Cablegate: Plan B: Argentina Announces Robust Public Works, Tax


DE RUEHBU #1623/01 3332143
O 282143Z NOV 08



E.O. 12958: N/A
SUBJECT: Plan B: Argentina Announces Robust Public Works, Tax
Incentive Response to Economic Crisis

This cable contains sensitive information - not for internet


1. (SBU) Argentine President Cristina Fernandez de Kirchner
announced November 25 an ambitious US$21 billion public works plan
to stimulate the economy, boost employment, and counter the impact
on Argentina of the global financial crisis. She also proposed the
creation of a new Ministry of Production and introduced a package of
tax incentives to encourage local job creation and the repatriation
of Argentines' funds from abroad (estimated at over $130 billion).
While explaining the details of the proposals November 26, Cabinet
Chief (and reportedly a key plan architect) Sergio Massa
acknowledged that the economy is contracting so far in fourth
quarter 2008, but claimed that these measures would result in real
growth of 4% in 2009. Industry leaders, who have been most vocal in
calling for GoA intervention -- including currency devaluation -- to
maintain competitiveness, applauded the policy package, and a key
GOA economic advisor characterized them to the Ambassador as "the
most pro-business measures ever taken by either Kirchner
government." However, most analysts reacted cautiously to the
proposals, preferring to wait for more details to determine the
potential impact of these initiatives on the economy. Many are
skeptical about the potential impact of the tax incentives or
possibility of attracting repatriated funds, and question how the
GoA plans to finance the public works program, given that it has no
access to credit and is facing a rapidly slowing economy and reduced
commodity prices. End Summary.

--------------------------------------------- -----
Plan B: Stimulus Package to Counter Economic Slide
--------------------------------------------- -----

2. (SBU) In a widely anticipated move, on Tuesday, November 25,
Argentine President Cristina Fernandez de Kirchner (CFK) announced
the GoA's multifaceted attempt to arrest the rapidly slowing economy
and rising industrial sector unemployment. In separate speeches to
industry leaders and construction company representatives, she
announced the creation of a new Ministry of Production, presented
her draft bill to the Argentine Congress to establish tax incentives
aimed at creating jobs and repatriating funds held overseas, and
announced a US$ 21 billion (roughly 6% of 2008 GDP) public works

3. (SBU) CFK announced this ambitious sounding plan after months of
official resistance to the need to address the spillover of the
world economic crisis on Argentina. During the President's trip to
New York in September for the UN General Assembly meeting, she had
even denied that the international financial crisis would really
affect Argentina, claiming that it was the problem of other
countries and Argentina had no need of a "Plan B" stimulus program.
With domestic consumption plunging, economic activity coming to a
screeching halt, and companies looking to lay off workers, local
media widely interpreted these announcements as the GoA giving in to
the need for a Plan B. Indeed, while commending the success of the
Kirchner economic model to date, she made it clear that the GoA is
ready to do whatever it takes to make sure that "those sectors most
vulnerable [will not] be affected by the crisis."

4. (SBU) In her November 25 remarks during a lunch with the
Argentine Industrial Union, CFK explained the details of the GoA's
draft tax moratorium bill (sent to Congress the same day). She
stated that companies creating new jobs would be given tax breaks
for bringing on new hires and declaring and regularizing "informal"
employees. With regards to the repatriation of funds, which the GoA
estimates in the range of $130 billion (most of which are undeclared
to GoA tax authorities), the President noted that companies or
individuals that declare funds abroad, but do not repatriate them,
will face an 8% tax rate under the new law. However, repatriated
funds placed in the local financial system would pay only a 6% tax
rate, and would face only a 3% tax rate if invested in government
bonds or 1% tax rate if invested in new real estate, infrastructure,
or industrial ventures.

5. (SBU) She also announced that the GoA was accelerating the
process of splitting the current Ministry of Economy and Production
into two in order to establish a stand alone Ministry of Production.
(The GoA established these ministerial changes in a special decree
sent to Congress November 26.) The new ministry will focus on the
promotion of Argentine industrial production and exports, and will
be headed by the current Minister of Production of Buenos Aires
Province, Debora Giorgi (who is well-known to Post). The President

swore in Giorgi as the new GoA Minister of Production November 26.

