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Cablegate: Argentina Economic and Financial Review, April 7 -

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P 182033Z APR 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 0817
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 04 BUENOS AIRES 000506

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, APRIL 7 -
18, 2008

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period April 7 - 18, 2008. The
unclassified email version of this report includes tables and

SIPDIS
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
----------

-- March official CPI up 1.1% m-o-m, while private sector
estimates 3%
-- Inflation expectations top 30%; increasing concerns about
wage/price spiral
-- IMF and World Bank question Argentina's CPI
-- GoA approves financial structure for over $3.5 billion
high-speed train
-- BCRA meets monetary target for 19th consecutive quarter,
helped by Treasury FX purchases

---------
Inflation
---------

March official CPI up 1.1% m-o-m, while private sector
estimates 3%
--------------------------------------------- -----
2. (SBU) After delaying for almost a week past the normal
April 6 reporting date, Argentine national statistics agency
INDEC reported April 11 that headline consumer price
inflation in March was 1.1% month-over-month. While the
announced inflation was in line with market expectations, the
report was well below most independent analysts' estimates
for actual or "true" inflation, which range from 2.5-3.5%.
(Note: The CPI is based on the Buenos Aires metropolitan
area price survey.) On a year-on-year basis, headline
official CPI was 8.8%, slightly accelerating from 8.4% in
February. INDEC also reported that producer price inflation
of 0.9% m-o-m in March, driven by higher agricultural primary
product and manufactured good prices. In y-o-y terms,
producer price inflation was 15.5%.

3. (SBU) According to INDEC, all nine sub-indexes of the CPI
showed increases, albeit quite moderate in contrast with the
popular perception of true inflation (see below) as reported
by consumer defense organizations and independent
consultants. INDEC's measure of the food and beverages
sub-index, which accounted for about 37% of the CPI in March,
increased only 1.1% m-o-m. This figure seems to take no
account of the three-week agricultural strike in March, which
caused food shortages and substantial price hikes in urban
areas (especially for basic food such as meat, poultry, milk,
fruits and vegetables). During the strike, senior GoA
officials blamed Argentine farmers for driving up food
prices, and following INDEC's announcement of March
inflation, several private commentators noted sarcastically
that the GoA should apologize to farmers, since at least
according to INDEC there had been no such spike in food
prices.

4. (SBU) Like food and beverages, housing, transportation and
health show price increases of only 0.7 - 0.8% m-o-m,
suspiciously low levels, given anecdotal reports of
increasing prices in all three areas. The largest increase
was in education, up 7.6% m-o-m (and accounted for 25% of
headline inflation). Despite this comparatively large
increase, private analysts still consider this figure
excessively low, since March was the start of the school year
and the press is reporting much higher increases in school
fees. Similarly, the 1.1% m-o-m increase in the price of
entertainment (which includes tourism) sub-index appears to
significantly understate the price increases that took place
during the long Easter weekend.

Inflation expectations top 30%; increasing concerns about
wage/price spiral
--------------------------------------------- -----
5. (SBU) On April 15, the Finance Research Center of Di Tella
University reported that inflation expectations for the next
twelve months increased to 33% in April, up from 26.8% in
March. The gap between Di Tella's inflation expectations
survey and the BCRA consensus survey, which estimates the

BUENOS AIR 00000506 002 OF 004


next twelve months "official" inflation (INDEC-reported) at
9.7%, widened to 23.1 percentage points. Inflation
expectations have risen by over 10 percentage points since
the beginning of the year. This rapid increase in
expectations is understandable given that first quarter
"true" inflation, annualized, is in the range of 30%, "true"
March inflation annualized is in the range of 43%, and early
estimates for "true" April inflation are in the range of
2.5-3% m-o-m, or again nearing 40% on an annual basis.

6. (SBU) Increasing inflationary expectations will likely
complicate ongoing wage negotiations, and may also force
Unions to seek additional wage increase later in the year or
even to demand some form of automatic increases (Note:
directly indexing wages to inflation is illegal under
Argentine law.) Local economists are increasingly concerned
about the acceleration of inflation, expectations, and wages,
which increase the chances that the economy will experience a
hard landing when commodity prices soften.

