Cablegate: Argentina: Global Crisis Threatens Export Growth, Trade


DE RUEHBU #1495/01 3041721
R 301721Z OCT 08 ZDK




E.O. 12958: N/A
SUBJECT: Argentina: Global Crisis Threatens Export Growth, Trade

Reftels: A. Buenos Aires 1389
B. Buenos Aires 1374
C. Buenos Aires 1415


1. (SBU) Argentina's strong goods export performance in the
aftermath of the 2001/02 financial crisis has stalled, a victim of
plunging world commodity prices and slower global growth
projections. From a projected 2008 trade surplus in the $12 billion
range, local economists now see the 2009 surplus dropping to under
$6 billion - and that assumes current commodity price levels are
sustained. Maintaining a substantial trade surplus has been a
pillar of the GoA's economic model because it has supported the
accumulation of dollar reserves, suits the mercantilist and
protectionist mindset of current decision-makers, and plays well
domestically with the powerful and employment-generating industrial
sector. A GoA concerned that key trading partners' substantial
devaluations will harm Argentina's relative competitiveness (the
Brazilian real has dropped 21% vis the peso since August 7) and
sensitive to industrialists' calls to protect domestic production
and employment has introduced a variety of non-tariff barriers and
allowed a managed peso depreciation of over 10% vis the dollar over
the past six weeks. Keeping exports up is also important to the GoA
because a significant share of proprietary federal revenues cmes
from export tariffs, especially on agricultural commodities.
Agricultural and industrial exports, and the tax revenues they
generate, are front and center in the GoA policy response to the
financial crisis. End Summary.

Argentina a Beneficiary of Soaring Commodity Prices
--------------------------------------------- ------

2. (SBU) Between 2002 and 2007, the value of total annual Argentine
goods exports more than doubled from US$26 billion to $56 billion.
During this same period, agricultural exports were the star
performer, jumping 140% from $12 billion to $28 billion, and rising
from 46% to 51% of total exports. As a consequence, Argentina
maintained a healthy overall trade surplus, reaching $11.1 billion
in 2007, after a record of $12.4 billion in 2006.

3. (SBU) Argentina's global exports in 2007 totaled $55.9 billion, a
20% increase y-o-y. According to official GoA statistics agency
INDEC, this jump was driven by a 12% increase in the price of
exported goods and an 8% rise in quantity of goods exported. 22% of
2007 exports by value were "primary products" led by cereals,
oilseeds, copper, fresh fruit and fish, which saw a 23% price
increase, as well as an 18% quantity increase. Processed
agricultural goods, at 35% the largest category of Argentine
exports, saw a 22% price increase but only a 3% increase in

4. (SBU) The y-o-y price increase trend was even more pronounced
during the first eight months of 2008. Within overall export
increases of 34% in price and 4% in quantity (and 39% in total
value), primary product prices rose 49% while quantities increased
only 4%, accounting for a 55% total increase in value. The value of
processed agricultural goods exports rose 40%, thanks to a 49% price
increase, which more than offset a 6% quantity decrease (presumably
at least partly caused by the extended agricultural strike).

Global Weakening and Commodity Price Plunge Bites
--------------------------------------------- ----

5. (SBU) In recent months, due in large part to the dramatic
slowdown in global growth forecasts, global commodity prices for
Argentina's primary exports have fallen precipitously. The
Argentine Central Bank (BCRA) tracks a commodity price index which
includes soy, wheat, corn, petroleum, steel, aluminum, beef and
copper, weighted by share of total Argentine exports. Together,
these commodities represent 40.5% of 2007 Argentine exports. After
peaking in June, up 67% y-o-y in dollar terms, the index fell over
18% by end-September, though the index remained 18% higher than in
September 2007. Prices for soy, Argentina's top export and emblem
of Argentina's efficient agricultural growth, dropped 39% from a
July 2008 high of $588 per metric ton to $360 as of October 29.

6. (SBU) As a consequence, private analysts are reducing their
projections of Argentina's trade surplus in 2009. According to the
2009 budget presented by the GoA to the Argentine Congress September
15 (Ref A), total 2008 exports were estimated at $73.5 billion, a
32% increase over 2007, with a trade surplus of $12.2 billion. 2009
budget exports were projected to be $78.3 billion, and the surplus
$12.0 billion. Some private estimates are less optimistic. For
example, internationally known Argentine economist Miguel Angel
Broda has sharply reduced his export performance estimates for 2009.
Broda's "optimistic" estimate for 2009 shows exports of $73.4
billion and a trade surplus of only $5.9 billion, roughly half the

GoA's estimate. Broda's "pessimistic" outlook foresees exports of
$65.2 billion - and a net trade deficit of $1.2 billion, which would
be Argentina's first trade deficit since 2001. HSBC's Chief
Economist predicts the 2009 trade surplus will be in the range of
$5-6 billion, less than half his estimate from earlier this year.

