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Cablegate: Argentina Economic and Financial Review, November

DE RUEHBU #2312/01 3411948
P 071948Z DEC 07





E.O. 12958: N/A
19 - DECEMBER 3, 2007

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period November 19 - December
3, 2007. The unclassified email version of this report
includes tables and charts tracking Argentine economic
developments. Contact Econoff Chris Landberg at
landbergca@state.gov 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.

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-- GoA bond sales: $500 million to Venezuela; $574 million in
local auction and $607 million to Social Security
-- Argentine power company EMDERSA raises just $60 million in
local IPO.
-- Central Bank earns $2.3 billion on investments of official
-- GoA imposes export taxes on metals and minerals to boost
2008 primary fiscal surplus.
-- Supreme Court ruling in favor of pensioner sets precedent
for other cases and creates potential GoA liability of ARP 8
-- Chamber of Deputies extension of the Economic Emergency
Law through December 2008
-- Unemployment continues to fall, but doubts increase about
INDEC statistics
-- Commodity exports drive January - October trade surplus


Argentine bond sales: $500 million to Venezuela, $574 million
in local auction, and $607 million to Social Security
2. (SBU) In an effort to fulfill the country's financing
needs for 2007 before the new administration takes over
December 10, the GoA conducted several recent bond sales,
including one to Venezuela. On November 13 (announced to the
public November 23), the GoA sold $500 million in
dollar-denominated Boden 2015 bonds to Venezuela. (The Boden
2015 is an Argentine law, 10-year, dollar denominated bullet
bond first issued October 3 2005, maturing in 2015, carrying
a fixed 7% coupon rate.) The bonds were priced at a reported
yield of 10.43%, 27 basis points lower than the last issuance
of the same bond to the GoV in August (see Econ/Fin Report
sent August 22). So far this year, the GoV has financed the
GoA for a total of $1.75 billion (effective value), which
represents 35% of the GoA's total bond sales this year. It
is unclear whether the GoV will repackage these Boden 2015s
with Venezuelan securities as a joint sale of the so-called
Bono del Sur (BdS). However, it is irrelevant from the GoA's
perspective whether the GoV holds the Argentine bonds or
flips them in a BdS sale.

3. (SBU) This Boden 2015 sale follows on the GoA's November
14 Bonar X auction for $574 million (see readout in November
19 Econ/Fin Report) and the recent IDB loan disbursement to
the GoA of $350 million. The GoA also announced in the
November 26 Official Gazette that the Social Security
Administration (ANSES) had purchased $542 million (face
value, equivalent to $607 million effective value) of
dollar-denominated Discount bonds issued under Argentine law.
The Discount bonds mature in December 2033 and were
originally issued in the GoA debt restructuring in 2005.
According to local press reports, the Discounts sold to ANSES
were priced at 111.9, with a yield of 8.28%, when that same
day, the bond was trading much lower at 98.27, corresponding
to a yield of 10.41%. If true, the reports suggest that
ANSES "voluntarily" purchased a bond with a yield 212 basis
points below the market yield. (Note: The GoA already
computes as current income the revenues from individuals who
have decided to transfer funds from their private pension
plans to the public GA system. See February 2 and November
22 Econ/Fin Reports for background on the pension system

BUENOS AIR 00002312 002 OF 005

reform that allows these transfers. The reason that the GoA
sold the bond to ANSES was to gain access to surplus ANSES
funds, derived from workers already paying into the public

Argentine power company EMDERSA raises just $60 million in an
4. (SBU) On December 3, Empresa Distribuidora Electrica
Regional (EMDERSA -- a power distributor in the northwest of
Argentina) raised just $60 million in a local IPO, after
calling off its original attempt to raise $200 million both
locally and internationally. The company originally launched
the opening of 155.6 million ordinary class B shares on
November 26 in separate tranches targeting local and
international equity markets. The company had anticipated a
pricing of ARP 3.70 - 4.40 for ordinary class B shares and
$11.75-13.97 for global depository shares. However, the
offering only attracted bids for $10 million from
international investors and $80 million locally (mainly from
private pension funds -- AFJPs). Following this
disappointing result, the Company canceled the initiative and
rescheduled it for December 3, but only for local investors.
The second round was also relatively disappointing, with
EMDERSA selling only 55 million shares at a price of only
about 3.45 per share, obtaining ARP 190 million ($60
million), or 30% of the target amount.

5. (SBU) EMDERSA has indicated it plans to use proceeds from
the IPO to cover operating and financing costs and to invest
in expansion projects (including 110mw/h thermal plant and a
combined cycle plant along in Salta province with Pan
American Energy) and acquisitions. Many analysts attributed
the market's lack of interest in this transaction to the
GoA's continued delays in authorizing electricity tariffs
increases. The GoA's refusal to raise tariffs largely frozen
since 2002 has undermined the profitably of energy companies
-- including EMDERSA -- operating in Argentina. Some
analysts also criticized the offer as overpriced compared to
other Latin American companies of the sector. EMDERSA
(controlling power distribution in the provinces of Salta,
San Luis and La Rioja) is controlled by a unit of JPMorgan,
which also managed the IPO along with Merrill Lynch.

