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P 272013Z MAR 09
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RUEHSO/AMCONSUL SAO PAULO PRIORITY 3905
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UNCLAS SECTION 01 OF 04 BUENOS AIRES 000361 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, MARCH 
9-23, 2009 
 
REF: BUENOS AIRES 284 
 
BUENOS AIR 00000361  001.2 OF 004 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period March 9-23, 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 
---------- 
 
-- President Kirchner announces plan to share soybean export 
tax revenues with provinces 
-- Disappointing February primary fiscal surplus 
-- Current account surplus narrows, net capital outflows 
increase in Q4 2008 
-- Peso depreciation continues, hitting 3.7 pesos/dollar 
March 23 
-- GoA public debt $145.9 billion at year-end 2008 
-- Consumer Confidence Index decreases 5% m-o-m; inflation 
expectations remain high 
 
------ 
FISCAL 
------ 
 
President Kirchner announces tax revenue-sharing plan 
--------------------------------------------- -------- 
 
¶2. (SBU) President Cristina Fernandez de Kirchner 
unexpectedly announced March 19 that the GoA will share 30% 
of the soybeans export tax proceeds with provincial 
governments and municipalities.  On March 20 the GoA 
published in the Official Gazette an emergency and necessity 
decree (N 206) formally creating a special "Federal 
Solidarity Fund" to channel the 30% revenue share to the 
provinces.  The funds will be earmarked for infrastructure, 
housing, schools, and water and sanitation projects.  (Note: 
until now, the GoA kept 100% of export tax revenues.) 
According to the decree, state-owned Banco de la Nacion will 
daily and automatically transfer the funds to the provinces. 
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 from this new 
measure, which enters into force April 1. 
 
¶3. (SBU) During the conference, President Kirchner 
acknowledged that the measure means a reduction of the 
federal fiscal surplus, but added that sustaining the 
national accounts also means sustaining provincial and 
municipal accounts.  The GoA estimates that, at current 
international prices, with the new revenue-sharing 
arrangement, the provinces will receive $1.8 billion annually 
(ARP 6.5 billion, or about 0.5% of GDP, or 11% of what 
provinces receive from coparticipation).  Although this 
measure will reduce GoA revenues, analysts do not expect it 
to worsen the federal fiscal surplus by the same magnitude 
because they predict the GoA will compensate by reducing 
discretionary transfers to the provinces.  These 
discretionary transfers reached 1.5% of GDP (about US$ 1.5 
bn) in 2008; and analysts had expected such transfers to rise 
to 2% of GDP (about US$ 6 bn) in 2009.  Therefore, if the GoA 
maintains discretionary transfers at the 2008 percentage 
level, the net result of sharing soy export tax revenues will 
be less than half a billion dollars. 
 
¶4. (SBU) The move to share the revenue with the provinces is 
politically shrewd.  First, it attempts to win political 
support from provincial governors and mayors ahead of the 
midterm legislative elections (likely to be advanced to June 
28 from October 25).  Second, it seeks to undermine popular 
support for farmers' demands to reduce soy export taxes from 
their current 35% level, since the fund will finance 
politically popular infrastructure and social programs. 
Third, it also counters farmers and local governments' 
allegations that the GoA uses export tax proceeds to fund 
projects and programs benefiting the Kirchners' urban 
constituency, neglecting the countryside where soy production 
 
BUENOS AIR 00000361  002.2 OF 004 
 
 
actually takes place.  (Note:  the main soy producing 
provinces -- Buenos Aires, Cordoba, Santa Fe, Entre Rios, 
Santiago del Estero, Chaco -- will still receive a smaller 
proportion than what they pay in export taxes.  According to 
Argentina's coparticipation scheme, these six provinces will 
receive 52% of the disbursements from the Solidarity Fund, 
whereas they contribute 92% of total revenue deriving from 
export taxes on soybeans, soybean meal, and soybean oil. 
Farmers' representatives have criticized the President's 
measure, calling it a "provocation," and announced more 
protests and roadblocks.  They initiated a 7-day strike on 
March 21.  (See BA 331 and 342 for more details.) 
 
