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Cablegate: Argentina Economic and Financial Review, January

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FM AMEMBASSY BUENOS AIRES
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UNCLAS SECTION 01 OF 05 BUENOS AIRES 000245

SIPDIS

SENSITIVE
SIPDIS

NSC FOR JOSE CARDENAS, ROD HUNTER
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE
ROBITAILLE
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER

E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JANUARY
28 - FEBRUARY 22, 2008

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period January 28 - February
22, 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
----------

-- Trade surplus reaches $11.2 billion: high export prices
trump accelerating imports
-- February 20 presentation by FIEL Chief Economist
-- Former INDEC employees estimate 2007 CPI at 22-26%, almost
three times official rate
-- IMF questions INDEC on CPI calculation methodology
-- UNCTAD report shows similar FDI performance in 2006 for
Argentina and Brazil
-- Mercedes Marco del Pont sworn in as new President of Banco
de la Nacion
-- ICSID tribunal appointed for Italian holdout bondholders'
arbitration against the GoA
-- GoA appoints first Director of new Civil Aviation Agency;
day-to-day operations to remain unchanged

-----
Trade
-----

Trade surplus reaches $11.2 billion: high export prices trump
accelerating imports
--------------------------------------------- -----
2. (SBU) The value of Argentine exports grew 20% in 2007 and
imports jumped 31%, according to GoA statistics agency INDEC.
Exports totaled $55.9 billion and imports were $44.8 billion
in 2007, with a net trade surplus of $11.2 billion, down 9.4%
from the 2006 surplus of $12.3 billion. INDEC attributed 60%
of the increased value of exports to higher goods prices, and
40% to increased quantity. On the export side, the increase
was led by primary products, especially oilseeds (soy) and
grains.

3. (SBU) Total value of exports in those areas (including
processed soy) rose from $13.4 billion in 2006 to just over
$20.0 billion in 2007, roughly 70% of the total value
increase of Argentina exports during the same period.
Another $1.1 billion -- 40% of the increase other than soy
and grains, and 12% of total 2007 export growth -- was
attributed to increased automotive exports to Brazil, thanks
to a bilaterally negotiated relaxation of restrictions on the
export of Argentine finished cars and parts. Hydrocarbon and
energy exports, despite an 11% increase in price, fell 12% in
total value to $6.8 billion due to expanded GoA export
tariffs and administratively imposed local market preferences
(resulting in a 20% reduction in the quantity of energy
exports). The largest value increase in imports was in the
category of intermediate goods, which rose from $11.9 to
$15.5 billion. This was complemented by a 34% rise (to $5.1
billion) in consumption goods, a 33% increase (to $2.7
billion) in motor vehicles, and a 64% increase (up to $2.8
billion) in imports of refined hydrocarbon fuels. Imports of
productivity-enhancing capital goods also increased, up 28%
to $10.8 billion.

4. (SBU) The increase in primary global agricultural
commodity prices has contributed significantly to Argentina's
trade surplus: the 2007 price increases for exports of
Argentine primary products and agricultural-based
manufactured goods accounted for $5.8 billion in increased
exports, or 52% of Argentina's trade surplus. Local analysts
acknowledge that the trade surplus is shrinking, but do not
believe it is at risk of disappearing soon. However, a
plunge in global agricultural commodity prices would have a
severe, negative impact on the trade balance. Equally
important, any such price decline would also significantly
reduce the GoA's revenue intake, since taxes on primary

BUENOS AIR 00000245 002 OF 005


commodity exports contribute a large share of the GoA's
primary fiscal surplus.

----------------
Economic Outlook
----------------

February 20 presentation by FIEL Chief Economist
--------------------------------------------- ---
5. (U) Mission representatives attended a February 20
presentation by FIEL Chief Economist Daniel Artana (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's main points:

6. (SBU) INDEC Statistics. Manipulation of statistics goes
beyond the CPI to include wholesale prices and industrial
production indices. Evidence of data manipulation is clear
when analyzing time series, with seasonal variation of prices
for core products -- especially food items -- disappearing
over the last year.

