Cablegate: Argentina Economic and Financial Review, November 2008


DE RUEHBU #1643/01 3372026
R 022026Z DEC 08



E.O. 12958: N/A

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering November 2008. The unclassified email
version of this report includes tables and charts tracking Argentine
economic developments. Contact Econoff Chris Landberg at 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.


--President Kirchner announces plan to foster growth, employment,
capital repatriation
--GoA on the Verge of Expropriating Aerolineas Argentinas?
--Congress set to extend the Emergency Economic Law and Financial
Transaction Tax (FTT)
--Congress approves 2009 Budget Bill
--October Trade surplus at $1.1 billion, flat versus a year ago
--GoA responds to summer season's first power outages with natural
gas tariff increases
--INDEC underreporting continues despite slowing inflation: October
CPI up 0.4% m-o-m, the lowest increase of the year
--Industrial production decelerates in October
--FIEL foresees a dark and tough future for Argentina's economy


President Kirchner announces plan to foster growth, employment, and
capital repatriation
--------------------------------------------- ---------
2. (SBU) In a November 25 presentation before the powerful UIA
(Argentine Industrial Union), President Cristina Fernandez de
Kirchner announced plans to submit a bill to Congress proposing tax
incentives to foster job creation and encourage the repatriation of
funds held by Argentine individuals and companies abroad (estimated
at over US$130 billion). The GoA sent this package of measures to
Congress the same day. Highlights:

-- Companies creating new jobs will receive a 50% tax break on labor
contributions for each new hire in the first year;
-- Companies regularizing "informal" employees will be forgiven past
tax owed on these employees;
-- Companies or individuals declaring funds held abroad to the local
tax authorities (AFIP) but choosing to keep them abroad would be
charged an 8% tax rate, whereas repatriated funds will face a 6% tax
if the funds are put in the local financial system without any
specific investment allocation, or 3% tax if the funds are invested
in bonds, or 1% tax if the funds are invested in real estate,
infrastructure, or agricultural or industrial ventures.
-- Splitting off a new Ministry of Production from the existing
Ministry of Economy and Production. The new Ministry will focus on
the promotion of Argentine production and exports. (The President
subsequently appointed current Production Minister for Buenos Aires
Province, Debora Giorgi, as the new Minister of Production.)

3. (SBU) Later on November 25, during a dinner presentation at the
Argentine Construction Chamber, the President announced the
launching of a 71 billion peso (roughly US$ 21bn or about 6% of
estimated 2008 GDP) public works program, designed to stimulate the
economy and mitigate the effects of the global financial crisis on
the local economy. The President predicted that the plan would more
than double the number of jobs in the construction sector, and said
complete details will be unveiled December 15. According to local
press, the plan will be implemented over three to five years.

4. (SBU) Industrial and construction leaders loudly applauded the
announcements, and several of Post's contacts among economists and
bankers who are normally critical of GoA economic policies praised
the pro-business tone of the President's initiatives. Nevertheless,
most foreign and domestic analysts appear skeptical of their impact,
predicting in their published critiques that the measures will have
limited affect on economic activity and are not sufficient to
counteract the precipitous fall in demand and production. They also
questioned how the GoA will finance the public works plan, given
that it has no access to credit and is facing the prospect of lower
than expected revenues in 2009. Many analysts also emphasized that
the measures do no address the main challenge facing the economy,
namely the lack of credibility of GoA economic policies.


GoA on Verge of Expropriating Aerolineas Argentinas?
--------------------------------------------- -------
5. (SBU) According to press reports and industry representatives,
the ruling party in Congress is preparing the legislative groundwork
for the expropriation of Spanish-owned flagship airline Aerolineas
Argentinas (AA) and sister carrier Austral. A vote could come
before the end of the year. The press quotes the draft bill as
stating "We cannot accept that public air transport in Argentina
continues in the hands of a company that operates with notable
incompetence," and also declaring the company "of public utility and
subject to expropriation."

6. (SBU) AA's owner, Spanish travel group Marsans, agreed in
principle July 17 to sell both airlines to the GoA, after which the
GoA took over operational control (with formal transfer pending
resolution of the purchase price). The press reports that the GoA
has since spent about $220 million to pay Aerolineas and Austral's
payroll and operating expenses. As part of the July agreement, each
side pledged to determine a value for the companies, or submit to
third party review if they could not agree on the purchase price.
The GoA's Valuation Tribunal estimated the value at negative US$ 832
million. Marsans contracted Credit Suisse to assess the airlines'
value, which it established at US$ 330-540 million. Congress
subsequently disallowed any third-party review, and indicated that
it alone would fix the price. Leading members of Congress were
quoted in the press stating the GoA should not pay anything for the
carriers, or even that Marsans should pay the GoA for taking it

