Cablegate: Argentina Economic and Financial Weekly for the Week Ending
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ZNR UUUUU ZZH
R 191920Z JUL 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5281
INFO RUEATRS/DEPT OF TREASURY WASHDC
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RUEHRC/USDA FAS WASHDC 2243
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
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PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS NSC FOR SUE
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AND OCC FOR CARLOS HERNANDEZ
USDOC FOR ALEXANDER PEACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
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OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
E.O. 12958: N/A
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for the week ending
July 14, 2006
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Weekly Highlights
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- Argentina and Chile to set new gas price agreement.
- Argentina will charge higher diesel fuel prices to foreigners
along its borders.
- Senate approves budget "superpowers."
- Buenos Aires province rescinds water company concession.
- Felisa Miceli announces that price agreements will not change
until the end of the year.
- Commentary of the Week: "Since the crisis, spending has grown ARP
95 billion"
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Argentina and Chile to set new gas price agreement.
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1. The new price agreement between the GOA and the Government of
Bolivia will go into effect on July 15, increasing the price of
natural gas from USD 3.20 to USD 5 per million cubic meters through
the end of 2006. In this context, Chilean Energy and Mining
Minister Karen Poniachik met with Argentine Planning Minister Julio
de Vido to reach an agreement on a new price for Argentine gas
exported to Chile. Poniachik said her government will analyze a
variety of tax formulas proposed by the GOA to determine which would
be the least harmful. She plans to meet with energy companies that
will be affected by the new levy on July 17 before making any
decision. Chile buys 90 percent of Argentine gas exports, and this
new price agreement is expected to go into effect at the end of the
month.
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Argentina will charge higher diesel fuel prices to foreigners along
its borders.
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2. On July 10, the GOA announced that fuel stations will be allowed
to charge more for diesel fuel sold to foreign-tagged vehicles along
Argentine borders, beginning August 10. Since Argentina has frozen
diesel oil prices while neighboring countries continue to charge
international prices, there has been a 1.5-2 percent increase in
demand for diesel fuel at stations along Argentina's borders.
According to Energy Secretary Daniel Cameron, this situation
contributed to the shortage of diesel fuel during the past few
months. Chilean President Bachelet and Foreign Minister Foxley have
both said that this measure is discriminatory and an action against
regional integration. In Brazil and Chile, a liter of diesel costs
USD 0.85 and USD 0.90, respectively; in Argentina it costs just USD
0.48.
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Senate approves budget "superpowers"
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3. On July 12, the Senate approved a measure giving the GOA
budgetary "superpowers" sought by the GOA. The bill now goes to the
Chamber of Deputies, where it is expected to be approved. The
so-called "superpowers" over the national budget would give the GOA
the power to modify the Budget Law and give the Chief of Cabinet the
power to reallocate funds irregardless of the provisions of the
Financial Administration Act or the Fiscal Responsibility Law. The
Senate amended the original proposal, adding a clause that these
"superpowers" will not extend to SIDE (Argentine intelligence
service) or to reserved funds. While past governments also have had
similar "superpowers," this bill is different in that the powers
granted to the Chief of Cabinet would be permanent.
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The Senate approves amendments to the Money Laundering Law.
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4. On July 12, the Senate approved a GOA-proposed law that would
lift bank and stock market secrecy in money laundering
investigations by the Argentine financial intelligence unit (UIF).
Previously, the UIF needed a court order in order to lift bank and
stock market secrecy. The law also revamps the UIF's structure,
replacing the current five directors with a single, appointed
President, who would have the authority to lift banking and stock
market secrecy. Opponents say that the law would concentrate too
much authority in a single official, who will be chosen by the
executive branch. Thus far, there is no indication who the GOA
will pick to be the new president of the UIF.
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Buenos Aires province rescinds water company concession.
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5. The Buenos Aires provincial government rescinded the water and
sewage concession contract granted to Aguas del Gran Buenos Aires
(AGBA), saying the company had not met its obligations. Italian
construction firm Impregilo and Spain's Dragados hold a 43 percent
and a 27 percent share in AGBA, respectively, while Spain's Aguas de
Bilbao Vizkaia hold a 20 percent stake and the company's workers
hold the remaining 10 percent. Governor Felipe Sola said that the
decision to rescind the contract was taken to "ensure that running
water and sewage drains are expanded in the places that most need
them, using a health-based, rather than a business-based, criteria."
The AGBA's services will be assumed by Aguas Bonaerenses (ABSA), a
company that is 90 percent owned by the province and 10 percent
owned by workers, which already operates in many parts of the
province.
