Scoop has an Ethical Paywall
License needed for work use Register



Cablegate: Argentina Economic and Financial Weekly for the Week Ending


DE RUEHBU #1769/01 2192037
R 072037Z AUG 06





E.O. 12958: N/A
SUBJECT: Argentina Economic and Financial Weekly for the week ending
August 4, 2006

--------------------------------------------- --------
Weekly Highlights
--------------------------------------------- --------

- The GOA sells USD 482 million worth of Boden 2012 bonds to
- CPI rises 0.6 percent m-o-m in July -- below market expectations.
PPI rises 0.7 percent m-o-m.
- The Chamber of Deputies approves budget "superpowers".
- Chilean industrialists denounce Argentina gas delivery cut.
- IDB approves two credit lines to Argentina provinces.
- The Minimum, Vital and Mobile Wage Council agrees to increase the
minimum wage 27 percent.
- Commentary of the Week: "The Internal Market or Exports?"

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

--------------------------------------------- --------
The GOA sells USD 482 million worth of Boden 2012 bonds to
--------------------------------------------- --------

1. On July 28, the GOA published a resolution authorizing the
issuance of USD 482 million worth of Boden 2012 bonds to Venezuela,
although the bond placement was made secretly on July 17. With this
new issuance, Boden 2012 stock has reached USD 15.1 billion, of
which more than one-quarter was sold directly to the GOV.

--------------------------------------------- --------
CPI rises 0.6 percent m-o-m in July -- below market expectations.
PPI rises 0.7 percent m-o-m.
--------------------------------------------- --------

2. The Consumer Price Index (CPI) increased 0.6 percent m-o-m in
July, below market expectations of 1 percent, and one-tenth of a
percentage point higher than in the last two months. The
better-than-expected result is due mainly to reduced pressure on
food prices, which make up almost one-third of the index. Last
month's increase brought inflation to 5.5 percent for the first
seven months of the year, compared to a 7.2 percent increase in the
same period last year. The seasonal component of the index
increased 0.3 percent, while the regulated component increased just
0.1 percent. The categories with the highest price increases were
education (+4 percent), recreation (+3.1 percent) and housing (+2.5
percent). Meat prices (representing 4.5 percent of the consumer
basket) decreased 3 percent m-o-m due to price restraint agreements
between the GOA and the meat sector as well as the partial ban on
beef exports. Year-on-year, CPI increased 10.6 percent. The BCRA
consensus survey forecasts 11.5 percent inflation in 2006, unchanged
from last month's forecast. The 2006 budget projects a 9.1 percent
inflation rate for 2006, and the Central Bank's inflation target
range is 8-11 percent.

3. Producer prices increased 0.7 percent m-o-m in June, due to a
1.3 percent increase in primary goods prices and a 0.5 percent
increase in the prices of manufactured goods prices and electricity.
The price of imported goods increased 0.4 percent. The PPI index
increased 11.4 percent y-o-y.

--------------------------------------------- --------
The Chamber of Deputies approves budget "superpowers."
--------------------------------------------- --------

4. On August 2, the Chamber of Deputies approved the budgetary
"superpowers" bill sought by the GOA, thus passing the bill into
law. The so-called "superpowers" over the national budget will 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 confidential funds (the so-called "fondos
reservados"). While past administrations also have had similar
"superpowers," this law is different in that the powers granted to
the Chief of Cabinet will be permanent, rather than temporary.

--------------------------------------------- --------
Chilean industrialists denounce Argentina gas delivery cut.
--------------------------------------------- --------

5. Several Chilean industrialists denounced the recent reduction in

gas imports from Argentina, which has limited supplies to small
consumers only. Argentine energy planners will reduce exports to
Chile, as well as restrict supplies to domestic companies and gas
stations. The reported cut in gas delivery coincided with the
coldest days in Argentina's winter; such gas restrictions are not
out of the ordinary when residential users increase demand during
cold spells. This criticism exacerbates tensions between Argentina
and Chile, after GOC officials remarked that Argentina's gas price
increase was higher than expected.