6. (SBU) During a subsequent speech Tuesday evening before the
Argentine Construction Chamber, CFK announced the launching of a
more than 71 billion peso (US$21bn) multi-year public works program
to stimulate the economy and alleviate the impact of the global
economic crisis on Argentina's economy. She stated that the details
of this proposal, which she called the "most ambitious public works
plan" in recent memory, would be unveiled on December 15.
Nevertheless, she stated that the goal is to more than double
employment in the construction sector from the current level of
360,000 jobs, and also cited investments in schools, road
infrastructure, and public housing as potential projects under this

7. (SBU) Cabinet Chief Sergio Massa spoke to the press November 26
to clarify details of CFK's broad proposals. He said that the rapid
deceleration of the Argentine economy was the main factor behind the
economic stimulus package, and acknowledged that economic activity
had fallen so far in the fourth quarter of 2008. (In a conversation
with the Ambassador November 26, Foreign Minister Jorge Taiana
confirmed that CFK was "extremely concerned" about the economic
situation, both within Argentina and globally.) Nevertheless, Massa
predicted that the fiscal stimulus through tax cuts and increased
expenditures on public works would enable the country to sustain a
4% real rate of growth in 2009. (Comment: This compares to most
economists' more negative forecasts, with estimates ranging from a
1-2% recession to growth of 3%.)

8. (SBU) He further commented that the new Production Ministry would
"have as an objective the creation of a structure that defends
exports, fortifies industrial and agricultural policies, and
coordinate the different sectors to deepen the process of
transforming Argentina and guaranteeing [high] levels of growth,
employment, and economic activity." Regarding the tax moratorium on
repatriated funds, he said "the measure will ensure that Argentines'
savings, kept under mattresses, in safes, or overseas, will serve to
promote Argentine growth." He discounted any possibility that it
could be used to launder illicit funds, stating that the funds would
have to be repatriated via banks and the GoA have strong controls in
place to monitor the funds. (Comment: Numerous Argentine private
analysts and opposition politicians have raised red flags about this
measure. In addition to whitewashing plain vanilla tax evasion --
with one newspaper referring to it as "national tax evaders' day" --
several experts on money laundering and terrorism finance have
argued that it could be abused by those looking to launder illicit

--------------------------------------------- -----
Reason for Stimulus: Threats to Growth, Employment
--------------------------------------------- -----

9. (SBU) Argentine industry, under growing pressure to cut back
formal and informal employment in the face of rapidly declining
consumer demand, has responded positively to the GoA's stimulus
package. Industrial leaders had recently increased their public
demands for government support, and in particular have been calling
for the devaluation of the peso in response to the recent 30-40%
depreciation of the Brazilian Real (Argentina's largest trading

10. (SBU) Layoffs are anathema to the Kirchner administration
formula that equates a strong, growing, and protected industrial
sector with economic development. However, the GoA and Argentine
Central Bank have also made it clear that they do not intend to
allow a rapid depreciation of the peso, which would further
exacerbate both inflation and the rapid capital outflow from the
financial system over the last year that accelerated again recently
following the President's October 21 announcement to nationalize the
private pension system. Given this situation, the question under
debate in the media has been how will companies, labor unions, and
the GoA divide up the costs of minimizing firings, layoffs and
suspensions in the face of forecasts of low to flat GDP growth or
even recession in 2009. Clearly, the President's announced measures
are designed to avoid the need for any layoffs.

--------------------------------------------- ------
Markets React Positively, but Analysts Urge Caution
--------------------------------------------- ------

11. (SBU) The government seems buoyed by the overall positive
reception that its policy package has received so far. Beatriz
Nofal, the head of the government's investment promotion board, told
the Ambassador at an event late November 26 that CFK's announcement

contained "the most pro-business measures ever taken by either
Kirchner government" since CFK's husband Nestor Kirchner assumed the
presidency in 2003. Commerce Undersecretary Luis Maria Kreckler
told the Ambassador that 40 Argentine businesspersons had
accompanied CFK on her trip earlier this month to North Africa, and
her exposure to them had encouraged her to adopt a more
business-oriented outlook. Cabinet Chief Massa, who was reportedly
the main architect of the measures, was similarly upbeat in his
conversation with the Ambassador at the same event, asserting that
"we're doing better."

