Cablegate: Argentina Economic and Financial Review, December

DE RUEHBU #1750/01 3591747
P 241747Z DEC 08



E.O. 12958: N/A
19 - 24, 2008


1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period December 19 - 24, 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 announces Ag Sector stimulus program
-- GoA ups payments to low-income workers and retirees
-- Congress amends income tax legislation to promote
consumption and growth
-- Congress approves Tax Moratorium and Capital Repatriation
-- Fitch downgrades Argentina's sovereign credit rating
-- ANSES auctions long-term deposits to banks
-- Consumer confidence index decreases 2.2% m-o-m, down 28%
for year
-- GoA 2009 Financial Program manageable, according to local

New GoA Economic Stimulus Programs

President announces Ag Sector stimulus program
--------------------------------------------- -
2. (SBU) On December 22, President Cristina Fernandez de
Kirchner continued her recent trend of making one major
government stimulus plan announcement each week, this time
presenting a package of measures to support the agricultural
sector (and also increasing payments to low-income workers --
see next item). This followed her December 15 decision to
expand her previously announced public works program from US$
21 billion to approximately US$ 31 billion and increase
payments to retirees (see next item), her December 4
announcement of US$ 3.9 billion in credit subsidies and
export tax cuts, and her November 25 announcement of a tax
incentive package and the original public works program.
Details of the December 22 proposal:

-- The President confirmed her December 4 proposal to reduce
the export tax on wheat and corn by five percentage points
each (to 23% for wheat and 20% for corn). In addition, she
announced that when historical production averages are
exceeded (13 million tons for wheat and 15 million tons for
corn), export taxes will decrease by one additional
percentage point for large producers (2,500 tons of wheat,
5,000 tons of corn), two points for medium-size producers
(500-2,500 tons wheat; 1,000 - 5,000 tons corn), and five
points for small producers (up to 500 tons wheat and 1,000
tons corn) for each additional million tons produced. (Note:
Producers are unlikely to see these further cuts, as grain
production is expected to fall significantly during this
marketing season due to the drought, export restrictions, and
maximum prices.)
-- Dairy bull calves: the GOA will build five feed-lot
operations capable of servicing a total of 200,000 head to
produce 100,000 tons of beef for the export market.
-- Fruit and Vegetables: the export tax for pears, apples,
peaches, citrus fruit, grapes, blueberries, strawberries,
onions, frozen potatoes, beans, and pulses will be reduced by
50% (fresh deciduous fruit and stone fruit currently pay a
10% export tax, and citrus fruit and vegetables, 5%).
-- Financial assistance: $230 million will be devoted to
producers who were affected by the recent drought.

3. (SBU) Ag Sector Reaction: Producers expected a reduction
of the export tax on soybeans, but were disappointed when
oilseeds (including soybeans and sunflower) were not included
in the announcement. The Liaison Commission (representing
the four main farmer organizations) strongly criticized the
announcements and threatened "direct action" (i.e., protests
on the highways). Road blockages occurred this week in the
Province of Entre Rios, and producer protests are being
organized by farm organizations throughout the country for
the post-holiday period.

BUENOS AIR 00001750 002 OF 004

GoA ups payments to low-income workers and retirees
--------------------------------------------- ------
4. (SBU) In addition to the Ag sector measures, the President
also announced December 22 an ARP 200 (US$ 58) lump sum
payment for all private and public employees earning the
minimum salary (ARP 1240 or US$ 360 per month), to be
implemented before January 6, 2009. This measure will impact
more than 600,000 employees. In addition, the GoA will
increase welfare payments by ARP 150 (US$ 43) to Family
Program beneficiaries and disabled pensioners, and ARP 100
(US$ 29) to Head of Households Program beneficiaries. This
program will affect approximately 2.1 million people, and the
GoA will implement it before December 29. Local press has
reported rumors that some in the GoA believe that provincial
governments should help fund these salary and welfare benefit
increases. In addition, the President announced December 15
that the over six million retirees in Argentina will receive
an ARP 200 US$ 58) lump-sum payment, on top of year-end
bonuses. This will increase public expenditures by
approximately US$ 350 million in December 2008, as estimated
by Economist Miguel Angel Broda in his weekly report, "Carta
Economica." The GoA hopes recipients will devote the ARP 200
entirely to consumption, thereby sustaining domestic demand.
However, many analysts believe the measure will have a
limited impact, dissipating by mid-January.