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Felisa Miceli announces that price agreements will not change until
the end of the year.
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6. On July 11, Economic Minister Felisa Miceli told the Senate that
the GOA intends to continue with its policy of negotiating sectoral
price agreements, and that existing price agreements will remain
unchanged for the rest of the year. According to Miceli, price
agreements have been efficient instruments to reduce inflation
expectations.
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Provincial finances increasingly dependent on the GOA.
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7. According to private consultants, Argentine provincial finances
are becoming more dependent on discretionary transfers from the GOA.
Between 2002 and 2006, the share of discretionary federal transfers
(i.e., transfers above and beyond those legally required by the
Argentine "co-participation" revenue sharing system) in overall
provincial revenues rose from 17 percent to 24 percent, indicating
that provinces are increasingly dependent on the federal government.
The GOA has seen a significant increase in revenues in the past
four years particularly from export taxes, which are not
automatically shared with the provinces.
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Kirchner announces the creation of the Southern Market.
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8. At the Argentine stock market's 152nd anniversary on July 10,
President Nestor Kirchner announced the creation of the Southern
Market, which will be inaugurated with the issuance of the Southern
Bond (a bi-national to be issued jointly with Venezuela). The
President remarked that these bonds will be priced in both
countries' markets and that negotiations are already underway with
the Caracas stock market.
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Argentine economic mission visits Washington.
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9. An economic mission headed by Secretary for Economic Policy
Oscar Tangelson visited Washington this week. The mission presented
a restructuring proposal for the Inter-American Development Bank
(IDB), which includes proposals for a redirection of infrastructure
loans, a reduction in transaction costs and a credit line in local
currency. In an IDB meeting on July 17, the mission will announce
its support to forgiving the debt of highly indebted countries such
as Bolivia, Honduras, Nicaragua and Haiti.
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Neuquen court orders Chevron to pay royalty in cash.
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10. A court in the province of Neuquen has ordered the local unit
of U.S.-based Chevron to pay recently increased provincial royalties
in cash. The provincial government decreed an increase in royalties
on March 1. Under the new plan, the province calculates the 12
percent nationwide royalty using international oil prices.
Previously, companies were required to pay royalties on global oil
prices less a federally mandated 45 percent export tax. Oil
companies operating in Neuquen have pursued different paths to avoid
paying the higher royalties. Chevron offered to pay the additional
amount in kind with a portion of its oil production, while
Repsol-YPF and Total filed complaints in the Argentine Supreme
Court. The Neuquen ruling against Chevron states that only the
province, not the company, has the right to offer oil instead of
cash payments for disputed royalties.
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The GOA creates a new subsecretary to fight against informal
employment.
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11. Minister of Labor Carlos Tomada announced the creation of the
Subsecretary of Work and Social Security Control as part of a series
of instruments to fight against informal employment. According to
an inspection last year of 134,021 private companies, 38 percent had
irregularities in their employees' status. Tomada said that most of
the companies that have employees who are not registered in the
Social Security program are not even officially listed as employers.
Tomada also said that the Ministry will simplify the process of
employee registration and present a new law to introduce a better
mechanism for registering rural workers.
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Consumer Confidence Index down 1.3 percent m-o-m.
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12. The consumer confidence index -- measured by Torcuato Di Tella
University -- decreased 1.3 percent m-o-m in July to 57.7 points,
down from 58.5 points in June. Only one component of the index
decreased: consumer sentiment toward the macroeconomic environment
(-5.8 percent m-o-m). The other two components increased: consumer
willingness to purchase durable goods and real estate (+0.65
percent) and improvement in personal situation (+1.8 percent m-o-m),
but not enough to outweigh the drop in consumer sentiment. The
index rose 14.3 percent y-o-y. The index is based on surveys of
individual economic sentiment and consumer willingness to purchase
durable goods, houses and cars.
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World Bank approves a USD 75 million loan for road infrastructure in
Cordoba province.
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13. The World Bank approved a USD 75 million road infrastructure
and maintenance loan for the province of Cordoba. The fixed-spread
loan is repayable over 13.5 years, including a six-year grace
period. The Bank is emphasizing infrastructure projects in its
Country Strategy for the 2006-2009 period. Currently, the WB funds
several operations that promote more efficient public expenditure
and sustainability in road infrastructure, including the National
Highway Asset Management Project for USD 220 million, the Provincial
Roads II Project for USD 150 million, and the Buenos Aires Province
Sustainable Investment Development Project for USD 200 million.
