Cablegate: Argentina Economic and Financial Weekly (October


DE RUEHBU #2445/01 3031951
R 301951Z OCT 06





E.O. 12958: N/A
27, 2006)

1. Provided below is Embassy Buenos Aires' Economic and
Financial Review for the week ending October 27, 2006. 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 recipient list.

Weekly Highlights

--Buenos Aires Province successfully launches $475 million
bond issue
--Argentine Congress may extend Economic Emergency Law
through December 2007
--Tensions rise between GoA and health insurers over proposed
2007 fee increases
--GoA announces intention to terminate "Price Agreements" at
the end of 2007
--Argentina's September trade surplus is $895 million, in
line with market expectations
--BCRA forecasts low inflation, record GDP growth, and lower
--Argentina to import electricity from Brazil during
high-demand peaks expected late-2006
--GoA will not increase penalties on households that fail to
reduce energy consumption
--Oil production in Argentina expected to decrease by 17%
between 2007 and 2009
--Commentary of the week: When the Lights Are On and the
Economy Is Off

Buenos Aires Province successfully launches $475 million bond
--------------------------------------------- ----

2. On October 25, the Province of Buenos Aires successfully
issued $475 million in 12-year bonds. The Province received
$1.2 billion in bids for its original issuance of $300
million (four times oversubscribed), prompting it to increase
the amount to $475 million (the maximum amount allowed by the
provincial congress). The bond was priced to yield 9.75% or
a spread of 492 basis points over comparable maturity U.S.
Treasury securities, and it immediately tightened to 9.57% in
the secondary market. Merrill Lynch was the lead-manager of
the transaction. (Note: Similar to the federal government,
B.A. Province defaulted on its debt following the 2001/2
financial crisis. In December 2005, the Province
restructured the majority of the $3 billion in private sector
bonds it had defaulted on at 45 cents on the dollar. The
Province achieved a 93% acceptance rate from bondholders
versus 76% in the federal government's March 2005 debt
exchange. End Note). The Province plans to use the proceeds
to make debt payments and fund capital expenditures. S&P has
assigned its speculative grade single-B-plus rating to the
province, the same as Argentina's sovereign rating, with a
stable outlook. Moody's has assigned ratings of B3 to the
offering, also the same as its sovereign rating for the
country but two notches below S&P's.

Argentine Congress may extend Economic Emergency Law through
December 2007
--------------------------------------------- -------

3. Argentine Senator Capitanich stated on October 20 that
Congress is considering xtending the Economic Emergency law,
due to expire December 31, 2006, for one year. Congress
first approved the Economic Emergency Law in 2002 following
Argentina's economic and financial crisis, and has since
extended it on an annual basis. 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 renegotiations). Even
though the economy is growing rapidly for the fourth
consecutive year, the GoA argues that the extension of the
Emergency Law is necessary to allow the country to defend
itself in lawsuits filed by holdouts from the 2005 debt

exchange. Additionally, the GoA says it needs the extension
to facilitate renegotiation of contracts with private utility

Tension rises between the GoA and health insurers over 2007
fee increases
--------------------------------------------- ----

4. On October the 23, health insurers announced that they
will increase fees by 18-23%, effective January 2007, in
order to cover rising costs, including a 19% salary increase
for the sector's workers. (Note: this fee increase will
impact three million private health insurance subscribers.).
Economic Minister Miceli responded on October 24 that the GoA
would not allow "irresponsible" price hikes and reassured the
public that the GoA would use "whatever means" it has to
prevent them. Furthermore, Miceli reiterated that the GoA
will continue its price control regime for as long as
necessary. In a more conciliatory move, Miceli said the GoA
would review the health sector's cost structure to determine
whether some level of fee increase might be justified. Local
analysts estimate that the 18-23% fee increase would result
in a 0.8% m-o-m increase in the January CPI.