Congress amends income tax legislation to promote consumption
and growth
--------------------------------------------- -----
5. (SBU) In an unusually rapid procedure, the Argentine
Senate unanimously approved the GoA's proposed amendments to
income tax legislation on December 18, one day after the
lower house had unanimously passed it, and only three days
after the GoA sent the bill to Congress. The bill modifies
the so-called "Tablita de Machinea," named after Economy
Minister Machinea, who introduced the scheme in 2000. (Note:
the "tablita" established the legal income tax deductions
available for taxpayers. Available deductions decreased as
income levels increased, with zero deductions allowed for
annual incomes over ARP 221,000, or about US$ 64,000. The
occasional result was that after-tax income for taxpayers
earning over the maximum amount could be lower than for some
earning less, creating a distortion in the labor market.)
The approved amendment lowers the effective income tax rate,
mainly for middle and higher income employees, since it
removes the provision that limits income tax deductions.

6. (SBU) Private analysts estimate the measure will reduce
income tax collection by ARP 2.5 billion per year (US$ 725
million). While the GoA took this action to foster greater
consumption, private analysts argue that higher earners are
inclined to save or purchase foreign currency instead of
consuming. Therefore, they expect it will not have much
effect, and suggest instead finding ways to increase the
disposable income of low-earners -- for example, by lowering
the VAT -- who have a higher propensity to consume. Economia
y Regiones, a think tank specializing on provinces, notes
that the amendment will reduce GoA automatic transfers to
provinces by about US$ 380 million per year, since income tax
revenue is almost equally shared between the GoA and
provinces, under Argentina's "co-participation" laws.
Interestingly, not one congressional representative from the
provinces mentioned or objected to this during floor debates.

Congress approves Tax Moratorium and Capital Repatriation bill
--------------------------------------------- --
7. (SBU) On December 18, the Senate approved the GoA's bill
to provide tax incentives to foster job creation and
encourage the repatriation of funds held abroad, with a vote
of 42 in favor and 27 against. Given that the Chamber of
Deputies had already approved the bill (see November 28 and
December 10 Economic and Financial Review for further
details), it will enter into force after publication in the
Official Gazette. A prominent element of this law is the
Capital Repatriation chapter, which has generated concern
both locally and internationally over whether it may
facilitate money laundering. The bill as approved exempts
any party taking advantage of this opportunity from having to
verify the origin of the money or assets repatriated into the
local financial system. (Note: however, Article 40 of the
law does state that the law does not relieve financial or
non-financial entities from their legal obligations under

BUENOS AIR 00001750 003 OF 004

Argentina's anti-money laundering or counter-terrorism
finance laws.)


Fitch downgrades Argentina's sovereign credit rating
--------------------------------------------- -------
8. (SBU) On December 18, Fitch Rating Agency downgraded
Argentina's long-term local currency issuer rating to "B
minus" from "B," its country ceiling to "B" from "B plus,"
and its performing bonds in foreign and local currency
governed by Argentine law to "B minus" from "B." Fitch cited
challenging fiscal and external financing requirements and
Argentina's limited options to deal with them, as well as
decelerating real GDP growth and falling commodity prices, as
reasons for the downgrade. Fitch acknowledged that the
recent nationalization of the private pension funds will help
the GoA cover debt obligations over the next twelve to
eighteen months, but argued that it will also increase
long-term costs. Fitch further warned of even greater
challenges for policy makers in the event of a sharper than
anticipated economic slowdown or increased capital flight.

9. (SBU) The Fitch downgrade is just the latest from the
credit agencies. On October 31, S&P lowered Argentina's
foreign and local currency sovereign credit ratings to B-/C
from B/B with stable outlook. This followed S&P's August
downgrade for both foreign and local currency ratings from B
to B. Also in August, Moody's changed the outlook on
Argentina's B3 foreign and local currency government bond
ratings from positive to stable. In late October, Moody's
expressed concerns over the GoA's nationalization of the
private pension system, but noted that this would not impact
Argentina's B3 rating because it already reflects a high
probability of financial distress. Rating agencies have also
downgraded their debt ratings for several Argentine provinces
and private companies over the course of 2008.

ANSES auctions long-term deposits to banks
10. (SBU) On December 16, GoA social security agency ANSES
successfully auctioned ARP 600 million in deposits to banks
operating in Argentina. Through the auction mechanism, banks
bid on fixed-term deposits from ANSES at 11% for one year.
In return, the winning bidders pledged to lend the funds at
below-market rates to small- and medium-sized businesses at
14.2%, to consumers at 15.4%, and to car buyers at 16.25%.
This compares to average market interest rates of 35%, 33%,
and 22%, respectively. This initiative is part of a broader
plan to auction a total of about US$ 2.5 billion in
fixed-term deposits from the stock of private sector pension
funds (AFJPs) that the GoA recently nationalized. Chief of
Cabinet Sergio Massa and ANSES Director Amado Boudou
described the auction as a success, since demand was almost
three times the auctioned amount (ARP 1.6 billion). However,
the majority of participating banks were state-owned, and
they walked away with 80% of the allocated funds. The GoA's
stated strategy is to foster lower interest rates and
stimulate lending to individuals and small companies in order
to mitigate the local credit squeeze and promote increased
spending and investment. ANSES is scheduled to hold the next
auction, for an additional ARP 600 million, this week.