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May wage index increased 1.53 percent m-o-m.
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14. The National Bureau of Statistics (INDEC) announced that the
wage index increased 1.53 percent m-o-m in May. This index defines
wages as a price, without considering hours worked or special
payments for productivity gains. This index surveys the formal and
informal private sector and the public sector, which rose 1.62
percent, 1.80 percent and 1.10 percent, respectively. INDEC also
announced that the basic food basket -- used to measure poverty and
indigence -- increased 0.04 percent m-o-m in June, showing a slight
increase after experiencing its sharpest drop in three years in
May.
15. According to INDEC, inequality has also increased in Argentina.
The difference between the medium income of the richest 10 percent
of the population and the poorest 10 percent increased from 32 to 36
times between Q3 of 2005 and Q1 of 2006.
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The BCRA reduces the limit on the amount of public debt that banks
can hold.
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16. The BCRA will reduce the regulatory limit on the amount of GOA,
provincial and municipal debt that banks may hold to 35 percent of
their total assets, down from 40 percent. The aim of this measure
is to generate greater liquidity, promote private lending and limit
bank financing to the GOA and trying to prevent the crowding out of
the private sector in favor of public sector financing that has
occurred at various times in the past. Currently, banks' assets are
ARP 233 billion, of which ARP 63 billion are held as public debt (27
percent of the total). This measure will not affect the BCRA's
Lebacs or Nobacs and will be effective as of July 1, 2007.
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BCRA rolls over its maturities. Investors keep concentrating their
bids in Nobacs.
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17. The BCRA received ARP 2.3 billion in bids at its July 11 Lebac
and Nobac auction, compared to ARP 1.1 billion in Lebacs that came
due during the week. ARP 118 million came from the fixed peso
segment and ARP 1 billion from the pesos indexed by CER segment. It
accepted ARP 416 million in Lebac bids and ARP 1.6 million in Nobac
bids. The yield on the 70-day Lebac and the 168-day Lebac remained
at 7.10 percent and 8.50 percent, respectively. The yield on the
245-day Lebac decreased from 10.18 percent to 10.06 percent and for
the 364-day Lebac the yield was 12.15 percent. The yield on the
longest term instrument, the 490-day Lebac, was 12.56 percent.
Lebacs for maturities of more than 490 days were withdrawn due to
lack of interest by the BCRA. The spread on the one-year Nobac
decreased from 2.19 percent to 2.10 percent and on the two-year
Nobac increased from 3.74 percent to 3.75 percent. The Badlar rate
(the base rate for Nobacs) is currently at 9.2 percent. Investors
continue concentrating their bids in Nobacs; this was a response to
the BCRA's downward movement in the Lebacs yield and to a high
Badlar rate.
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The peso is unchanged against the USD this week, closing at 3.10
ARP/USD.
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18. The peso remained flat versus the USD this week, closing at
3.10 ARP/USD. On Wednesday, the BCRA purchased USD 89.5 million to
keep the peso unchanged against the USD. In the first three days of
the week, the BCRA purchased USD 170 million. The peso exchange
rate has depreciated 1.6 percent since the beginning of the calendar
year. The BCRA's reserves stood at USD 26.1 billion as of July 11,
and have increased USD 7.5 billion, or 41 percent, since the GOA
prepaid its entire IMF debt on January 2.
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Commentary of the Week: "Since the crisis, spending has grown ARP 95
billion", by Jos Luis Espert, from an article published in Ambito
Financiero on June 14.
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19. In the last quarter century, Argentina has stood out among
those countries that have had very frustrating experiences with
respect to economic growth. Between 1980 and 2006, real GDP per
capita grew at an insignificant annual average of 0.50 percent, a
figure similar to Brazil (0.51 percent) and countries that were
communist until 1989 such as Romania (0.4 percent) and Bulgaria (0.5
percent). In the same period, Chile grew 2.9 percent per year,
China 8 percent, Ireland 4.2 percent and India 4 percent. Quite a
contrast, no?
20. A major explanation for such poor performance has been the
recurring financial collapses brought on by enormous -- although
decreasing -- fiscal deficits, with the exception of 2001. When the
"Rodrigazo" occurred in the middle of 1975, the budget deficit
reached 14 percent of GDP. At the end of the Martnez de Hoz's
"tablita" in January of 1981, it was 11.5 percent of GDP. During
the hyperinflation of 1989, it was at 8.3 percent. When the Tequila
crisis hit in 1995, it was 3 percent and when convertibility
shattered in 2001 it was 5.3 percent of GDP. Today we have
surpluses of 1.5 percent of GDP after interest payments, a historic
record not only in the last quarter-century but also in the last
half-century. But we have to be cautious, as this is happening in
the middle of a cycle of large capital inflows to emerging markets
and an increase in our terms of trade rarely seen in history.
