 
contracting economy) and the GoA's intent to maintain 
contra-cyclical spending in advance of mid-term elections will make 
it difficult for the GoA to achieve this target.  Any significant 
increase in transfers to the Province will further complicate GoA 
efforts to maintain a strong fiscal position. 
 
------------------------------- 
Farm Groups and GoA Trade Barbs 
-------------------------------- 
 
¶8. (SBU) Agricultural groups have portrayed the revenue sharing 
announcement as an attempt to buy the support of cash-strapped 
provincial Governors in advance of mid-term elections which could be 
held as early as June 28.  Analysts believe the Kirchners hope to 
co-opt the governors by giving them a stake in the controversial soy 
tax revenues, and thus keep them from siding with the farmers. 
Gaining the buy-in of governors will also thwart farmers' efforts to 
get Congress to lower the export duties, since many legislators 
answer directly to their provincial governors.  "This is a new 
declaration of war on the agriculture sector," said opposition 
Senator Gerardo Morales.  "They're putting soy money directly into 
the campaign," Argentine Agrarian Federation head Eduardo Buzzi said 
in an interview with local media.  Interior Minister Florencio 
Randazzo responded that the CFK revenue-sharing initiative proves 
the GoA wants to boost provincial welfare, rather than collect high 
export taxes for its own purposes.  "It's not about the coffers," 
Randazzo said, "It's about increasing and sustaining economic 
activity and employment."  Farmers' groups appear to have rejected 
this explanation, have called the measure a "provocation" and have 
called for more roadblocks, some of which were reportedly put in 
place just hours after CFK's speech. 
 
-------------------------------------------- 
Market Reaction:  More Pressure on the Peso? 
-------------------------------------------- 
 
¶9. (SBU) It is as yet early to determine how markets will react to 
this announcement, and it will also be difficult to differentiate 
market reactions to this announcement while domestic equity and 
fixed income markets are still roiled by GoA's efforts to move up 
elections.  Nevertheless, many analysts speculate that this 
announcement will result in the further depreciation of the peso, 
already under pressure due to Argentines' concerns over the 
deceleration of the economy and the uncertainty generated by the 
decision to advance the elections.  Not only does this measure 
increase concerns about the GoA's fiscal strength and ability to 
meet debt payments, but if farmers respond by continuing to withhold 
exports, it will reduce the amount of dollars circulating in the 
economy.  Despite market expectations that the Argentine Central 
Bank will continue to intervene strongly in the spot and future 
markets to maintain the peso stable, analysts now expect the peso to 
hit 3.80 or higher prior to the late-June elections (compared to the 
current level of 3.67 pesos/dollar). 
 
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Comment 
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¶10. (SBU) It remains to be seen whether the President's announcement 
will result in a net increase of funds for the provinces, but 
clearly it is an effort by the Kirchner administration to fragment 
the alliance of agricultural producers and governors of rural 
 
provinces who favor a reduction in GoA export taxes.  Pundits have 
interpreted this as a shrewd move by former President Nestor 
Kirchner to respond to farmer and local government complaints that 
the GoA uses export tax revenues discretionally to reward its urban 
constituencies rather than return them to rural soy producing areas. 
 Additionally, by increasing revenue transfers to the provinces, the 
GoA is likely to garner extra political support from provincial 
governors and mayors ahead of the midterm legislative elections. 
Governors routinely complain that the GOA is not living up to legal 
requirements to share designated federal revenue streams with the 
provinces.  Some governors and many local analysts also accuse the 
GoA of political favoritism in disbursing the funds and not 
following the complex and partially population-based distribution 
formula established by law (See Ref B for a detailed history of 
Argentina's provincial revenue sharing system).  Finally, the 
President's announcement may succeed in reducing popular support for 
farmers' demands for lower export taxes, since the fund will be used 
for politically popular social and infrastructure projects. 
 
WAYNE