Argentine Central Bank earns $2.3 billion on investments of
official reserves
6. (SBU) The BCRA announced November 28 that it earned $2.3
billion through October 2007 on the investment of its
reserves. This represents a 7.1% annual yield, 200 basis
points higher than for the same period last year. According
to the BCRA, the positive result was due to three factors:
the extension of maturities on its investments, currency
diversification (especially into the Euro), and increased
value of its gold holdings. According to the BCRA release,
its Euro portfolio gained 16% and its gold position gained
26% through end-October. The BCRA does not appear to be
pursuing a different reserves management strategy than it has
in the past, but the BCRA press release boasts that its
adequate reserve management -- maximizing reserves while
limiting risks -- left it well-positioned to benefit from the
dollar's depreciation and the increasing price of gold. The
BCRA's latest official report on November 23 shows reserves
at $44.4 billion. Press reports on December 3 announced that
official reserves had exceeded $45 billion for the first

GoA imposes export taxes on minerals to boost the 2008
primary fiscal surplus
7. (SBU) The GoA abruptly imposed on November 30 a new 10%
tax on all exports of minerals. This followed recent
increases of agriculture and hydrocarbons export taxes (see
Nov 19 Econ/Fin Report). The GoA formally announced the
measure December 4. In the context of the strong rally in
international mineral prices, the action seeks to retain for
the government part of the increased revenue going to the
sector. Private analysts expect the tax to raise additional
revenues of ARP 800 million (slightly over $250 million).
(Note: Copper and gold exports alone are estimated at $2.7
billion in 2007.) This tax is the latest effort of

BUENOS AIR 00002312 003 OF 005

President Nestor Kirchner's government to increase federal
tax revenue and boost the GoA primary fiscal surplus prior to
the changeover of government on December 10. According to
Ecolatina (a local consultancy), the combined increase in
export taxes in agriculture, hydrocarbons, and minerals will
raise revenues of approximately $2.8-3.2 billion, or over 1%
of GDP -- a significant contribution to President-elect
Cristina Fernandez de Kirchner's goal of increasing the GoA's
primary fiscal surplus to 4% in 2008 (from the estimated 3 to
3.25% in 2007).

8. (SBU) Local press articles state that the measure became
effective on November 30 by way of two official letters to
the Argentine Customs Service, one from the Secretary of
Mining and the other from Secretary of Internal Commerce
(Guillermo Moreno). These letters instructed Customs to
impose the 10% tax on all minerals exports, effective
immediately. There is still some question as to whether this
measure is legal, given that it appears to violate (or at
least modifies) existing law governing the mining sector.
Regulation governing the mining sector is codified in
Argentina's "Ley de Inversiones Mineras" (Mining Investment
Law), introduced in 1993. This law establishes regulations,
incentives, and royalty rates (3% on gross output value, paid
to provincial governments) for the mining sector for thirty
years (ending 2023). It is still unclear at this time if the
companies affected by this new tax will seek legal recourse
through Argentine courts.

Economic Policy

Supreme Court ruling in favor of pensioner sets precedent for
other cases and creates potential GoA liability of ARP 8
9. (SBU) The Argentine Supreme Court ruled November 26 in
favor of a pensioner seeking an adjustment to his pension to
make up for the extreme divergence in salary and pension
levels since the end of the 2001-2002 financial crisis. In
the case filed by pensioner Adolfo Badaro, the Supreme Court
agreed that the GoA's net 11% increase in pension benefits
from 2002 to 2006 did not reflect the much higher increase in
salaries during the time period. The Supreme Court ordered
the GoA to compensate Mr. Badaro by increasing his pension by
88.5% (retroactive to 2002), based on the increase in
statistical agency INDEC's salary indices. The ruling sets a
possible precedent for 1.4 million other public pensioners to
claim similar adjustments on their pensions.

10. (SBU) Osvaldo Giordano, Director of local think tank
IDESA (Institute for the Social Development of Argentina),
estimates the ruling could increase the GoA's annual
expenditures on pensions by ARP 8 billion (over $2.5
billion). However, another local think tank, RSH
Consultores, calculates that if this ruling were applied
retroactively to all pensioners in the same situation as the
claimant, the GoA would face a liability of about ARP 27
billion (over $8.5 billion) for the period 2002-2007, in
addition to the ARP 8 billion per year going forward. The
Supreme Court also ruled unconstitutional Article 7 of the
Social Security Law, which allows Congress to determine the
level of pension increases in the annual budget. Instead,
the Supreme Court called on Congress to approve an automatic
mechanism for adjusting pensions (this would require a change
to current law prohibiting indexation).

