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Cablegate: Argentine Congress' Budget Review Clouded by Global

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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001389

SENSITIVE
SIPDIS

Ref: A) BUENOS AIRES 1374, B) BUENOS AIRES 1312, C) BUENOS AIRES
1277

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL PGOV AR
SUBJECT: Argentine Congress' Budget Review Clouded by Global
Uncertainty

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

1. (SBU) The Argentine legislature is set to amend the 2008 budget
and pass the 2009 budget in the face of a deteriorating external
environment and increasing anxiety about its impact on Argentina's
economy and finances. The 2008 bill increases expenditures in 2008
by about US$11.5 billion due to higher than expected revenues, and
also amends the Central Bank Charter to allow use of reserves to pay
the Paris Club. Although GoA presentation of both bills was more
open and transparent than in previous years, the 2009 budget
continues the GoA practice of lowballing economic assumptions for
GDP growth (4%) and inflation (8%), both below most private
estimates. However, the gap between the budget assumptions and
reality may well be much smaller this year, as we expect analysts to
continue marking down expectations for 2009 growth due to fallout
from the financial crisis. The 2009 budget also includes
assumptions for a primary fiscal surplus of 3.27% of GDP and a trade
surplus of US$12 billion that appear optimistic in light of
decelerating growth, the dramatic fall in commodity prices, and
slowing world demand. The opposition has criticized GoA budget
decisions to retain emergency powers to realign spending at will and
expand its ability to borrow from government-owned Banco Nacion and
the Central Bank. These moves could prove useful to the GoA in
possibly dark economic days ahead. It appears likely, however, that
the GoA will face tough 2009 mid-term elections with tighter
finances and less leeway to use spending to win political support.
End Summary.

-----------------------------------------
Global Uncertainty Looms Over Budget Vote
-----------------------------------------

2. (SBU) In the context of the global financial crisis, high
volatility and increasing uncertainty in Argentine markets, and
predictions of a sharp world economic slowdown, the Argentine
legislature is set to act next week on two key budget laws that will
direct the GoA's fiscal policies during the turbulent period to
come: amendment of the 2008 budget and passage of the 2009 budget.
Ruling party Senator Luis Alberto Viana, Chairman of the Senate's
important economic and investment committee, reassured Ambassador
October 2 that the legislature will accept the amended 2008 budget
and rapidly pass the 2009 bill without major changes. However, it
is clear that the difficult external environment is causing
increasing anxiety in both Congress and the GoA (see Ref A) with
regards to the fallout on Argentine economic growth and GoA
finances.

--------------------------------------------- ----------
2008 Budget Amendment: funding for subsidies/Paris Club
--------------------------------------------- ----------

3. (SBU) President Cristina Fernandez de Kirchner (CFK) signed on
September 15 her first ever "Urgent Necessity Decree" (DNU),
amending the 2008 budget to increase expenditures by 36 billion
pesos (or roughly US$11.5 billion). The estimate for expenditures
in the original 2008 budget was 161 billion pesos (about US$51
billion). The GoA will finance the expenditures from higher than
expected revenues, the result of the GoA's underestimation of both
growth and inflation in the original 2008 budget bill. Also a
common budget practice during Nestor Kirchner's Presidency, the GoA
underestimated 2008 growth at 4%, compared to private estimates of
7%, and CPI inflation at 7.3%, when most analysts expect inflation
to end the year at about 20%.

4. (SBU) The GoA has announced it will direct these additional
revenues to cover higher than expected expenditures in 2008 for
transport, energy and food subsidies. CFK likely used the DNU
because it is faster than drafting legislation, is the equivalent of
law, and goes into effect after approval in a special bicameral
committee. (In theory, both the Chamber of Deputies and Senate must
then submit the DNU to floor vote, but in practice this usually
happens months later with no debate.)

5. (SBU) Senator Viana told Ambassador that Congress would treat
this DNU as a full law and approve it through floor votes. However,
he conceded that Argentina needs to get away from using DNUs, which
made more sense following the 2001/02 crisis when the country was in
disarray and the GoA needed to act quickly. CFK has boasted in the
past that she has not issued one DNU since entering office, whereas

BUENOS AIR 00001389 002 OF 004


the opposition severely criticized her husband Nestor Kirchner for
relying heavily on them during his presidency.

6. (SBU) The 2008 budget amendment includes an understated article
amending the Central Bank (BCRA) Charter to allow use of official
reserves to pay the Paris Club (reported reftel). The article
establishes an exemption to the BCRA prohibition on long-term
lending to the GoA. The exemption will allow the BCRA to issue a
loan to the GoA for the purpose of paying public debts as specified
under the decree issued September 3, 2008, declaring the GoA's
intention to pay 100% of debts owed to Paris Club creditors. By
including it as a minor article in an eighteen-article DNU, the GoA
kept press attention to a minimum.

--------------------------------------------- ---
Greater Transparency in unveiling of 2009 Budget
--------------------------------------------- ---

7. (SBU) Also on September 15, President CFK signed the 2009 Budget
Bill and sent it to Congress for approval. As evidence of the GoA's
willingness to show greater transparency and openness under new
Cabinet Chief Sergio Massa, Economy Minister Carlos Fernandez,
Finance Secretary Hernan Lorenzino, and Massa himself all
participated in lengthy presentations on aspects of the budget and
submitted to detailed question and answer sessions with both
Congress and the press. In contrast, former Economy Minister Miguel
Peirano refused to entertain any questions after presenting the 2008
budget bill in October 2007.

--------------------------------------------- -----
2009 Budget Highlights: lowball assumptions may turn out to be
overly optimistic
--------------------------------------------- -----

8. (SBU) The 2009 bill continues the previous government's trademark
practice of underestimating key economic assumptions in order to
benefit later from having higher than expected revenues. However,
given the deteriorating global economic climate and also most
private analysts' estimates of rapidly decelerating economic
activity in Argentina, many of the following estimates may prove
accurate or even optimistic.