7. (SBU) 2007 GDP growth overestimated. The BCRA consensus
survey estimates 2007 GDP growth at 8.6%, an overestimation
of up to 0.5-0.7% due to the underestimation of the CPI. GDP
data through third quarter 2007 (latest released) appears
relatively reliable, but FIEL has strong doubts about the
input data used to calculate GDP during fourth quarter 2007
and going forward. FIEL's economists predicted that the GoA
would ensure that 2008 real GDP growth remains in the
8.5-8.7% range, if not through stimulative policies then
through "methodological innovations," to use Citi's term.

8. (SBU) Impact of international turbulence. Argentina is
increasingly dependent on high global commodity prices for
its main exports for maintaining the twin surpluses (trade
and fiscal). However, the good news is that prices are
expected to remain high even with growth decelerating in the
US and Europe. Growth in China (and the rest of Asia) should
compensate for lower demand in U.S. and Europe, even if
annual real growth in China falls (as the economists expect)
from 11% to 8%. This is also partly due to the appreciation
of the Yuan, which has already appreciated 12% in 2008
compared to only 6% in 2007, providing ample room for the
dollar value of exports to remain high.

9. (SBU) Macro Policy. Fiscal and monetary policies remain
extremely expansive, with primary expenditure still growing
at a rapid pace and real interest rates still net negative.
Even though primary fiscal expenditure is decelerating (from
the 50% plus growth rate in 2007), it is still growing at
about 35% nominally, which translates to about a 15-16% real
growth rate assuming true inflation of 20%. Economists from
the entire political spectrum are calling for slower growth,
even heterodox economists who support the GoA such as Eduardo
Curia, Aldo Ferrer, and Roberto Frenkel.

10. (SBU) Energy. Two instruments that Argentina used to
attenuate energy shortages in the past were to reduce natural
gas exports to Chile and to import electricity from Brazil.
However, these two instruments are no longer particularly
useful, because Argentina barely exports any natural gas to
Chile anymore (see below graph, measured in thousands of
cubic meters)) and Brazil's recent dry weather will limit the
amount of electricity Brazil can continue to export to
Argentina. Also unclear is whether Brazil will allow
Bolivian natural gas to be diverted to Argentina. (The
recent energy summit held in Buenos Aires involving Brazilian
President Lula da Silva and Bolivian President Evo Morales
suggests that Brazil will not/not do so.) On the positive
side, two factors that should help the GoA manage the energy
shortages this winter are: 1) the two new thermal generation
plants that should come on line by May; and, 2) current
forecasts indicate that the 2008 winter may not be as cold as
the one in 2007, which was the coldest in decades.

Former INDEC employees estimate 2007 CPI at 22-26%, almost
three times official rate
--------------------------------------------- -----
11. (SBU) A group of former INDEC technicians publicly

BUENOS AIR 00000245 003 OF 005


announced their calculation of the 2007 Buenos Aires
metropolitan area CPI at about 22-26%, almost three times the
official INDEC CPI of 8.5%. These were mostly staffers fired
by Secretary of Internal Trade Guillermo Moreno, who replaced
many of the more capable and experienced INDEC employees in
charge of calculating inflation and poverty statistics, after
they reportedly refused to acquiesce to Moreno's demand that
they "adjust" the data. (Note: Moreno is the GoA official
responsible for the government's system of price controls and
is also alleged to be the mastermind behind the manipulation
of INDEC data. INDEC's internal union states that 14
employees were removed from the agency and re-employed at the
Ministry of Economy after they testified against GoA
intervention of INDEC and CPI data manipulation.
Additionally, the union argues that an unspecified number of
statisticians and administrative employees have been demoted
and replaced with employees willing to collaborate with the
Moreno.)

12. (SBU) The ex-INDEC employees mainly based their
unofficial estimate of 22-26% on the inflation rate reported
by the statistical agency of the province of Mendoza.
Mendoza's inflation rate has been strongly correlated
(99.75%) with the Buenos Aires CPI from 2003 to 2006.
According to this report, food and beverage prices have been
distorted the most. For Mendoza, this subcategory of the
index increased about 36-39%, compared to the official INDEC
increase of only 8.6%. (Note: the Buenos Aires CPI is
commonly used as the official Argentine inflation figure and
is also used to construct the CER (coeficiente de
estabilizacion de referencia), the CPI-linked index used to
adjust peso-denominated debt.) Unions have argued to the
media that INDEC's CPI does not reflect true inflation, and
are, therefore, requesting wage increases in the range of
20-35% (depending on the union) in order to maintain the
purchasing power of employees' salaries.