7. (SBU) Credit Suisse, which as recently as September estimated
that the 2008 current account surplus would be $5.2 billion (after
$7.3 billion in 2007) and 2009 surplus at $2.6 billion, downgraded
the latter estimate to $1.5 billion. The global crisis was the
driver behind this downgrade, as the bank cited both lower commodity
prices and lower foreign demand for non-commodities as reasons that
Argentina would have "nearly zero growth in the dollar value of
total exports." Local think-tank FIEL is even more pessimistic,
projecting a 2009 current account surplus of just $800 million in

Non-Transparent Budget Trade Surplus Estimates
--------------------------------------------- -

8. (SBU) Commodity price assumptions are not explicitly stated in
GoA budgets. However, local business daily Ambito Financiero quotes
a Ministry of Economy official involved in the budget's formulation
as saying the assumed price for raw soybeans would average $420 per
ton in 2009. As of October 22, the price of soybeans stood at
$340/ton - 19% lower. In 2007, Argentina exported 26 million tons
of raw soybeans. The $80 price drop, with the same quantity of
exports (though soy exports are predicted to be higher in 2009 than
in 2007), translates into a drop of $2.1 billion in export value.
The 19% drop, if applied to all commodities in the BCRA index, would
result in a loss of $5.6 billion of exports - the equivalent of 47%
of the trade surplus estimated in the official GoA budget.

9. (SBU) According to Embassy Economy Ministry contacts, budget
estimates are made at a fairly high level of government, without
technocrat-level consultations. Adrian Makuc, National Director of
Trade Policy in the Ministry of Economy, told Econoff October 16
that, while his office used to have input into the trade numbers
used in the budget, "Now I read about them in the paper, just like
you." When asked about the possibility of the GoA presenting a
revised budget to Congress, rather than continuing to seek approval
of the one already presented, he added, "There seems to be more
concern (within the GoA) about getting the budget passed than
correcting the numbers."

Impact of Peso Depreciation on 2009 Trade Balance
--------------------------------------------- ----

10. (SBU) According to INDEC, industrial products represented 31% of
export value in 2007 - roughly half of the 57% of export value
contributed by primary commodities (excluding hydrocarbons and
precious metals) and processed agricultural goods. With the run-up
in global commodity prices, in the first eight months of 2008,
industrial products' share of the value of exports fell to 29%,
while commodities and processed agricultural goods rose to 60%.
Concerns over the increasing relative strength of the Argentine peso
against major trading partner currencies, most notably Brazil's real
(Ref B) - have ed to calls by manufacturers for an immediate and
substantial peso devaluation to maintain competitiveness. The
Central Bank has managed an over 10% devaluation of the peso over
the past six weeks from 3.05 to 3.38 (as of October 27). Local
analysts agree that, all other things equal, a devalued peso should
stimulate additional primary commodity export production and so
support Argentina's trade balance on the margin.

Note: The budget assumed an average 2008 exchange rate of 3.19 pesos
per dollar (through October 16, the ytd average was 3.11 according
to the BCRA), and 3.34 in 2009. With Cabinet Chief Sergio Massa
announcing expectations of the exchange reaching 3.35 by the end of
2008, and presumably even lower in 2009, it appears to be an
admission by the GoA that the exchange rate and projected trade
surplus included in the 2009 budget cannot both be achieved. End


11. (SBU) Maintaining a large trade surplus has been a pillar of the
GoA's economic "model", partly because it suits the mercantilist and
protectionist mindset of its current decision-makers, but also
because it plays well domestically to big industry, a traditional
foundation of Peronist support in Argentina. A GoA concerned that
trading partners' substantial devaluations imperil its relative
competitiveness (Brazil's real has fallen 21% vis the peso since
August 7) and sensitive to industrialists' calls to protect domestic
production and employment has introduced a variety of protectionist
non-tariff barriers (Ref C) and has allowed a managed peso
depreciation of over 10% vis the dollar over the past six weeks.
Countervailing arguments that a peso devaluation is potentially

inflationary have been discounted in light of a dramatic drop in
domestic growth projections: 2009 GDP forecasts have been
progressively lowered from 6-7% just six months ago to the 1-2%
range today, with some economists now projecting recession. Keeping
exports up is also important to the GoA because a significant share
of proprietary federal revenues not automatically shared with
provinces comes from export taxes, especially on agricultural
commodities. Trade flows - agricultural and industrial - and the
tax revenues those export flows create, are front and center in the
GoA trade policy response to the financial crisis.


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