Macro Outlook

Consumer confidence index decreases 2.2% m-o-m, down 28% for
--------------------------------------------- -------
11. (SBU) Di Tella University's consumer confidence index
slid for the third consecutive month in December, decreasing
5.3% m-o-m to 37.1 points. The index accumulated a decrease
of 28% for the whole year, after starting January at 55.0
(shortly after President Cristina Fernandez de Kirchner took
office). It dipped to 40 in June in the middle of the farm
conflict and looks to close the year at a level not seen
since December 2002. In December, all three index components
declined: 1) consumer willingness to purchase durable goods
and real estate decreased 6.7%; 2) consumer sentiment towards
the macroeconomic environment decreased 3.5%; and 3)
consumers' perception of personal economic well-being
decreased 6.3%. According to analysts, this sharp
deterioration in consumer sentiment reinforces the view that
the economy will continue to slow rapidly in the months

BUENOS AIR 00001750 004 OF 004

ahead, despite recent GoA measures designed to promote
consumption and credit. (Note: The index is based on
surveys of individuals and consumers' willingness to purchase
durable goods, houses and cars.)

GoA 2009 Financial Program manageable, according to local
--------------------------------------------- -------
12. (SBU) High yields in Argentine sovereign bonds (over 40%
for dollar-denominated short duration bonds, and close to 50%
for peso-denominated short duration bonds) reflect market
concerns over the GoA's capacity and willingness to pay its
debts. Post surveyed three well-known private economic
consultancies to get their views on the GoA's ability to meet
2009 financial obligations. Despite minor differences in
their estimates, all three groups consider the GoA's 2009
financial program to be manageable, with the GoA's financing
gap ranging from a low of $1.2 billion to $3.5 billion,
depending on macro and available refinancing assumptions. In
the opinion of these analysts, the market is overreacting to
the possibility of an Argentine default. Highlights of the
analysis from FIEL (Fundacion de Investigaciones Economicas
Latinoamericanas), Bein Asociados, and Miguel Kiguel's
Econviews follow:

-- Primary surplus: FIEL estimates the primary surplus at US$
9.8 billion, or about 3% of GDP (including the roughly US$ 4
billion in annual inflows to ANSES derived from the recent
nationalized private pension funds, AFJPs, but excluding
potential extra tax collection from the tax amnesty approved
in Congress December 18). This is in line with Bein's
estimate of US$ 10.2 billion, also about 3% of GDP (and again
including AFJP flows), but lower than Kiguel's base case
scenario of 3.5% of GDP. (It is noteworthy that all three
analysts include the new ANSES/AFJP expected inflows as part
of the primary surplus, even though in theory they belong to
ANSES and the GoA can only access them via issuing debt to
-- Debt obligations: FIEL estimates the GoA's 2009 financial
needs at US$ 19.9 billion, excluding short-term intra-public
sector debt. The other two include such debt, which accounts
for their higher estimates in the range of US$ 21 to 21.5
-- Debt repurchase: This is a required obligation stemming
from the GoA's 2005 debt restructuring. FIEL estimates that
the GoA must buy back US$ 1.7 billion in 2009, whereas Kiguel
estimates it at US$ 2 billion and Bein estimates US$ 2.5
billion. All three expect the GoA to fulfill this
requirement by rolling over ANSES holdings of GoA bonds.
-- Roll-over from ANSES: FIEL estimates the GoA will
roll-over an additional US$ 1 billion in bonds, held
originally by ANSES or by the AFJPs. This is slightly lower
than Bein's estimate of US$ 1.4 billion and Kiguel's estimate
of US$ 1.5 billion.
-- Financing Gap: FIEL estimates the resulting financing gap
at US$ 3.2 billion. This assumes that the GoA will do a debt
swap with local holders of the "Prestamos Garantizados" (PG
-- guaranteed loans), thus reducing amortizations by US$ 2
billion in 2009. It also assumes the International Financial
Institutions roll-over debts of $2.2 billion. Bein estimates
a financing gap of only US$ 1.2 billion, assuming a PG swap
resulting in reduced payments of US$ 2.6 billion and IFI
refinancing of US$ 2.2 billion. Kiguel has a slightly higher
estimate of US$ 3.5 billion financing gap, but this excludes
the possibility of a PG swap or IFI refinancing. All three
expect the GoA to cover the gap via borrowing from the
Argentine Central Bank or largest state-owned bank, Banco de
la Nacion.


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