GoA announces intention to terminate "Price Agreements" at
the end of 2007

5. GoA officials and executives of major food companies met
October 25 and verbally agreed to maintain current food
prices through December 2007. Following the meeting,
Secretary of Internal Trade Guillermo Moreno stated that

President Kirchner envisions ending all price control
agreements at the end of 2007, whereupon it would allow
market forces to determine prices. Local media reports on
this announcement report that local private sector players
are skeptical that the GoA would end price controls without
an extended phase-out period.

Argentina's September trade surplus is $895 million, in line
with market expectations
--------------------------------------------- -------

6. The September trade surplus reached $895 million, in line
with market expectations. Exports increased 17% y-o-y to
$4.0 billion, following 12% y-o-y growth in August, with
increases in both price (6% y-o-y) and quantity (11% y-o-y).
Exports were driven by increases in industrial goods (35%
y-o-y), agribusiness (20% y-o-y) and primary goods (15%
y-o-y), while fuel and energy exports decreased 12% y-o-y.
Imports increased 28% y-o-y to $3.2 billion, with increases
in both price (5%) and, especially, in quantity (22%).
Imports were driven by increases in fuel and oil (67% y-o-y),
intermediate goods (31% y-o-y), capital goods (30% y-o-y),
parts for capital goods (22% y-o-y) and consumer goods (17%
y-o-y). The accumulated trade surplus reached $9.1 billion
for the first nine months of 2006. The BCRA consensus survey
expects the 2006 annual trade surplus to narrow to $10.8
billion by the end of the year, compared with a $11.3 billion
trade surplus in 2005.

BCRA forecasts low inflation, record GDP growth, and lower
unemployment in 2006
--------------------------------------------- -------

7. In its latest Inflation Report, issued October 23, the
BCRA forecasted 2006 inflation between 8% and 11%, in line
with the Monetary Program, and estimated that prices will
show a similar performance in 2007. The BCRA noted that
inflationary expectations -- measured by the BCRA consensus
survey -- had fallen. The median forecast for year-end
inflation stood at 9.8% in the September's survey, down from
11.4% in June and from 13% in January. According to
September's survey, the consensus estimate for 2007 inflation
is 10.5%.

8. The BCRA report also highlighted the strength of the

economy and forecast that real GDP growth will exceed 8% in
2006, with total GDP 16% higher than the record achieved in
1998. The BCRA also estimates that the unemployment rate
will fall to 9% by year-end, and the primary fiscal surplus
will be 3.3% of GDP for 2006 (Note: this is lower than
reported in the October 20 E&F Weekly, which stated that at
current trends the GoA's primary fiscal surplus will reach 4%
of GDP for 2006, compared to the budget's 3% forecast.)

Argentina to import electricity from Brazil during
high-demand peaks expected late 2006
--------------------------------------------- -----

9. The GoA announced plans to import electricity from Brazil
during the demand peak expected for the end of 2006. This
measure seeks to alleviate expected energy shortages, which
are the result of the combination of strong demand for energy
(due to expected higher than normal temperatures) and lower
supply generated by technical failures at four energy
generators. CAMMESA (the wholesale electricity market
administrator) separately asked electricity generators to
postpone maintenance-related stoppages and shut-downs until
after December, when electricity demand is expected to

GoA will not increase penalties on households that fail to
reduce energy consumption
--------------------------------------------- -----

10. During an Industrial conference on October 20, Energy
Undersecretary Folgar stated that the GoA will not accede to
energy company calls for it to increase penalties (beyond
current levels) on households that are not reducing their
energy consumption. Folgar argued that the existing penalty
fee structure is adequate and that the incentives under the
government's current energy savings program are working to
reduce consumption. (Note: In May 2005, the GoA introduced a
plan to induce residential users to save energy. In order to
avoid a government-imposed fine, residential users must
reduce energy consumption relative to the previous year's
level. Energy companies have advocated for increasing this
fine to add further incentive for reducing consumption, and
thus alleviate the expected energy shortages.) Folgar also
denied that the GoA will provide subsidies to industries that
generate their own electricity.