Chamber of Deputies approves extension of the Economic
Emergency Law
11. (SBU) The Chamber of Deputies voted December 4 to approve
a one-year extension of the Economic Emergency Law, due to
expire December 31. The Senate was due to vote on the law
December 5 to allow the new administration to come into
office with this important -- albeit controversial -- tool at
its disposal. However, the official majority party was
unable to muster a quorum, and postponed the vote until next
week. The media reports that the Senate will attempt to pass
the measure into law December 12, two days after President
Cristina Fernandez de Kirchner assumes office. Congress

BUENOS AIR 00002312 004 OF 005

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 allows the
executive branch to enact a wide range of economic policies
by decree (e.g., debt and utility tariff renegotiations),
which otherwise would require Congressional authorization.
Even though Argentina's economy is growing rapidly for the
fifth consecutive year and unemployment is near 8% (see below
item), the GoA argues that the extension of the Emergency Law
is necessary to allow the country to defend itself in
international lawsuits filed by holdouts from the 2005 debt

Economic Outlook

Unemployment continues to fall, but doubts increase about
INDEC statistics
12. (SBU) INDEC (GoA statistical agency) announced November
22 that Argentina's unemployment rate had fallen 0.4
percentage points to 8.1% in the third quarter of 2007,
compared to 8.5% in the previous quarter. However, INDEC's
report highlighted that it was unable to conduct the
household survey used to calculate the unemployment level in
many of the cities where it is normally done, including the
key districts of Buenos Aires' suburbs, La Plata, Mar del
Plata and Bahia Blanca (representing 63% of the country's
population). Instead, the agency calculated the overall
unemployment rate assuming that cities not surveyed had
unemployment rates roughly equivalent to the level of those
surveyed. Local analysts argue that this assumption has
biased the index in favor of a lower unemployment rate, since
the excluded districts mentioned above are thought to have
significantly higher unemployment than the national average.

13. (SBU) INDEC is widely accused of tampering with national
statistics, principally the CPI index (see Econ/Fin Reports
from Feb 2, Sep 20, Oct 26, Nov 19). This latest
announcement is the latest INDEC action that is fueling
suspicions that INDEC may be manipulating other statistics
besides inflation numbers, possibly including (in addition to
unemployment) GDP, industrial production, and poverty levels.
(Note: INDEC includes beneficiaries of the GoA's "Heads of
Households" financial support program as employed in
calculating the 8.1% unemployment rate recently announced.
When excluding these beneficiaries, the unemployment rate
fell to 8.8% in Q3, from 9.5% in Q2.)


Commodity exports drive January - October trade surplus
14. (SBU) Argentina's trade surplus for January - October
2007 totaled $8.3 billion (compared to a surplus of almost
$10 billion for the same period in 2006). On a 12-month
rolling basis, the trade balance widened to $10.7 billion in
October, from $10.5 billion in September. Exports for
January-October 2007 increased 18% y-o-y to $44.8 billion,
and imports grew 30% y-o-y to $36.5 billion during the same
period. Exports in the month of October were higher than
expected, growing 32% y-o-y to a historical, single-month
record of $5.5 billion, while imports grew 35% y-o-y to $4.4

15. (SBU) October export growth was due to similar increases
in both volumes (16%) and prices (14%). Three items explain
almost three-quarters of monthly export growth: oilseeds,
vegetable oils, and pellets. Overall exports of agribusiness
products increased 40% y-o-y in October, while industrial
exports rose only 24%, although local speculation is that
during October commodity exporters were accelerating
shipments ahead of the expected increases in export taxes
(reported in the November 19 Econ/Fin Report). Even so, the
wide disparity in export growth rates indicates what many
analysts see as a marked shift to primary goods and
agribusiness products as the main drivers of export growth,
taking the lead away from industrial goods exports. In fact,

BUENOS AIR 00002312 005 OF 005

the accumulated annual trade surplus is mostly the result of
the trade in primary goods, which shows a surplus of about
$11.5 billion. On the other hand, industry as a whole
(including the food industry) experienced a trade deficit --
for the first time in the past decade -- of roughly $3.2

16. (SBU) Exports of fuels and energy were down 5% y-o-y,
despite the 29% increase in prices so far in 2007. Volumes
of fuel exports fell 27%. Banco Santander calculates that
Argentina's external sales of petroleum amounted to 2.16
million barrels in October, or 56% lower than in October 2006.

17. (SBU) October import growth was due primarily to volume
increases (25%) and much lower price increases (8%). The
strength of imports appears to reflect strong domestic demand
growth, particularly for energy (even though October is not a
peak month for energy consumption). Imports of consumer
goods were up 51% y-o-y, while imports of capital and
intermediate goods rose 27% and 42% y-o-y, respectively.
Meanwhile, energy-related imports (diesel, carbon,
electricity) increased 65% y-o-y in October.

18. (SBU) The BCRA's consensus forecast for the 2007 trade
surplus is about $9.6 billion, and predicts a decline to $8.4
billion in 2008, with a deceleration in the growth rate for
both exports and imports as both global and Argentine growth
slow. No further increases in agricultural commodity prices
are anticipated, but given their steep acceleration since
late Q2, even flat commodity prices would improve the terms
of trade by 5% next year. Real import growth is seen
decelerating slightly, with a more marked slowdown expected
for prices (assuming fuel price pressures abate in 2008).

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