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UNCLAS BUENOS AIRES 000134 
 
SENSITIVE 
SIPDIS 
TREASURY PLEASE PASS TO WLINDQUIST. 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD PGOV PREL AR
SUBJECT: Argentina: Fiscal Situation Steadily Deteriorating But No 
Major Problems Until 2011 
 
REF: BUENOS AIRES 118 
 
Summary and Comment 
 
------------------------------ 
 
 
 
¶1.  (SBU) The long-term Argentine fiscal situation is 
deteriorating.  The fiscal gap is manageable in 2010, but will be 
difficult to overcome in 2011 without a restoration of the 
government's ability to borrow on the international financial 
markets.  The GOA has, so far, managed to bridge the gap during the 
last few years via the use of internal sources of financing from 
public Argentine institutions and one-off payments from 
institutions such as the Central Bank (BCRA) and the Social 
Security Agency (ANSES).  While these payments will be made in 
2010, when the fiscal gap is estimated to be in the USD 3-5 billion 
range, they cannot be depended on to continue indefinitely.  In 
2011, however, the gap is forecast by some to balloon to as high as 
USD 14 billion. 
 
 
 
¶2.  (SBU) With this in mind, the government's quest for 
supplemental sources of funds led it to establish the (as yet 
unrealized) Bicentennial Fund and is also likely behind its efforts 
to solve the problem of the holdouts from the 2005 debt 
restructuring, which should increase its ability to borrow on the 
international markets.  In addition, the government just announced 
the appointment of a Kirchner-aligned economist as the President of 
the BCRA, who is likely to accommodate the government's 
expansionary fiscal program.  These steps make it somewhat less 
likely that the government will resort to extraordinary actions 
reminiscent of the decision in 2008 to nationalize privately-held 
pension funds.  This additional monetary and fiscal expansion 
brings with it the specter of inflation, which is already 
accelerating and expected to reach 20 percent in 2010.   End 
Summary and Comment. 
 
 
 
Surplus Decreased 47% from 2008 to 2009 
 
--------------------------------------------- --------- 
 
 
 
¶3.  (SBU) According to the Argentine Ministry of Economy, the 
primary fiscal surplus decreased 47% y-o-y from ARP 32 billion in 
2008 to ARP 17.3 billion in 2009.  The 2009 surplus -- equivalent 
to 1.5% of GDP -- is well below 2008's 3.1% level.  While these 
figures do indicate that Argentina's fiscal situation is worsening, 
they understate the overall deterioration in the GOA's fiscal 
stance.  The official figures for 2009 include: extraordinary 
income of about ARP 9.5 billion related to the IMF's Special 
Drawing Rights (SDR) allocation to the Argentine Central Bank 
(BCRA) -- an amount determined by an IMF  member country's 
shareholder stake;  accounting earnings of ARP 8.3 billion from the 
accrual of interest and dividends on funds held at the Social 
Security Agency (ANSES), assets which had previously been managed 
by private pension funds prior to their nationalization in late 
2008; and the distribution of ARP 4.5 billion in unrealized BCRA 
profits, mostly due to the peso's depreciation. 
 
 
2009 "Surplus" is Actually a Deficit 
 
--------------------------------------------- 
 
 
 
¶4.  (SBU) Deducting these three extraordinary items from the 
positive side of the fiscal ledger, the 2009 government-reported 
ARP 17.3 billion (1.5%) surplus turns into an actual deficit of ARP 
4.5 billion, or 0.4% of GDP.  Consultant and former Economy 
Ministry Director General Javier Alvaredo told Dep EconCouns 
recently that, according to his calculations, the true primary 
fiscal deficit for 2009 was 1.6% of GDP.  Regardless of which 
figure is more accurate, the trend is clear.  There has been a 
steady deterioration on the fiscal front in recent years.  After 
reaching almost 4% of GDP in 2004, the true primary fiscal surplus 
halved to about 2% in 2007 and 2008 and went into free-fall in 
2009, turning into a deficit. 
 
 
 
Expenditures Keep Growing 
 
----------------------------------- 
 
 
 
¶5.  (SBU) Regarding the rate of growth of tax collection and 
expenditures, the picture is unpromising, casting doubts on the 
GOA's ability or willingness to control spending.  In 2007, 2008, 
and 2009, tax collection, according to government figures, 
increased 33%, 35%, and 13%, respectively, compared to a growth in 
primary expenditures of 44%, 35% and 30%, respectively.  In 2010, 
the government does not appear to be on track to moderate spending 
growth, leading private analysts to forecast a further 
deterioration in its fiscal position.  Private estimates of the 
primary fiscal balance for the year range from a deficit of 1% of 
GDP to a surplus of 0.5%, depending on the assumptions used.  A 
Banco Galicia report forecasts expenditure growth of 27% versus 
growth in tax collections of 24%, leading to a primary fiscal 
surplus of ARP 13 billion (or about 1% of GDP).  Macrovision 
Consulting estimates that primary spending will increase 26% and 
tax collections 23%, leading to a balanced primary fiscal result. 
Alvaredo came in with a much more negative forecast for 2010, 
saying that a 34% primary spending increase (an average of the last 
three years, according to his own calculations), will generate a 
primary fiscal deficit of 2.5% of GDP.  He also posited a scenario 
in which primary expenditures would only increase by 25%, which 
would improve the primary fiscal deficit to 1% of GDP. 
 