Oil production in Argentina expected to decrease by 17%
between 2007 and 2009
--------------------------------------------- ------

11. According to a report elaborated by thirty oil companies
in Argentina, local oil production will decrease 17% between
2007 and 2009 due to the natural drying up of existing oil
wells and the lack of investment in exploration (largely a
response to GoA taxes on oil exports, which are designed to
maintain low domestic prices). Local oil production has
already decreased 5% in 2005 and 3.2% in the first semester
of 2006. Meanwhile, there is surging demand for fuel, driven
by high GDP growth (e.g. the demand of gasoline increased 18%
in the first semester of 2006). As a consequence, oil
exports decreased 59% y-o-y in the first six months of 2006.
At this rate, Argentina may go from being an oil exporter to
an oil importer in the next two years.

Commentary: When the Lights Are On and the Economy Is Off
--------------------------------------------- -------

12. In order to avoid an electoral stumble, the government
is concerned about providing electrical power to heavy
residential users in the short term. However, the impact on
the industrial sector may end up affecting the economic
growth rate.

13. The government denies the existence of a (energy) crisis
based on a simple fact: the massive foretold blackouts have
not occurred. It is trying to avoid any blackouts in the
Federal Capital and Buenos Aires suburbs, where the majority

of residential users and voters live. The political
objective to keep residential users subsidized and protected
from power outages is at odds with the necessity, also
political, to maintain a high economic growth rate.

14. The government's main concern is to reduce power outages
during the (austral) summer season. Electrical generation is
currently at maximum capacity, and is at risk, as technical
studies from CAMMESA (wholesale electricity market
administrator) anticipated. The largest consumers of
electricity, accounting for approximately 30% of total
demand, will have to satisfy their additional demand for
electricity from outside the system (either they self
generate it or purchase it from other producers). If the
demand peak surpasses 18.000 MW, large users will not only
have to search for additional supply, but will also have to
move their demand off peak.

15. The industrialists are worried about long run results
and are thus increasingly concerned about the energy
shortage. They have, therefore, begun to dust old generating
equipment, buy new equipment, or rent it from other
companies, in order to provide themselves with additional
energy. In today's market the international wholesale price
per MW for industry is $35. However, companies using rented
equipment to generate their own electricity, using diesel
oil, face prices five times higher. This solution, anyway,
is temporary, just to get through the summer. If the company
is to maintain its growth, it must take measures to assure
long term energy supply. This is where the other part of the
energy problem begins. If a power generation company is to
sign a contract to provide the needed extra energy output, it
must purchase additional gas from a gas producer. As the
supply of gas is stagnant, and gas reserves are in sharp
decline, it is impossible to get new contracts for additional

16. The government's plan does not take into account all
these aspects. The same industrialist who started seeking
additional electricity to maintain his growth is having his
legs cut out from under him by the gas supply. With less
natural gas for industrial activity (until more comes from
Bolivia or the LNG (liquid natural gas) plant is
constructed), users must shift to other more expensive fuels,
such as diesel, which are also limited. As the country loses
its petroleum self sufficiency, the local price for oil
(until now capped by a mixture of government policy and moral
suasion) is also beginning to pressure on the up side. As a
consequence, prospective investors (in Argentina) face an
expensive and uncertain energy supply.

17. Investment is required for the government to maintain
its high-growth strategy. The need to keep the lights on for
most voters conflicts with the need to maintain economic
expansion. Energy supply is a short term hostage. If there
is no investment to increase the energy supply, the economy
risks faltering. Paradoxically, if economic growth slows,
there will less need for the extra energy. The energy issue
will say goodbye to newspaper headlines when the country
overcomes this dilemma: when there is enough energy for both
keeping the lights on and sustaining the economy's takeoff.
(Note: By Daniel Montamat; translated from an editorial
published in Cronista on October 19. 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

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