21. Although in all the crises suffered in the past 26 years
(except the end of convertibility) the fiscal deficits were
increasingly smaller, public spending has continued to grow. If we
analyze the federal-plus-provincial fiscal results, that is, if we
exclude public service entities/companies whose services were not
eliminated but rather were replaced (up until now) by private
concessions and we keep in mind that interests on public debt
averaged 1.6 percent of GDP with little variation (except 1982 and
2001, with 4.5 percent), primary public spending was 21.8 percent of
GDP in 1981, 22.3 percent prior to hyper inflation, 24 percent
before the Tequila crisis, and 25 percent before the collapse of
convertibility. And it (primary public spending) increased so much
since the launching of the "productive model" that it has already
reached a historic record (in the last quarter century as well as in
the last half century) of 35.5 percent of GDP.
22. In other words, little by little, the federal government has
continued gaining positions despite the fact that the economy,
relative to the world, went backward (probably the country lagged
because the state moved forward). Furthermore, as capital
expenditures began the period at 5 percent of GDP and fell to 1
percent of GDP in 2002, the bulk of the rise in primary spending was
for increased current spending without interest (salaries, pensions,
goods and services, transfers to the private sector). The jump in
current spending was even greater than in primary spending: it went
from 14 percent of GDP in 1982 to 22 percent in 2006. Too much for
an economy that was almost stagnant for more than 25 years.
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New Record
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23. However, if fiscal deficits have been decreasing and public
spending increasing, this means that tax collection has consistently
increased. The average during the 1980s was 18.4 percent of GDP
(with value-added tax (VAT) making up 2.7 percent of GDP); during
convertibility it was 23.5 percent (VAT 6.4 percent) and today we
are already scratching off another historic record of 29 percent of
GDP (VAT 7 percent) -- a record for the last quarter century as well
as the last half century.
24. Certainly, after a 26-year period (1980-2006) in which
Argentina had the poorest economic growth in its entire history,
even worse than the period between the two world wars with the Great
Depression included (0.74 percent real per capital GDP growth per
year between 1913 and 1950), the "lesson" that we have apparently
learned is that one must not have a fiscal deficit. The level of
public spending doesn't matter at all. Public spending can always
grow because taxes, sooner or later, can also increase indefinitely.
It is so today, that those who are in the formal sector pay the
equivalent of nearly 45 percent of GDP in taxes (assuming that
evasion is 1/3), as if we were a rich country. This is nonsense.
25. It is very likely that our sudden fiscal discipline is directly
connected to the inability to finance fiscal deficits after having
bastardized the currency with hyperinflation and the public debt
with various defaults. One also must not underestimate Kirchner's
tricky and Machiavellian interpretation in the sense that he knows
that within the political "class," the party loyalties of factions
and even of ideologies change and switch fluidly, as if it were a
market for the buying and selling of stinking cauliflower or an
endless soap opera.
26. From January 2002 and until the end of this year (according to
the figures from the Secretary of the Treasury), that is, after the
last five years of the productive model, consolidated public
spending of the federal and the provincial government will have
increased ARP 95 billion (120 percent) consisting of, among other
things, an additional ARP 25 billion in salaries, ARP 9 billion in
goods and services, ARP 13 billion in social security, ARP 18
billion in transfers to the private sector, ARP 6 billion in
transfers to municipalities and ARP 20 billion in capital
expenditures. Tax collections will reach ARP 182 billion, ARP 118
billion more than in 2001, with an additional ARP 53 billion going
to the provinces. Provinces have no right to go into deficit as is
being announced. Is there never enough money to meet their
desires?
27. But what is most serious is that society hasn't realized that
having a fiscal surplus is important not only in order to avoid the
explosion of public debt that led to crises in the past. It is also
crucial, for long-term growth, to minimize public spending. It is
stable private spending subject to competitive rules (not corporate
rules like in Argentina) that will give us a healthier future than
that of the "fakirs" of the last quarter century. Public spending
that is clientelist in the best case and corrupt in the worst does
not appear to be the solution to our decadence. (Note: We reproduce
selected articles by local experts for the benefit of our readers.
The opinions expressed are those of the authors, not of the Embassy.
End Note.)
GUTIERREZ
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