12. (SBU) Local markets reacted positively on November 26 and 27 to
the announcements. On average, Argentine bond prices increased
5-10% and the Buenos Aires Stock Market (MERVAL) jumped over 5%, and
the peso depreciated only two cents, to close November 27 at 3.37
pesos/dollars. (Comment: Given the lack of detail provided so far
about the President's proposals, it may be that investors are still
digesting the news and that the price increases in Argentine assets
actually reflect the recent rebound in global -- especially emerging
-- markets.)

13. (SBU) Local and foreign analysts have reacted cautiously,
preferring to wait for more details before making a final
assessment. One of Post's closest banker contacts commented that
CFK came across as "much more realistic and less arrogant" than in
most of her speeches. Nevertheless, they have raised numerous
questions about the potential positive impact of these various
measures, with many arguing that it is unlikely the stimulus
measures will actually arrest declining economic activity.

14. (SBU) With regards to the tax incentives to create jobs,
analysts are skeptical that they will be sufficient to counteract
the precipitous fall in demand and production. Regarding the
incentives for repatriating funds, most analysts consulted by Post
believe that investors hold deep concerns about the direction of the
Argentine economy and the safety of investments in Argentine assets
(following the recent example of the expropriation of private
pension assets). Given that capital flight from Argentina is
estimated in the range of $22-24 billion for 2008, and over $4
billion just in October, the prevailing trend is going the opposite
way. Nevertheless, some analysts have pointed out that many
Argentines might take advantage of the opportunity to bring back
funds legally that they likely never paid on taxes in order to
invest in real estate.

15. (SBU) With regards to the public works program, most analysts
believe it is too early to determine the impact. Still unclear is
what the GoA will implement during 2009 and what it plans to
implement over several years, and also unclear is whether the plan
will incorporate all new projects, representing a true fiscal
stimulus, or whether some of the public works projects may already
be included in the 2009 budget. Finally, the most frequently heard
question relates to how the GoA will pay for the program. Given
that it has no access to credit and is facing the prospect of
lower-than-expected revenues in 2009 due to the slowing economy and
much-reduced international commodity prices for Argentina's
agricultural exports, analysts note that the announcement of such an
ambitious fiscal stimulus program has the potential to further
destabilize Argentine markets that are already pricing GoA bonds at
default levels.

Comment: Paying the Piper

16 (SBU) In comparison with her sometimes combative rhetoric in the
past, the President took a more realistic approach in these
speeches, particularly in demonstrating her growing understanding of
the need to work in collaboration with the private sector to address
the tough economic times confronting the country. Nevertheless, he
Kirchner Administration's base motivation for presenting these
proposals is to save jobs in high-profile industrial sectors via a
pump-priming recipe of tax credits and state-funded infrastructure
development. Beyond attempting to staunch the immediate pain of a
rapidly softening economy, these targeted measures also speak to the
Kirchner administration's need to shore up its political base in
advance of 2009 mid-term elections.

17. (SBU) However, given that a slowing economy and low
international commodity prices for Argentina's agricultural exports
will substantially reduce federal tax revenues in the coming year,
analysts are right to ask from whence the billions to pay for this
program will come. At a November 25 lunch the Ambassador held, a
group of leading businesspersons and economists predicted the GoA
would scrape together enough funds to meet 2009 spending and debt

payment needs. But the GoA certainly will not get funding from
international capital markets, which remain largely closed for
Argentine risk. And not from GoA bond purchases by domestic
institutional investors, whose species has been exterminated by the
nationalization of the private pension fund system.

18. (SBU) The likely GoA alternative is to use newly available
resources captured from nationalized pension funds, along with
recently augmented access to borrowing from Argentina's Central Bank
and the largest state-owned bank, Banco Nacion. But it is as yet
unclear that these additional resources will really suffice to
finance both a large pre-2009 election spending pinata as well as
meet GoA spiking debt obligations coming due in 2009 and 2010. If
investors suspect that the GoA's spending plans will jeopardize its
ability to service its debts, negative market reactions could
overwhelm any positive stimulus effects, leaving companies, workers,
and the government fiscal balance in an even more delicate state.


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