IMF and World Bank question Argentina's CPI
-------------------------------------------
7. (SBU) Despite having expressed doubts in private to the
GoA about the quality of Argentina's CPI, the IMF included in
the April 10 release of the World Economic Outlook CPI
estimates of 9.2% for 2008 and 9.1% for 2009, in line with
official INDEC estimates. However, the IMF cautioned that
"most private sector analysts believe that actual inflation
is considerably higher than reflected in official data."
(Note: This is almost the exact caveat that Post included in
the Investment Climate Statement, released March 5, 2008.)
In February, when local press reported that IMF staff had
sent a letter to INDEC questioning its inflation-measuring
methodology, there was local speculation that the IMF would
exclude Argentine data from the report. According to
Argentine daily "Cronista Comercial," a senior IMF source
stated April 9 that "if the situation does not change and
(the Argentine government) does not make more transparent the
indices and methodologies with which it calculates CPI, the
next IMF report (to be released in six months) will probably
not include official GoA statistics."

8. (SBU) In contrast, Augusto de la Torre, World Bank Chief
Economist for Latin America and the Caribbean, opted to
exclude Argentina from a presentation he gave during the
spring IMF/World Bank meetings, showing inflation statistics
for the region. When later queried by a Cronista reporter
about inflation in Argentina, he diplomatically responded,
"The only thing I can tell you is that we understand that the
Argentine government is preparing a new inflation index with
an updated methodology and qualitative changes. We are going
to wait to see the new data." Cronista also reported that de
la Torre subsequently admitted that he did not include
Argentine inflation numbers "so as to not have to respond to
questions about it."

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

GoA approves financial structure for over $3.5 billion
high-speed train
--------------------------------------------- -----
9. (SBU) On April 4, the GoA published in the Official
Gazette Resolution N178, approving the financial structure to
pay for the politically controversial project of building a
high-speed train between the cities of Buenos Aires, Rosario,
and Cordoba. Under the resolution, the GoA will issue two
bonds to finance the construction of the train by French
company Alstom. The first bond for Euros 430 million will be
a 30-year, amortizing, dollar-denominated bond with a fixed
coupon for the first 17 years and a variable coupon of Libor
plus a spread for years 18-30. (Note: the Economy Ministry
will determine the spread nearer the launch date, expected in
May or June 2008.)

10. (SBU) The GoA expects to issue the second bond for Euros
2.0 billion in several tranches from 2009-2011. Argentina's
Congress must approve this second bond as part of the overall
2009 Budget Law (prior to January 31, 2009). This second
bond will be a thirty-year, amortizing, dollar-denominated
bond with a fixed coupon. Interestingly, these bonds will be
issued under English law, which will require the GoA to
engage in a sophisticated legal structure to avoid attachment
from "holdout" bondholders. Also, the GoA will pay French
corporate and investment bank Natixis a 3% and 1% fee (on the
principal amount) to structure and underwriting the

BUENOS AIR 00000506 003 OF 004


transaction, respectively. Interestingly, under the terms of
the agreement with Alstom, the GoA's financing obligation is
independent of the performance or completion of the project,
meaning it will be obliged to issue these bonds even in the
face of construction delays or cost increases. Local media
has independently reported that Natixis' package could be
refinanced by French export credit agency COFACE if/when the
GoA settles on its Paris Club arrears.

11. (U) Background: In May 2006, the GoA announced plans to
develop the first high-speed rail line in South America,
stretching 310 km from Buenos Aires to Rosario, with a
further 400-km line proposed for a 160km/h operation between
Rosario and Cordoba. In May 2006, the GoA held an open
tender for the contract to build the project. Four European
firms presented as bidders: Alstom (French), Siemens
(German), CAF (Spanish) and Impregilo (Italian). The total
cost of the Buenos Aires)Rosario)Cordoba line was
calculated at $4 billion. When technical and financial bids
were due in March 2007, only the Veloxia grouping of Alstom,
Isolux Corsan, Iecsa and Emepa came forward, and the GoA
selected this consortium as the preferred bidder in June
2007. President Cristina Fernandez de Kirchner officially
announced in January 2008 that Alstom and its partners had
been awarded the project. She also discussed the project
during her April 7 meeting in Paris with French President
Sarkozy. The two governments and Alstom have reportedly
agreed to sign the final contract in late April.