7. (SBU) Money hemorrhaging continues: Aviation analysts and media
reports estimate AA's daily losses at about US$ 1.5 million, or
about US$ 700 million annually. These same analysts say that AA's
9,200 employees represent an employee per plane ratio of about 344,
far higher than the industry average of about 60-100. Media and
Embassy industry contacts report that in the run-up to the 2009
congressional elections, the GoA may hire even more. AA has been
plagued by workers' strikes, flight delays, and cancellations for
months, and the GoA says it has a debt load of nearly US$ 900
million. AA was on the verge of bankruptcy in 2001 when Marsans
bought it from Spanish holding company SEPI. AA and Austral operate
about 80% of domestic flights in Argentina.


Congress set to extend Emergency Economic Law and Financial
Transaction Tax (FTT)
--------------------------------------------- ---------
8. (SBU) The Argentine Chamber of Deputies passed the one-year
extension (until Dec. 2009) of the controversial Economic Emergency
Law November 26 (134 positive votes against 95 opposed) over strong
criticism from the opposition. This law delegates legislative
powers to the executive branch and allows the President to enact a
wide range of economic policies by decree (e.g., debt and utility
tariff renegotiation, extend social assistance plans, implement
measures to foster employment and growth). Background: the Economic
Emergency Law was first approved in January 2002 during President
Duhalde's administration and has since been extended five straight
years, despite opposition arguments that after five consecutive
years of over 8% real GDP growth the country is no longer in a state
of emergency. This year, however, the GoA cited the deteriorating
international economic environment in its justification of the

9. (SBU) Along with the Emergency Economic Law, the lower house also
approved a one-year extension (also until Dec. 2009) of the FTT
(financial transactions tax) on November 26, and forwarded it to the
Senate for approval. The FTT 2009 annual collection is budgeted at
ARP 22 billion, of which 70% goes for the federal Treasury and the
remaining 30% to the provinces. Opposition Deputies called for the
equal sharing of the tax with provinces. Background: the FTT was
first introduced in 2001 by then-Minister of Economy Domingo Cavallo
and since then been extended every year, despite criticism that it
discourages financial intermediation in an already undersized
domestic financial market. However, the GoA highly values this tax
for its ease of monitoring and collection, and the extension is a
priority for the GoA given expectations that overall tax revenues
will decline significantly in 2009 due to the decelerating economy
and lower sliding commodity prices. The Senate Budget Committee
started debating both bills December 2, with Senate approval
expected around the middle of the month.

Congress approves 2009 Budget Bill
10. (SBU) After an eight-hour debate, the Senate overwhelmingly
approved the 2009 budget bill on November 5 (48 positive votes vs.
14 negative ones) without amendments and over the strong criticism
from the opposition (which argued that the bill does not reflect the
current economic reality). The Chamber of Deputies had already
approved the bill October 16, also without making changes to the
version the Executive sent to Congress on September 15. The law was
published in the Official Gazette on November 21 and entered into
force by the end of the month.

11. (SBU) During the Senate debate, opposition criticism focused on
three issues: 1) the outdated macroeconomic assumptions of the
budget, which for the first time in five years may prove overly
optimistic, particularly with regards to GDP growth, inflation, and
prices of Argentina's main commodity exports; 2) the granting of
so-called "superpowers" to the GoA, which they argued renders the
budget meaningless, given that it allows the Chief of Cabinet to
reallocate expenditures without Congressional approval; and 3) the
failure to include the revenues the GoA will receive as a result of
the nationalization of the private pension fund system (which the
Senate approved November 20 and will enter into force in early to
mid-December). Highlights of the 2009 budget bill:

-- GDP growth of 4%, which may prove accurate or even optimistic,
given most private analysts' estimates of rapidly decelerating
economic activity in Argentina. (Note: in past years the GoA has
estimated growth of 4%, whereas actual growth has exceeded 8%. This
serial underestimation has lead to large inflows of unbudgeted tax
revenues, which the GoA has been able to redirect with minimal
congressional oversight using "superpowers.")
-- CPI of 8%, compared to private estimates of about 20%;
-- An average exchange rate of 3.19 ARP/USD, already outdated given
the current exchange rate of 3.35 ARP/USD. (Many private analysts
estimate the peso will end 2009 in the range of 3.80-4.00 USD.)
-- Primary fiscal surplus of 3.27% of GDP, compared to the primary
surplus of 3.15% of GDP included in the 2008 budget. The budgeted
primary fiscal surplus may be difficult to obtain, given the
expected deceleration of revenues and falling commodity prices of
Argentina's key exports.
-- A trade surplus of $12 bn, the result of $78 bn exports and $66
bn imports. (The 2007 trade surplus was $11.2 bn and is estimated
at $12 bn for 2008, according to the latest BCRA consensus survey.)
However, private estimates of the 2009 trade surplus are sharply
lower, ranging from zero to $6-8 bn, reflecting rapid increases in
imports and falling commodity prices.
-- An ARP 3 billion cut in subsidies (over a 10% drop compared to
2008 subsidies of about ARP 35 billion).
-- An estimated 25% increase in pension payments, representing
increased expenditures of about 10bn pesos.