 
 
2010 Manageable 
 
---------------------- 
 
 
 
¶6.  (SBU) In spite of the range of forecasts for the fiscal 
accounts, analysts generally believe that the GOA's financial 
program is manageable through the end of 2010.  If the debt 
restructuring for the holdouts is carried out sometime during the 
first quarter of 2010, that transaction is expected to bring about 
USD 1 billion in new cash to the GOA.  Furthermore, the GOA is 
still thought to retain a few pockets of liquidity that it could 
tap to meet its financing needs.  The largest, as in past years, 
are the BCRA's expected 2010 profits of about ARP 20 billion and 
 
 
ANSES' expected 2010 interest earnings of around ARP 8 billion. 
The appointment of Kirchner loyalist Mercedes Marco del Pont as the 
new President of the BCRA increases the likelihood that the BCRA 
will act in accord with the government's fiscal plans. 
 
 
 
Substantial Deterioration in 2011 
 
---------------------------------------- 
 
 
 
¶7.  (SBU) Banco Galicia Chief Economist Nicolas Dujovne says that 
the 2010 fiscal gap will total about USD 3.5 billion.  He arrives 
at this figure after taking into account USD 1 billion in cash 
raised in the debt exchange, USD 1.6 billion in continuing support 
from international financial institutions that still operate in 
Argentina, and the support of ANSES and BCRA mentioned above. 
Dujovne explained that it will be easy to manage this gap, even 
without the potential additional assets provided by the 
Bicentennial Fund, which is still pending Congressional approval 
that could come as early as March when Congress reconvenes. 
Assuming that the Bicentennial Fund is authorized and the 
government makes full use of those newly-available funds, Dujovne 
says that expenditures could grow as much as 37% without expanding 
the financial gap beyond USD 3.5 billion.  Beyond 2010, the picture 
gets much worse, as he forecasts a 2011 financing gap of almost USD 
14 billion, even taking into account continued extraordinary income 
from ANSES (he does not foresee any from the BCRA), which is 
certainly not assured.  As Dujovne puts it, "Two Bicentennial Funds 
will be necessary if public expenditures are maintained at the same 
pace as in 2009 (+30%)." 
 
 
 
No "Credit Event" Expected in 2010 
 
--------------------------------------------- 
 
 
 
¶8. (SBU) Standard and Poor's Argentine Country Director Sebastian 
Briozzo told Dep EconCouns that the fiscal situation is continuing 
its slow and steady deterioration.  He said that the government's 
long-term strategy of tapping internal sources of financing by 
rolling over debt with public entities is running out of fuel. 
However, he maintained that whatever the fiscal gap ends up being 
in 2010, it ought to be easily manageable for a country with an 
economy the size of Argentina's.  The GOA's plan to set up the 
Bicentennial Fund was meant to enable the government to pursue a 
more aggressive and expansive fiscal policy.  It would allow 
considerable room for maneuver in terms of increasing discretional 
public spending, likely to be used to bolster support for the 
government among provincial governors who face a grim fiscal 
situation now. 
 
 
 
¶9.  (SBU) Briozzo forecast a reasonable economic performance in 
2010, with no "credit event" expected.  While he did not completely 
rule out extraordinary measures similar to the 2008 nationalization 
of the pension funds, Briozzo expressed a certain optimism 
regarding the short-term, especially if the debt restructuring 
proposal proceeds and the country begins to borrow on the 
international markets.  He added, however, that the situation in 
2011 looked considerably grimmer, and could only be alleviated by 
 
 
access to international borrowing.  Otherwise, he noted, the 
government might be forced to take another extraordinary step 
similar to the pension nationalization. 
 
 
 
"Disastrous Consequences for Inflation" 
 
--------------------------------------------- ---- 
 
 
 
¶10.  (SBU) Javier Alvaredo also characterized the creation of the 
Bicentennial Fund as a political act designed to facilitate 
additional discretionary spending.  He pointed out that the fine 
print in the decree that established it leaves open the theoretical 
possibility of almost tripling it at some point to about USD 18 
billion.  Even prior to the appointment of the new BCRA President, 
he viewed the Bank and its Board of Directors as weak and overly 
responsive to the Kirchners.  As such, he said it stands ready to 
monetize GOA fiscal needs, with "disastrous consequences for 
inflation." 
MARTINEZ