-- The bill estimates GDP growth in 2009 of 4%, conservative
compared to BCRA consensus survey estimates of 5.4%. However, this
prediction is in line with many of the more conservative private
estimates, and exceeds Citi's latest pessimistic predictions of 2-3%
GDP growth.

-- 2009 CPI is estimated at 8%, well below private estimates of 20%
or higher for 2009. Independent economic analysts have interpreted
the GoA's budgeted CPI as an indication that the GoA will continue
to "intervene" in national statistics agency INDEC's inflation
calculations well into 2009.

-- An average exchange rate of 3.19 ARP/USD. (The private sector
expects greater depreciation of the currency, with the BCRA
consensus estimate for 2009 at 3.35 ARP/USD, and some private
analysts recently predicting 3.5 ARP/USD.)

-- Primary fiscal surplus of 3.27% of GDP, compared to the primary
surplus of 3.15% of GDP included in the 2008 budget. (Due to higher
revenue growth than expected and slower growth rate of expenditures,
some economists have predicted the GoA could end 2008 with a
3.5%/GDP primary surplus. However, the 2009 estimate looks
optimistic giving rapidly decelerating economic activity and falling
commodity prices.)

-- A trade surplus of US$11.9 billion, as a result of exports for
US$78 billion and imports for US$66 billion. The trade surplus in
2007 was US$11.2 billion and it is estimated at US$10.6 billion for
2008. However, private estimates of the trade surplus in 2009 are
sharply lower, at US$8.2 billion, reflecting rapid increases in
imports and falling commodity prices.

-- A three billion peso reduction in GoA subsidy payments, primarily
to the energy and transportation sectors, equivalent to an almost a
10% drop from 2008 subsidies estimated at 35 billion pesos (about
US$11 billion).

-- An estimated 25% increase in public pension payments,
representing an increase in expenditures of about 10 billion pesos.

BUENOS AIR 00001389 003 OF 004


(This follows from the Pensioners Mobility Law, ordered by the
Supreme Court and pending approval in Congress.)

-- A new appropriation of 600 million pesos per year (about 50
million pesos per month) to cover operational expenditures of the
recently nationalized airlines Aerolineas and Austral (Ref B).
Private estimates of the funding necessary to keep the airlines
afloat are three times higher.

--------------------------------
GoA retains superpower authority
--------------------------------

9. (SBU) Contrary to media speculation that the GoA might use the
2009 Budget bill to end its reliance on the so-called "Superpowers"
Act, the draft sent to Congress retains it. These "superpowers"
gives the Chief of Cabinet broad discretion to redistribute spending
without prior Congressional approval. In previous years, the
underestimation of growth and inflation has resulted in significant
levels of excess revenues. Opposition Deputy Claudio Lozano
estimates that from 2003 to 2008 the GoA managed about 85 billion
pesos (roughly US$27 billion) without Congressional oversight.
Lozano predicts that the GoA will have an additional 15 billion
pesos in excess revenue to spend in 2009, though this will not be
the case if growth decelerates more rapidly than the GoA expects, as
many private economists now anticipate.

--------------------------------------------- ----
GoA expands access to Banco Nacion and BCRA funds
--------------------------------------------- ----

10. (SBU) The 2009 Budget bill includes two controversial articles
increasing the GoA's ability to borrow from the largest Argentine
bank, state-owned Banco de la Nacion (BNA) and also from the BCRA.
The bill changes the BCRA's Charter to allow it to provide
short-term lending for the GoA to use for any foreign currency
payments, whereas before these funds could only be used to debts to
international financial institutions. This means that the GoA could
use BCRA funds to pay sovereign debt obligations coming due in 2009,
which are estimated much higher than in previous years. The bill
amends BNA's Charter to allow the GoA to borrow funds to finance
capital expenditures and debt repayments up to a limit of 30% of the
GoA deposits held at the BNA. This type of financing is currently
prohibited under the BNA's Charter. The opposition has criticized
both initiatives, arguing that they undermine the independence and
potentially the strength of the two financial institutions' balance
sheets, and is vowing to fight to excise the provisions from the
bill. (Comment: While these are questionable moves, the greater
access to BCRA and BNA financing may prove highly useful to the GoA
in the event that the global economic downturn and consequent
economic deceleration in Argentina prove sharper than expected. End
Comment.)

-------
Comment
-------

11. (SBU) Since CFK submitted both budget bills to Congress,
Argentina's stock market has plunged 11%, Argentine country risk has
jumped over 400 basis points to a post-crisis record of 1232 bps,
10-year sovereign bond yields have increased on average to 23% (from
17%), the Peso has depreciated 4% from 3.07 ARP/USD to 3.23, prices
for Argentina's main agricultural and hydrocarbon commodity exports
have fallen 25-30%, and the banking system is seeing early signs of
dollarization of deposits and capital flight. There were already
concerns about the impact of the financial crisis on Argentina, and
the news of the last three weeks has exacerbated these concerns.
CFK and other GoA officials have touted Argentina's twin surpluses
(trade and fiscal) and high reserve levels as an umbrella protecting
Argentina against external shocks. However, private analysts are
rapidly ratcheting down their estimates for Argentine growth,
exports, and fiscal balance.

12. (SBU) For the first time under the Kirchners, the assumptions in
the budget that Congress passes over the next few weeks will likely
turn out to be overly optimistic. With important interim
congressional elections set for 2009, this could prove an
uncomfortable check for a government hoping to use excess revenues
for purposes of political patronage, as it has in recent elections.

BUENOS AIR 00001389 004 OF 004


Wayne

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