-- Travel Time: The Buenos Aires to Cordoba trip will take
three hours, compared to the current 10 hours by automobile.
According to the project, the journey will be served by eight
double-decker high speed trains, each with a capacity of 500
passengers, operating nine return trips/day at speeds of up
to 320 km/hour.

-- Infrastructure. The project requires construction of seven
stations and 780 kilometers of tracks, an electrical network,
signaling apparatus, the supply of rolling stock, and
maintenance. Alstom will provide overall management and
engineering, the supply of rolling stock, signaling,
communications, electrification, and maintenance. Alstom
will manufacture the trains in France and assemble them in
Argentina. IECSA and Isolux Corsan will be in charge of
civil works, and EMEPA will join Alstom in constructing the
rail line.

-- Passengers. Analysts estimate that three million
passengers per year will use the high-speed line for the
Buenos Aires ) Rosario line, and an additional 500,000
passengers will use the Rosario-Cordoba line.

12. (SBU) Concerns: Aside from the high cost, critics of
this deal point to a number of problems that complicate this
project: 1) Argentina will be going from a "Lada to a
Lamborghini," and does not have in place the necessary
expertise to operate the project -- requiring an expensive
management contract. 2) The country is already facing
electricity capacity issues, and this project will require a
large and reliable supply of power. 3) Ticket prices likely
will exceed most Argentines' capacity to pay, limiting the
number of passengers that will use the train, or requiring
significant ongoing GoA subsidies, or more likely both.
(According to an EU study, a high-speed train requires six
million passengers/year to justify the investment and nine
million passengers/year to be profitable.)

--------
Monetary
--------

BCRA meets monetary target for 19th consecutive quarter,
helped by Treasury FX purchases
--------------------------------------------- -----
13. (SBU) The BCRA announced April 14 that for the 19th
consecutive quarter it had fulfilled its monetary target in
first quarter 2008. The BCRA's 2008 Monetary Program targets
M2, which is defined as cash in circulation plus private and
public sector sight-accounts (savings and checking).
According to preliminary BCRA data, the average M2 level
during the quarter was ARP 149.8 billion, ARP 1.0 billion
below the base scenario of ARP 150.7 billion established in
the 20087 Program, and ARP 3.5 billion above the lower limit
of ARP 146.3 billion. Nominal growth of M2 reached a strong
18.2% y-o-y, but still below the upper growth target of 22.5%
and below the nominal growth of GDP. Independent economists
note that, in Argentina's increasingly inflation driven

BUENOS AIR 00000506 004 OF 004


economy, M2 growth becomes a less reliable measure of
inflationary pressures as consumers choose to limit cash
balances to avoid depreciation carrying losses.

14. (SBU) During the quarter, the GoA Treasury (under the
Economy Ministry) purchased $1.5 billion foreign exchange.
This had a contractionary impact on monetary aggregates, both
on the monetary base and M2, since the Treasury used pesos
already in circulation to make the purchases (as opposed to
the BCRA's issuance of new pesos to purchase FX). The
Treasury purchases also helped offset the expansionary effect
of private sector purchases of foreign exchange (to hedge
against high inflation and concerns about a possible
depreciation of the peso) and the increase in private sector
credit. Also, in March the agricultural strike, which mostly
halted agricultural commodity exports, reduced dollar inflows
to exporters. The combination of these factors supported the
BCRA's effort to prevent the nominal appreciation of the
peso, and alleviated the burden of sterilizing its foreign
exchange purchases (estimated by private analysts at $2.9
billion for the quarter).


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