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Cablegate: Argentina: Economy Minister Fernandez On Economic Impact Of

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0976/01 1991509
ZNR UUUUU ZZH
R 171509Z JUL 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 1545
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 000976

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL EINV AR
SUBJECT: Argentina: Economy Minister Fernandez on Economic Impact of
Agricultural Strike

Ref: (A) Buenos Aires 0974
(B) Buenos Aires 610
(C) Buenos Aires 831
(D) Buenos Aires 842

This cable contains sensitive information - not for internet
distribution.

-------
Summary
-------

1. (SBU) GoA Economy Minister Fernandez, in a meeting with WHA
Assistant Secretary Shannon, Treasury DAS O'Neill, and Ambassador,
emphasized the "legitimate right" of President Cristina Fernandez de
Kirchner to unilaterally impose variable export tariffs on
agricultural commodities, but argued that her June decision to
request parliamentary approval for these taxes has since helped
inform and "order" public debate on the issue. Fernandez
acknowledged that uncertainties generated by the extended conflict
had impacted domestic financial markets, with recent evidence of
deposit withdrawals and capital flight. But Argentina's current
economic situation is far stronger than it was in past crises, he
argued, with almost $50 billion in reserves and twin fiscal and
trade surpluses providing the economy a solid "structural"
foundation. Fernandez called the GoA's fiscal situation through
June 2008 "good", notwithstanding the fact that revenues fell short
of projections due to the agricultural sector holding back on
taxable exports. Fernandez called the GoA's pending announcement of
"Bicentennial" projects and reforms still undefined due to the GoA's
preoccupation with the agricultural sector conflict agenda but he
indicated that the GoA was working on a number of initiatives aimed
at boosting consumer income. He called generating additional auto
domestic sector production a GoA priority to generate jobs and
reduce the bilateral trade deficit with Brazil. Fernandez noted his
earlier meeting with Treasury DAS O'Neill at the June regional
finance ministers meeting in Cancun and said he plans to attend the
October Bank/Fund annual meeting in Washington. End Summary

-----------------------------------------
Cancun Regional Finance Ministers Meeting
-----------------------------------------

2. (U) Assistant Secretary Thomas Shannon, Treasury Deputy Assistant
Secretary Brian O'Neill, and Ambassador met Friday morning, July 11
with Economy Minister Carlos Fernandez prior to the second round of
USG/GoA bilateral discussions (Ref A). Also attending were Vice
Foreign Minister Taccetti, Argentine Ambassador to the U.S. Hector
Timerman, and GoA Finance Secretary Hernan Lorenzino.

3. (SBU) Treasury's O'Neill noted his recent meeting with Minister
Fernandez at the June 2008 gathering of regional Finance Ministers
in Cancun, Mexico. Fernandez said he appreciated the meeting's
unscripted format and its ban on press, which he said allowed for
frank discussions of the impact of high food and hydrocarbon
commodity prices on the global economy as well as on the impact of
current U.S. economic weakness on the hemisphere's linked economies.
He called the interventions of the IMF, World Bank and IDB
particularly helpful in reviewing both issues. Argentina, Fernandez
said, used the opportunity to outline the GoA's program of expanded
investment in public infrastructure.

4. (SBU) O'Neill noted that, while all attending ministers discussed
the potential fallout of U.S. economic turmoil on their own
economies, their key concern was the commodity price-linked increase
in domestic inflation rather than the potential for U.S. economy
contagion. Aside from Canada, which has been most affected by
reduced U.S. demand for autos and wood products, O'Neill noted that
hemispheric economies have broadly weathered the U.S. downturn. He
added that in Latin America the Caribbean and Central American
economies -- net food and energy importers -- were the most
vulnerable. Fernandez agreed, noting that net food and energy
importing nations in the hemisphere had been "violently impacted" by
the run-up on global agricultural commodity prices. Countries like
Argentina, which are largely self sufficient in food and energy,
"remain on alert" as global markets absorb the significant shift in
terms of trade.