Disappointing February primary fiscal surplus 
--------------------------------------------- 
 
¶5. (SBU) The GoA announced March 19 that the primary fiscal 
surplus declined 50% y-o-y, from ARP 3.2 billion in February 
2008 to ARP 1.6 billion in February 2009, much lower than 
private analysts' estimate of ARP 1.9 billion.  This was the 
result of weak tax revenue, which increased only 13% y-o-y to 
ARP 17.7 billion, and higher expenditures, which increased 
20% y-o-y to ARP 14.7 billion.  Within expenditures, 
infrastructure spending increased by 28% y-o-y, subsidies to 
the private sector increased 28% y-o-y (in spite of tariff 
increases), and salary expenditure jumped 41% (due to both 
higher salaries and an increase in the number of employees). 
The year/year decline in the primary fiscal surplus was 97% 
when excluding the ARP 1.5 billion in revenues derived from 
the nationalized private pension funds.  After interest 
payments, the overall fiscal surplus for February was ARP 637 
million.  GoA Secretary of the Treasury Juan Carlos Pezoa 
acknowledged to local press that 2009 primary fiscal target 
of 3.27% of GDP may not be achievable.  Although Pezoa 
downplayed the impact of the Federal Solidarity Fund (see 
above item), he pointed to the deteriorated international 
environment as the complicating factor.  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. 
 
--------------- 
EXTERNAL SECTOR 
--------------- 
 
Current account surplus falls in Q4 2008 
---------------------------------------- 
 
¶6. (SBU) The GoA Economy Ministry announced March 19 the 
Balance of Payments (BOP) results for the fourth quarter of 
2008, showing a current account surplus of US$ 1.8 billion. 
This was above the BCRA market forecast of US$ 1.6 billion, 
but much lower than the US$ 3 billion surplus in the fourth 
quarter of 2007.  The US$ 1.2 billion quarter-over-quarter 
decrease was mainly the result of lower exports, since 
imports and dividend remittances remained largely unchanged. 
The merchandise trade surplus in Q4 reached US$ 3.6 billion, 
compared to the Q4 2007 trade surplus of US$ 4.6 billion. 
(Note: exports dropped 6% y-o-y and imports rose 1% y-o-y in 
Q4 2008, according to INDEC.)  Despite the sharp drop in 
agriculture commodity prices in the second half of 2008, the 
merchandise trade surplus increased to US$ 16 billion in 
2008, compared to a surplus of US$ 13.3 billion in 2007. 
 
¶7. (SBU) Despite the significant deterioration of the current 
account in Q4 2008, Argentina still posted a US$ 7.6 billion 
surplus for the full year, up from US$ 7.1 billion in 2007 
(largely due to the higher trade surplus).  However, the 
current account surplus did not cover the full-year capital 
account deficit, which plunged from a US$ 5.3 billion surplus 
in 2007 to a large US$ 9.2 billion deficit in 2008, as a 
result of a spike in capital flight.  (Note: This was the 
first year since 2002 where the combined capital and current 
accounts were in deficit.) The capital account showed net 
capital outflows of US$ 3.4 billion in Q4 2008, versus net 
capital outflows of just US$ 186 million in Q4 2007.  These 
outflows are mainly explained by the non-financial private 
sector, which totaled US$ 3.4 billion.  Accumulated 
non-financial private sector outflows totaled US$ 11.3 
billion in 2008 (compared to US$ 1.2 billion in 2007). 
 