12. (SBU) The bill includes two controversial articles, which
increase the GoA's ability to borrow from state-owned Banco de la
Nacion (BNA) and from the Argentine Central Bank (BCRA). The change
to the BCRA's Charter allows short-term lending to the GoA for
foreign currency payments, whereas before these funds could only be
used to pay debts to international financial institutions. In
theory, the GoA can now use BCRA funds to pay sovereign debt
obligations coming due in 2009/2010. The amendments to the BNA's
Charter 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 was previously
prohibited under the BNA's Charter.


October Trade surplus at $1.1 billion, flat versus a year ago
--------------------------------------------- ---------
13. (SBU) Official GoA statistics released November 25 show that
Argentina's goods trade surplus in October 2008 was virtually
identical to the surplus in October 2007, despite substantial
month-on-month growth in the surplus throughout the first nine
months of 2008. The October 2008 surplus, according to statistics
agency INDEC, was $1.133 billion, just 0.8% more than the $1.124
billion surplus in October 2007. This contrasts sharply with total
surplus growth in 2008, which - including October - had risen 38%
y-o-y. The September 2008 trade surplus of $1.67 billion was 95%
higher than the surplus one year before. Imports and exports in
October were both up y-o-y (16.6% and 13.4%, respectively), but by
less than rates earlier in the year.

14. (SBU) Planning Minister Julio De Vido announced the same day new
GoA trade estimates for 2009 predicting that exports will decline
16% in value terms compared to 2008 (to an estimated $56 billion)
and the overall trade surplus will fall to $7 billion. He
attributed the declines to lower commodity prices. The total trade
surplus through October 2008 was $11.4 billion, after a surplus of
$11.1 billion for all of 2007. Private analysts' 2009 trade surplus
estimates range from flat to a surplus of $8 billion, with this
latter figure seeming optimistic compared to the GoA's own estimate
of $7 billion. The latest BCRA consensus survey estimates a $12
billion and $6 billion trade surplus for 2008 and 2009,


GoA responds to summer season's first power outages with natural gas
tariff increases
--------------------------------------------- ---------
15. (SBU) Once again, the first heat wave of summer has exposed
Argentina's fragile energy situation. People turning on their air
conditioners to deal with the high temperatures increased
electricity demand and strained the power grid, triggering blackouts
in several areas of Greater Buenos Aires. Power cuts last week
affected approximately 45,000 people and even led to street protests
in Buenos Aires against the GoA. Planning Minister Julio De Vido
publicly apologized for the electricity cuts and said the GoA would
initiate investigations through the energy regulatory agency to
impose sanctions on the energy firms (presumably distribution
companies) that failed to fulfill their distribution contracts.

16. (SBU) According to local press reports, De Vido also made a
number of announcements on November 28, including an ARP 1.4 billion
cut in the subsidies on natural gas (the main input for the
generation of Argentine electricity) and a retroactive increase in
natural gas rates charged to the biggest industrial, commercial, and
residential users. (Energy subsidies totaled approximately US$ 12
billion in the Jan-Sep 2008 period.) De Vido said that the increase
would be 10% for industrial and commercial users and would only
affect 1.5% of companies. In the case of residential users, the
increase would be between US$ 3 and US$ 31 per month, and would only
affect the top 36% of consumers (households consuming over 1000
cubic meters per year). This announcement followed a 20% increase
in natural gas transportation and distribution rates in September
2008, and is the fourth increase in natural gas tariffs in the last
four months. De Vido also stated that the increases would be passed
through to natural gas well-head prices to promote investment in
exploration and production, which will also result in higher royalty
collection for producing provinces. (The press reported that De
Vido estimated potential new investment in the range of US$ 250