5. (SBU) O'Neill noted that Chile had offered to host next year's
regional finance ministers meeting and that, in then interim, he
looked forward to seeing Minister Fernandez at the upcoming
IMF/World Bank annual meeting in Washington in October.

--------------------------------------------- ------
Impact of Agricultural Conflict on Domestic Economy

--------------------------------------------- ------

6. (SBU) In response to O'Neill's question on the economic impact of
the extended GoA confrontation with the agricultural sector over its
November 2007 increase in agricultural export tariffs, Fernandez
said that the conflict has unfolded in the context of a "complex
politico-economic scenario" in which "false arguments" have muddied
the debate and in which fundamental economic issues have been
"discussed badly." Both Fernandez and Timerman emphasized the
"legitimate right" of the executive to impose variable export
tariffs. (There is a pending constitutional challenge in the
Supreme Court to the Executive's right to impose such high export
taxes without Congressional assent). Nevertheless, Fernandez said
that President Kirchner's June decision to request parliamentary
approval has since helped inform and "order" public debate. "We are
a democracy, after all," he concluded.

7. (SBU) Fernandez acknowledged that uncertainties generated by the
extended conflict had impacted domestic financial markets. He
called recent evidence of deposit withdrawals and capital flight the
response of an Argentine public long sensitized to uncertainty by
Argentina's volatile economic track record. But Argentina's current
economic situation is far stronger than it was in past crises, he
argued, with almost $50 billion in reserves and twin fiscal and
trade surpluses providing the economy a solid "structural"
foundation. Fernandez called the GoA's fiscal situation through
June 2008 "good," notwithstanding the fact that revenues fell short
of projections due to the agricultural sector holding back on
taxable exports. "We will have to calibrate our [agricultural
sector] agenda going forward," Fernandez concluded, "and work to
address sector-specific concerns in the cotton, fruit and foo
processing sectors." [Comment: In separate meetings with local and
foreign bank representatives (septel), more serious concerns were
raised about the health of the GoA's fiscal situation.]

-----------------------------------
Bicentennial Agenda Still Undefined
-----------------------------------

8. (SBU) Ambassador Wayne noted media speculation that
"Bicentennial" initiatives (in the run-up to the 2010 Revolution
Bicentennial) the GoA might announce shortly could include measures
to promote the return of flight capital, including via favorable tax
treatment. President Fernandez de Kirchner was originally to have
announced measures, including a social pact initiative -- Ref B --
and a long term infrastructure development program on May 25
(Revolution Day) and later on July 9 (Independence Day). Fernandez
replied that the GoA's Bicentennial agenda is still being developed
and debated internally and the timing of announcements has been
delayed due to the GoA's focus on resolving the agricultural sector
crisis. He said the government is working on a number of
initiatives designed to help with consumer spending. (Press reports
say the government is considering a higher minimum wage, higher
pension payments and some other fiscal/tax moves designed to win
public favor.)

9. (SBU) One of his Economy Ministry's current focuses, Fernandez
said, is negotiating with Brazil further modifications to its
bilateral auto pact (Ref C), which has contributed to a growing
bilateral Argentine trade deficit. Argentina will seek more
"balance," particularly in auto parts trade. Fernandez called the
auto sector an important source of new industrial employment.
Argentina will produce a record level of about 640,000 cars this
year, and the GoA's goal is to double that number in five years
time.

-----------
FDI Numbers
-----------

10. (SBU) Ambassador Timerman offered that Argentina had attracted
some $14 billion in new investment in the first half of 2008, of
which 10-15% was of U.S. origin. (Comment: Timerman's statement is
based on a new GoA report on $13.6 billion in "announced"
investments in the first half of 2008, i.e., investment projects
mentioned in the press. 85% of this total was attributed to foreign
firms and over half of the announced amount was concentrated in
oil/gas exploration and development). O'Neill noted that Brazil had
attracted a record $34 billion in FDI in 2007. Institutional
investors including sovereign wealth funds, he added, appear to be
recalibrating their hemispheric portfolio investments, with Canada
the number one destination.

11. (U) This cable was cleared by WHA A/S Shannon and Treasury DAS
O'Neill.


WAYNE

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