¶8. (SBU) The capital outflows reflect growing lack of 
confidence in the economy and GoA, particularly following the 
March-July campo crisis and the GoA's decision in October to 
nationalize the private pension funds.  Official BCRA 
Reserves decreased almost US$ 850 million during Q4 of 2008 
 
BUENOS AIR 00000361  003.2 OF 004 
 
 
to US$ 46.4 billion (as of December 2008).  (Note: the above 
graph shows a minor increase in reserve levels during 2008 -- 
roughly US$ 200 million.  This is accounted for in the 
relatively high US$ 1.6 bn figure for "errors and omissions" 
in the 2008 BOP report, compared to 'errors and omissions of 
under $800 million in 2007.)  The BCRA consensus survey 
forecasts the current account surplus at only $2.6 billion 
for 2009, compared to the current account surplus of $7.6 
billion in 2008.  (Note: the BCRA consensus survey does not 
present estimates for the capital account.)  Assuming capital 
outflows continue at a high rate in 2009, the much lower 
current account surplus implies a large reduction in BCRA 
reserves this year. 
 
¶9. (SBU) Clarification: Do not confuse the BOP data on 
capital outflows with the US$ 23.1 billion figure that the 
media reports for capital flight in 2008.  The BCRA is the 
source of the latter figure, which is derived from its 
Foreign Exchange Balance (FEB) report.  The FEB and BOP 
report have a similar format.  However, the former reports 
purchase and sales of foreign currency without considering 
the residency of the parties, while the latter reports 
economic transactions focusing on the residency of the 
intervening parties.  Also, the FEB uses a cash basis 
methodology, while the BOP uses accrual accounting.  The FEB 
calculates capital flight of $23.1 billion in 2008 (roughly 
2.5 times the 2007 level). 
 
------- 
FINANCE 
------- 
 
Peso depreciation continues in March 
------------------------------------ 
 
¶10. (SBU) As of March 23, the Argentine peso had depreciated 
3% against the dollar since the beginning of March and 6% 
since the beginning of the year.  It closed at 3.70 
pesos/dollar on March 23, two cents higher than the March 20 
close of 3.68.  The BCRA has managed a gradual depreciation 
of the peso since the beginning of the year.  However, the 
GoA announcement to advance elections, coupled with the 
announcement on soy export tax revenue-sharing, have spooked 
markets that are already nervous due to the decelerating 
national economy, uncertain outlook for the intrnational 
economy, and resurgence of the GoA conflict with Argentine 
farmers.  (Note: specifically, the worry is that farmers will 
continue to withhold exports.  The combination of lower 
exports and lower world commodity prices has already 
drastically reduced the supply of dollars circulating in the 
economy at the same time that dollar demand has increased.) 
 
¶11. (SBU) Many private analysts have accelerated their 
estimates peso depreciation during 2009, expecting the 
exchange rate to reach 4.2-4.3 pesos/dollar by the end of the 
year, compared to estimates published in early March of 3.8-4 
pesos/dollar.  For reference: the 6-month and one-year NDF 
(non-deliverable forward) closed March 20 at 4.24 and 4.86, 
respectively.  The BCRA calculates the six-month peso-dollar 
forward price at about 3.85 and the 12-month price at almost 
4.1.  Despite the expected sharper depreciation of peso, 
analysts expect the BCRA to make every effort to continue the 
gradual depreciation of the peso at least until the elections 
in late June (assuming the Senate approves the law to bring 
forward the elections, which the Chamber of Deputies approved 
March 18). 
 
GoA public debt $145.9 billion at year-end 2008 
--------------------------------------------- -- 
 
¶12. (SBU) On March 13, the Economic Ministry released updated 
data on GoA debt, current as of December 2008.  In 2008, the 
GoA debt stock (excluding the so-called "holdouts," or 
bondholders who did not participate in the 2005 debt 
restructuring) increased only $291 million to $145.9 billion, 
or 48% of GDP.  The increase was due to $770 million in GoA 
bond issuances, an $1.1 billion increase in bond principal 
due to the capitalization of interest (mainly on bonds issued 
during the 2005 debt restructuring), and $4.5 billion due to 
the increase in CER (CPI-linked index) to which roughly 77% 
of GoA bonds adjust their principal payments.  This increase 
was mostly offset by the $6.8 billion debt reduction 
resulting from favorable exchange rate adjustments (mainly 
the depreciation of the peso and the EURO relative to the 
dollar).  When including holdout debt, currently totaling 
 
BUENOS AIR 00000361  004.2 OF 004 
 
 
about $28.9 billion, the public debt stock rises to $174.9 
billion, or 58% of GDP. 
 