IMF questions INDEC on CPI calculation methodology
--------------------------------------------- -----
13. (SBU) Buenos Aires daily Cronista reported February 6
that the IMF asked GoA statistics agency INDEC, in a
seven-page written request, to clarify the methodological
changes introduced in 2007 to the CPI calculation, as well as
to explain the impact of those changes. This IMF information
request takes into account concerns among economists and
statisticians over the reliability of the CPI data, for which
there is much disagreement. INDEC reports 2007 CPI at 8.5%
y-o-y, while private analysts and former INDEC employees
estimate "true" inflation in the range of 22-26%.

14. (SBU) The IMF reportedly also asked for explanations on:
1) the reported layoffs of INDEC employees, who resisted the
alleged data manipulation; and, 2) if it were true that INDEC
had revealed to GoA officials the identity of the retailers
it surveys to measure the CPI, which would be a breach of
confidentiality. According to Cronista, the IMF alerted the

SIPDIS
GoA about the possibility of removing the Argentine inflation
statistics from its publications (such as the World Economic
Outlook report, the so-called WEO) if they fail to meet UN
standard's in compiling its statistics. (Comment: Post
understands from IMF sources that the letter included no such
threat, although the Cronista report is otherwise mostly
correct.)

UNCTAD report shows similar FDI performance in 2006 for
Argentina and Brazil
--------------------------------------------- -----
15. (SBU) Contrary to common belief that Argentina is not
receiving sufficient FDI when compared to other countries and
especially in comparison Brazil, a recent UNCTAD report finds
similarities between Argentina and Brazil and other LatAm
countries in terms of FDI. According to the report, inward
FDI flows to Argentina reached $4.8 billion in 2006, while
outward FDI flows totaled $2.0 billion, resulting in a net
inflow of $2.8 billion. In comparison, Brazil received FDI
flows of $18.8 and outflows of $28.2 billion. (For
reference, Latin-America and Caribbean as a whole received
FDI inflows of $83.7 billion and outflows of $49.1 billion.)
Even though Argentina's FDI inflows are small compared to
Brazil's in dollar terms, when measured as a percentage of
gross fixed capital formation, Argentina's FDI inflows

BUENOS AIR 00000245 004 OF 005


represent 9.6% of 2006 gross fixed capital formation, while
Brazil's inflows are only a slightly higher 10.5%. Also,
when comparing FDI stock as a percentage of GDP, Argentina
performs better than Brazil. In 2006, Argentina's FDI stock
reached $58.6 billion, or 27.4% of GDP, while Brazil stock
reached $221.9 billion, or 20.8% of GDP.

16. (SBU) The UN report ranks countries' FDI flows relative
to the size of their economies. The report presents the
Inward FDI performance Index, which is the ratio of a
country's share in global FDI inflows to its share in global
GDP, and the Outward FDI performance Index, which is
calculated as the ratio of a country's share in global FDI
outflows to its share in global GDP. In 2006, Argentina
ranked 83 on the Inward FDI Performance index (losing one
position compared to the previous year), better than Brazil
(which ranked 93), almost similar to Mexico (ranked 82), but
much worse than Chile (ranked 30). However, in the Outward
Performance Index, even though it gained two positions
compared to 2005, it ranked 54, worse than Chile (ranked 31),
Brazil (ranked 36), and Mexico (ranked 49).