6. The GOA responded to the GOC's criticisms, justifying the price
hike as a result of the increased price of gas imported from Bolivia
to Argentina.

--------------------------------------------- --------
IDB approves two credit lines to Argentina provinces.
--------------------------------------------- --------

7. The Inter-American Development Bank (IDB) approved two credit
lines to Argentina provinces. Cordoba province will receive a USD
180 million loan for an education, home and hospital development
program. The IDB also approved a USD 580 million credit to finance
a high-tension line to boost energy distribution across the "Great
North" provinces (Catamarca, Corrientes, Chaco, Formosa, Jujuy,
Misiones, Tucuman, Salta and Santiago del Estero). The loans have
25-year terms and a 4-year grace period for repayment at variable
interest rates.

--------------------------------------------- --------
The Minimum, Vital and Mobile Wage Council agrees to increase the
minimum wage 27 percent.
--------------------------------------------- --------

8. On July 28, the Minimum, Vital and Mobile Wage Council
participants (union leaders, employers and government employees)
reached an agreement to gradually increase the minimum wage between
now and November. On August 1, the minimum wage increased from ARP
630 to ARP 760. It will rise to ARP 780 in September, and finally
to ARP 800 in November. Union leaders are still demanding an
increase in the family allocation from ARP 60 to ARP 75 per child.

--------------------------------------------- --------
Tax revenues increase 27 percent y-o-y to ARP 12.7 billion in July
-- above expectations.
--------------------------------------------- --------

9. July federal tax revenues increased 27 percent y-o-y to ARP 12.7
billion -- above market expectations of ARP 12.2 billion. Labor
contributions were up 47 percent y-o-y due to increases in formal
job creation and salary increases, while VAT revenues rose 26
percent y-o-y, mainly due to increased economic activity. Income
tax and export tax revenues increased 26 percent y-o-y and 15
percent y-o-y, respectively. In real terms, revenues increased 14
percent y-o-y. July tax revenues reached ARP 83 billion in the
first seven months of the year (a 22 percent y-o-y increase),
reaching 58 percent of the BCRA consensus survey forecast of ARP
143.2 billion for 2006.

--------------------------------------------- --------
2007 budget macroeconomic parameters may include 4.5 percent GDP
growth and 8-11 percent inflation.
--------------------------------------------- --------

10. On August 2, El Cronista reported preliminary macroeconomic
projections that the GOA will likely include in the 2007 budget --
which is expected to be sent to Congress on September 15.
Reportedly, the projections include: 4.5 percent GDP growth, an 8-11
percent inflation band and a primary fiscal surplus totaling 3
percent of GDP. For 2007, the BCRA consensus survey predicts 6
percent GDP growth, an 11-12 percent inflation band and a primary
fiscal surplus of 3.2 percent of GDP. GOA officials said that the
projections are moderate because Argentine economic history is not a
certain matter. The 2007 budget would not include any reference to
the "hold-out" bondholders problem. [The "hold-out" bondholders did
not participate in the 2005 public debt exchange so the GOA has
outstanding debt with them.]

--------------------------------------------- --------
Banks pay USD 125 million in discount borrowing from the BCRA.

--------------------------------------------- --------

11. On August 2, banks canceled another USD 125 million in discount
borrowing from the BCRA. The payment is part of the BCRA's
"matching" program, which matches the terms of bonds held by the
banks with those of the discount debt. During the last 19 months,
banks have repaid 69 percent of their loans and the number of banks
with outstanding discount debt fell from 24 to 3 (Galicia Bank,
Provincial Bank of Buenos Aires and Bisel).

--------------------------------------------- --------
Mercosur central bank presidents will meet in Uruguay.
--------------------------------------------- --------

12. Presidents of the Mercosur countries' central banks will gather
on August 7-8 in Uruguay. The agenda includes discussion over the
creation of a regional Mercosur Bank, a new transaction currency for
use in commercial transactions between Argentina and Brazil and the
issuance of a common bond.