INDEC underreporting continues despite slowing inflation: October
CPI up 0.4% m-o-m, the lowest increase of the year
--------------------------------------------- ---------
17. (SBU) National statistics agency INDEC announced November 11
that October CPI was 0.4% m-o-m, the lowest of the year, but still
below market expectations of 0.6% m-o-m as measured in the BCRA
consensus survey. The CPI decelerated slightly to 8.4% y-o-y in
October from 8.7% y-o-y in September. The 0.4% increase is due
mainly to price increases for home appliances, clothing,
transportation, and leisure activities. According to INDEC, the CPI
accumulated an increase of 6.5% for the first ten months of the
year, compared to private estimates of 15-20%. Private estimates
for 12-month inflation (through October) are in the 15-20% y-o-y
range, compared to the official INDEC estimate of 9.3% y-o-y.
Anecdotal evidence suggests inflation is easing due to the slowdown
in economic activity; and thus, the difference between "published"
INDEC data and "true" inflation is likely shrinking. However, even
with inflationary pressures easing, "true" monthly inflation still
remains above the figure reported by INDEC. For the moment, there
are no signs that the GoA will take advantage of this new scenario
to make a smooth convergence to the true inflation of official CPI.
INDEC also reported that Wholesale prices (WPI) increased 0.5% m-o-m
in October, accumulating an increase of 9.4% in the first ten months
of 2008.


Industrial production decelerates in October
18. (SBU)INDEC reported November 21 that Industrial production (IP)
in October decreased 1.9% m-o-m, seasonally adjusted, and increased
2.6% y-o-y. The announcement disappointed the market, which had
anticipated a 4.6% y-o-y increase. In the first ten months of the
year, the IP increased 5.9% y-o-y compared to 7% during the same
period last year. According to private analysts, the soft and
disappointing October reading was the result of domestic and
international factors, including tighter credit conditions, a
stronger currency compared to trading partners, sustained capital
flight and uncertainty, slower global growth, and sliding commodity
prices. According to the last release of the BCRA consensus, IP is
estimated to increase 7.1% in 2008 and fall by almost half to 4.2%
in 2009. Within the index, four out of the twelve sub-sectors
measured decreases, with the hardest hit being plastics (down 11%
y-o-y) and textiles (down 10% y-o-y), while the sub-sectors with the
largest increases were non-metallic minerals (cement, glass, and
other construction materials, up 10% y-o-y), tobacco (up 9% y-o-y)
and food and beverages (up 7% y-o-y).

FIEL foresees a dark and tough future for Argentina's economy
--------------------------------------------- ---------
19. (SBU) This item outlines the main points from the FIEL Chief
Economist's monthly presentation (Buenos Aires-based Latin American
Economic Foundation -- FIEL -- is a highly regarded, independent
Argentine think tank devoted to economic and social research on
Argentina and Latin America).

-- Recession: FIEL's own IP index dropped 2.5% y-o-y in October,
compared to the official report of a 1.9% decrease (see above item).
This, according to FIEL's analysis of the numbers, is an indication
that the risk of recession in 2009 is growing. In the first ten
months of 2008, FIEL's IP index increased 4.3%, with only three
sectors (autos, food and beverage, and metals) contributing almost
90% of the increase. FIEL expects two of these sectors -- autos and
metals -- to decline rapidly due to the fall in external and
domestic demand.

-- Unemployment: contrary to the GoA's claim that the unemployment
rate fell to 7.8% in the third quarter, from 8.1% in QIII 07 and 8%
in QII 08, FIEL believes that there has not been any employment
creation since the beginning of the year. FIEL estimates that
unemployment will once again exceed 10% in 2009.

-- Inflation Decelerating: FIEL estimates that the CPI decelerated
to an annual level of 19% as of October, (compared to levels above
25% in March), and it continued decelerating as of the first two
weeks of November, which showed an annual rate of 18%.

-- Trade Balance: FIEL estimates that the trade surplus will fall to
$8 billion in 2009, compared to its estimate of $13 billion for
2008, the result of falling commodity prices and sharp increase in
imports. FIEL predicts the GoA will pursue all means possible,
especially using non-tariff barriers, to limit imports, particularly
from Brazil and China. The three key items to monitor, in order to
assess the direction of Argentina's economy and exports, are: 1)
Brazil's GDP (since Brazil's growth impacts Argentine exports,
especially of autos); 2) the Brazilian Real, which has sharply
depreciated making Argentine exports to Brazil less competitive; and
3) the price of soy (Argentina's single largest export).

-- Devaluation: the GoA does not appear willing to let the peso
depreciate rapidly (as neighboring countries have done) from its
current level of around 3.35 ARP/USD for fears of: 1) pass through
to prices; and 2) a bank run on deposits. However, FIEL believes
the BCRA may decide to let the peso slide, since it would help the
GoA finance primary expenditures (due to increases in peso revenues
from export taxes). Also, a large, one-time devaluation would help
stop (or reduce) capital flight (by making the dollar more
expensive). FIEL's economists argued that not letting the peso
depreciate, or managing a gradual devaluation, will result in a
sharper recession. Either alternative, they believe, will be costly
in political terms.


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