¶13. (SBU) The currency composition (excluding holdouts) of 
the national debt is almost equally divided between 
foreign-currency-denominated debt (53% or $77 billion) and 
peso-denominated debt (47% or $69 billion).  Within the 
peso-denominated debt, the 77% adjusted by CER is distorted 
by the use of the "official" 2008 inflation rate of 7.2%, 
which is less than half the "true" inflation rate of about 
20%, as estimated by private analysts.  For 2009, the GoA 
estimates it will make $24 billion in principal payments and 
$4 billion in interest payments.  Since theprimary fiscal 
surplus is deteriorating rapidly due to both disappointing 
tax collection and increased expenditures ahead of the 
legislative elections, it is as yet unclear how large the GoA 
financing gap will be in 2009.  However, the GoA has engaged 
in liability management operations to reduce the debt 
obligations.  Aside from the nationalization of the private 
pension funds and the debt swap of Prestamos Garantizados 
(see February 27 Economic and Financial Review), the press 
reports the GoA now plans a debt swap for Boden 2012s.  FIEL 
and Estudio Bein, two well-known local economic consultant 
firms, estimate that the 2009 financial gap could reach $5 
billion.  However, the rapid deceleration of GDP could show 
these estimates to be overly optimistic. 
 
--------------------------------------------- - 
INFLATION EXPECTATIONS AND CONSUMER CONFIDENCE 
--------------------------------------------- - 
 
Consumer confidence falls; inflation expectations high 
--------------------------------------------- --------- 
 
¶14. (SBU) Torcuato Di Tella University's consumer confidence 
index decreased 5% m-o-m to 37.4 points in March.  The index 
accumulated a decrease of 27% from its level of 51.5 points 
in December 2007, when President Cristina Fernandez de 
Kirchner took office.  (Note: The index is based on surveys 
of individuals and consumers' willingness to purchase durable 
goods, houses, and cars.)  For reference: the index dipped to 
below 40 in June during the farm conflict, subsequently 
recovered slightly, and than began to fall again in October 
2008 following the nationalization of the private pension 
funds.  The index has since been highly volatile, with a 
decreasing long-term trend.  In March, all three index 
components declined: 1) consumer willingness to purchase 
durable goods and real estate decreased 17%; 2) consumer 
sentiment towards the macroeconomic environment decreased 
2.7%; and 3) consumers' perception of personal economic 
well-being decreased 0.9%.  According to analysts, the 
deterioration in consumer sentiment is explained by the view 
that the economy will continue to slow rapidly in the months 
ahead, with a large impact in unemployment plus continued 
high inflation. 
 
¶15. (SBU) A key factor affecting consumer sentiment is 
inflation.  Though the median of Di Tella University's 
inflation expectations index, covering the next 12 months, 
improved from 25% in February to 20% in March, it is still 
very high given the contracting economy.  For comparison, the 
BCRA consensus survey estimate for the next 12 month 
inflation is only 7.1% (reflecting what the market expects 
the official INDEC figure will be).  Most private analysts' 
estimates for "true" inflation in 2009 hover around mid to 
high teens.  This shows that consumers are overshooting their 
inflation expectations in the absence of reliable official 
statistics.  (Note: According to INDEC, February's CPI 
increased 0.4% m-o-m, compared to private analysts' estimate 
of around 1%.  INDEC's estimate for y-o-y inflation remained 
unchanged at 6.8% in February, versus private estimates of 
15-20%.) 
 
 
WAYNE