--------------------------------------------- --------
The GOA wants to control rising rent prices.
--------------------------------------------- --------

13. Secretary of Internal Trade Guillermo Moreno is working to
reach an agreement with the real estate sector on the issue of
rising rent prices. According to the National Bureau of Statistics
(INDEC), rents have increased 7.2 percent in 2006, while the CPI
increased 4.9 percent. Moreno hopes to reach a voluntary agreement
without resorting to a price freeze.

--------------------------------------------- --------
Banco Nacion has a new vice-president.
--------------------------------------------- --------

14. On July 28, the GOA designated Roberto Jose Feletti as the new
vice-president of Banco Nacion. Feletti was secretary of planning
and infrastructure for the City of Buenos Aires, and before that
served as president of Banco Ciudad de Buenos Aires. Felleti's term
will last until December 2007.

--------------------------------------------- --------
July labor demand index down 1.01 percent m-o-m.
--------------------------------------------- --------

15. The July labor demand index calculated by Di Tella University
decreased 1.01 percent m-o-m to 111.77 points, after a 7.18 percent
increase in June. Labor demand has decreased 2.02 percent so far
this year. The decrease is mainly due to a fall in the demand for
services (-3.46 percent), as well as for administrative and
commercial personnel (-2.34 percent and -1.76 percent,
respectively). The index is up 6.7 percent y-o-y. [The index is
based on comparisons of job vacancy announcements printed in the two
largest newspapers of the country.]

--------------------------------------------- --------
Oil-producing provinces and the GOA agree on a Federal Hydrocarbon
Law bill.
--------------------------------------------- --------

16. Nine out of Argentina's ten oil and gas-producing provinces
reached an agreement with the GOA on a Federal Hydrocarbon Law bill,
which will now be sent to Congress for approval. This law would
give provinces control over exploration and use of their natural
resources, including administration of permissions, concessions and
royalties. According to the bill, the GOA will remain in charge of
the nation's energy policy as a whole. The nine provinces that
signed are Mendoza, Chubut, Formosa, Jujuy, La Pampa, Rio Negro,
Salta, Santa Cruz and Tierra del Fuego. All are members of the
Federal Organization of Hydrocarbon-Producing Provinces (OFEPHI).
The province of Neuquen, which has withdrawn from OFEPHI, did not
sign the bill. According to press reports, Neuquen's governor is
considering a run against President Nestor Kirchner in the 2007

--------------------------------------------- --------
The GOA will increase employees' pension fund contributions to 11
--------------------------------------------- --------

17. On July 27, the GOA issued a decree to gradually increase
employees' required pension fund contributions. Currently,
employees must contribute 7 percent of their earnings; in January it
will rise to 9 percent. A second increase to 11 percent is scheduled
for June 2007, bringing the contribution rate back to its pre-crisis
level. The GOA decreased contributions from 11 percent to 7 percent
in 2001, in an attempt to reactivate private consumption. Since
then, the GOA has discussed increasing the contribution rate on
several occasions, but it has remained at 7 percent until now.

--------------------------------------------- --------
The GOA will issue a new Bonar bond.
--------------------------------------------- --------

18. Secretary of Finance Alfredo Mac Laughlin announced
preparations for a new Bonar issuance are underway, after the GOA
successfully issued USD 500 million in Bonar V bonds on July 26.
These dollar-denominated Bonar X bonds will have a ten-year term,

and they could be issued within the first two weeks of August.

--------------------------------------------- --------
The BCRA requests USD 700 million from the BIS.
--------------------------------------------- --------

19. The BCRA requested a USD 700 million credit from the Bank for
International Settlements (BIS), which would be used to pay the USD
2.3 billion owed on Boden 2012 and 2007 capital due without
diminishing reserves. The BCRA also asked for funds at the
beginning of the year to restore its lost reserves after prepaying
its debt to the IMF.