-------
Finance
-------

Mercedes Marco del Pont sworn in as new President of Banco de
la Nacion
--------------------------------------------- -----
17. (SBU) On January 30, Chief of Cabinet Alberto Fernandez
swore in Mercedes Marco del Pont as President of the
state-owned Banco de la Nacion Argentina (BNA). Marco del
Pont, who replaces Gabriela Ciganotto, stated that she will
work to promote credit to small-and medium-size enterprises
(SMEs), to reduce nominal interest rates, and to improve
income distribution, as well as finance the government as
necessary (although she clarified that the 2008 GoA financial
program is manageable without BNA help). She stated that the
BNA is committed to current monetary and foreign exchange
policies, making it clear that BNA will complement the BCRA's
efforts to purchase foreign exchange to maintain an
undervalued peso. Regarding interest rates, she mentioned
the need to reduce interest rates for SMEs as well as to
extend local currency loan tenors beyond current ceilings of
about five years. It remains to be seen whether the BNA will
play a role in the GoA announced strategy to create a
national development bank similar to the Brazilian BNDES
(providing long-term credit, possibly at subsidized interest
rates, in order to promote economic development).
(Background: BNA is entirely state-owned with roughly 500
branches in Argentina and other countries. A main goal of
BNA is to serve as the financial agent of the federal
government: it receives public deposits and makes payments
on behalf of the government. Of late, BNA has concentrated
on SME lending as well as on serving under-banked sectors of
the population (e.g. lower income individuals and from
isolated towns of Argentina).)

ICSID tribunal appointed for Italian holdout bondholders
arbitration against the GoA
--------------------------------------------- -----
18. (SBU) On February 4, the World Bank appointed Swiss
citizen Robert Briner as the presiding Judge of the ICSID
(International Center for Settlement of Investor Disputes)
arbitral tribunal that will rule on the complaint filed
against the GoA by Task Force Argentina (TFA). TFA is
defending about 195,000 Italian investors that did not
participate in the 2005 GoA debt restructuring and still hold
defaulted debt totaling about $4.4 billion (and are claiming
payment of face value plus interest arrears on the defaulted
bonds). The TFA is basing its suit on the failure of
Argentina to respect the 1990 Italian-Argentine bilateral
treaty.

19. (SBU) TFA representatives celebrated the designation of
the judge as it overcame the GoA's attempts to block the
registration stage of the case and then, when that was
unsuccessful, block the appointment of the presiding judge.
(The tribunal is composed of three judges, one chosen by each
party and the third jointly agreed upon. The GoA named
Georges Abi-Saab of Egypt and TFA named Albert Jan van der

BUENOS AIR 00000245 005 OF 005


Berg of the Netherlands, but the World Bank directly
appointed Briner following the GoA's objection to the
appointed third judge.)

--------------
Civil Aviation
--------------

GoA appoints first Director of new Civil Aviation Agency;
day-to-day operations to remain unchanged
--------------------------------------------- -----
20. (SBU) Former Mendoza Governor Rodolfo Gabrielli was sworn
in on January 29 as the GoA's first Director of the
newly-created civil aviation agency, ANAC (National Civil
Aviation Administration), the organization that will
eventually take full and formal control of Argentina's civil
aviation structure. This appointment is a small but
important step in the GoA's road towards civilian control of
civil aviation in Argentina.

21. (SBU) Presently, Argentina civil aviation largely falls
under the control of two state bodies: the Ministry of
Defense's Air Regions Command, and the Secretary of
Transportation's Under Secretary of Commercial Air Transport.
ANAC will formally replace both bodies and their functions.

22. (SBU) ANAC's structure and responsibilities have slowly
been defined as a result of three GoA decrees over the past
year. Although ANAC's general role and director are now
known, these same decrees also mandate that ANAC will only
take full legal control of Argentine civair once the GoA
updates certain other aviation codes and other relevant
legislation, which the GoA has mandated will occur no later
than May 29, 2008. In fact, many observers think that ANAC
will not likely be a truly functional civair agency even
then, and the process could take another one to three years,
if not longer. Meanwhile, Argentine civair will continue to
be run, on a day-to-day basis, by the Air Regions Command and
the Secretary of Transportation (the Under Secretary of
Commercial Air Transportation's role was legally terminated
this month).

23. (SBU) Rodolfo Gabrielli is the former Peronist Governor
of Mendoza province (1991-1995), and son of another Mendoza
Governor, Francisco Gabrielli. (The Mendoza airport is named
after his father Francisco). Gabrielli was Mendoza's
Minister of Economy from 1987-1991, a national congressman
from 1995-1999, Interior Minister under former President
Adolfo Rodgriguez Saa, president of the state satellite
company ArSat under President Nestor Kirchner, as well as a
Director of the national airports regulator, ORSNA.
Observers concur that Gabrielli's considerable political
skills will come in handy in managing the diverse and
conflictive world of Argentine civil aviation.
KELLY

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