--------------------------------------------- --------
Non-contributing pensioners pressure fiscal accounts.
--------------------------------------------- --------

20. A measure that allows people above retirement age to sign up
for retirement pensions, without ever having contributed to the
social security system, is pressuring GOA fiscal accounts. The
retirement payments for people that take advantage of this measure
will be financed with public funds from the current pay-as-you-go
retirement system. Private consultants estimate that if all 2.2
million eligible persons take advantage, it will cost approximately
ARP 11.4 billion. This problem is perceived as one of the major
consequences of the Argentina's high rate of informal employment
(estimated at 45 percent).

--------------------------------------------- --------
The IMF asks Argentina to reopen debt exchange.
--------------------------------------------- --------

21. At their July 28 meeting, IMF members discussed the future of
the "Argentine case." The IMF emphasized the importance of
reopening the debt exchange, though its argument that new financing
would be impossible was weaker after Argentina's successful bond
issuance last week. Other recommended policies were revaluation of
the peso exchange rate, restrictions on peso emissions, and
reductions in government expenditures. Argentina has three
outstanding debts: it owes money to "hold-out" bondholders and to
the Paris Club, as well as accumulated interests with the European
Investment Bank. This week, the GOA will decide if will allow
publication of the IMF's report, which includes comments from
Economic Minister Felisa Miceli and BCRA President Martin Redrado.

--------------------------------------------- --------
BCRA rolls over its maturities and decreases rates for Lebacs and
--------------------------------------------- --------

22. The BCRA received ARP 1.4 billion in bids at its August 1 Lebac
and Nobac auction, compared to ARP 707 million in Lebacs that came
due during the week. It accepted ARP 453 million in Lebac bids and
ARP 436 million in Nobac bids. The yield on the 175-day Lebac
decreased from 8.80 percent to 8.50 percent and on the 259-day Lebac
decreased from 10.70 percent to 10.30 percent. The yield on the
longest term instrument, the 343-day Lebac, decreased from 12.05
percent to 11.90 percent. Lebacs for maturities of more than 343
days were withdrawn due to lack of interest. The spread on the
one-year Nobac decreased from 2.08 percent to 1.93 percent and the

two-year Nobac from 3.74 percent to 3.64 percent. The Badlar rate
(the base rate for Nobacs) is currently at 9.5 percent. The BCRA
changed its policy, accepting almost all Lebac bids and rejecting
most Nobac bids, achieving a reduction of rates.

--------------------------------------------- --------
The peso appreciated against the USD this week, closing at 3.09
--------------------------------------------- --------

23. The peso appreciated versus the USD this week, closing at 3.09
ARP/USD. The BCRA is not reporting daily transactions in the dollar
market until August 3, but the absence of reporting and a high
dollar supply in the market pushed the peso exchange rate down
against the USD. The peso exchange rate has depreciated 1.3 percent
since the beginning of the calendar year. The BCRA's reserves stood
at USD 26.2 billion as of July 21, and have increased USD 7.6
billion, or 41 percent, since the GOA prepaid its entire IMF debt on
January 2.

--------------------------------------------- --------
Commentary of the Week: "The Internal Market or Exports?" by Manuel
Alvarado Ledesma, Director of the Agro-economic Consultancy (CAE),
from an article published in La Nacion on July 22.
--------------------------------------------- --------

24. Economics is the science of choices in conditions of scarcity.
No matter what the choices are, not choosing is not an option. It
is not possible to be both doctor and patient at the same time.
This truism has become a nail in the heel of the current leaders.
Obviously, this applies to some more than others. What does this
reflection mean to us? The sudden devaluation - and its subsequent
micro-devaluations - was permitted as a form of improving the
competitiveness of our economy abroad. Of clear mercantilist roots,
the strategy, adopted as much by this government as by previous
post-devaluation authorities, was clearly pro-exportation. The
devaluation would improve the balance of trade and increase official
resources, but it simultaneously would impoverish the internal
market, affecting mainly the middle class and the most modest
sectors, at least in the short term. On making this choice, the
successive authorities should have known that internal prices would
be extremely affected. However, it is as if they were surprised by
the consequences; they decided to neutralize part of their negative
effects on the internal market through the implementation of
exportation laws on some products. Among these, those of the
agriculture sector stand out.

25. The contradiction is clear. With the modification of the
exchange rate, the price of food and of extractive activities rise,
but the values of other products follow right behind - although to a
different extent. Of course, the government applies export taxes to
the first goods to rise, so that their prices are lower in the
internal market and so that fiscal resources increase at the same
time. And if such taxes do not produce all the effects desired,
then the fiscal authority takes new measures to influence

26. The current absurdity is in wanting to stay in good terms with
the internal market and at the same time trying to maintain a high
dollar to encourage export activity, thus generating higher tax
revenue. The strategy has the political logic of providing
resources to the executive branch, but it implies the economic
contradiction of trying to be in two places at the same time.

27. The government does not demonstrate clearly a calling for
economic principles. Still, a central task remains incomplete: to
define well what is, to the government's understanding, the nature
and extent of state intervention in the economy. As it is today,
the borders between the state and the market are blurred.
Furthermore, they are unstable. In this context, there is no
predictability, and therefore investment is scarce and will surely
follow a path of short-term gains.

28. If one aims for economic stability and export growth, what is
needed is a central bank, independent of political power, that is
dedicated to maintaining the currency's value, a high grade of
economic liberalization that places the country in the global
economy, and a public expenditure that is as crystal clear as it is
efficient. All this should be within a framework of enormous

respect for private property and institutions, with clear and fixed
regulations, that create a predictable horizon. The dollar matters,
but the institutions that determine the transaction costs, and
therefore productivity, matter much more.

29. On the contrary, the Central Bank is paradoxically promoting
future inflation and sectoral struggle to increase sectoral incomes.
In this way, it will surely unleash an internal struggle where each
soldier will only succeed if his is able to give up what his
opponent wants. In place of soldiers of production, we will instead
have soldiers of the zero-sum game.

30. In summary: in its contradiction, economic policy is hurting
the main link of the entire agro-industrial chain. And this is no
small matter, as it makes up more than 35 percent of GDP. (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.)


© Scoop Media

Advertisement - scroll to continue reading
World Headlines

UN News: Aid Access Is Key Priority

Among the key issues facing diplomats is securing the release of a reported 199 Israeli hostages, seized during the Hamas raid. “History is watching,” says Emergency Relief Coordinator Martin Griffiths. “This war was started by taking those hostages. Of course, there's a history between Palestinian people and the Israeli people, and I'm not denying any of that. But that act alone lit a fire, which can only be put out with the release of those hostages.” More

Save The Children: Four Earthquakes In a Week Leave Thousands Homeless

Families in western Afghanistan are reeling after a fourth earthquake hit Herat Province, crumbling buildings and forcing people to flee once again, with thousands now living in tents exposed to fierce winds and dust storms. The latest 6.3 magnitude earthquake hit 30 km outside of Herat on Sunday, shattering communities still reeling from strong and shallow aftershocks. More

UN News: Nowhere To Go In Gaza

UN Spokesperson Stéphane Dujarric said some 1.1M people would be expected to leave northern Gaza and that such a movement would be “impossible” without devastating humanitarian consequences and appeals for the order to be rescinded. The WHO joined the call for Israel to rescind the relocation order, which amounted to a “death sentence” for many. More

Access Now: Telecom Blackout In Gaza An Attack On Human Rights

By October 10, reports indicated that fixed-line internet, mobile data, SMS, telephone, and TV networks are all seriously compromised. With significant and increasing damage to the electrical grid, orders by the Israeli Ministry of Energy to stop supplying electricity and the last remaining power station now out of fuel, many are no longer able to charge devices that are essential to communicate and access information. More


Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.