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Cablegate: Argentina Economic and Financial Review, December

DE RUEHBU #1725/01 3542036
P 192036Z DEC 08 ZDK



E.O. 12958: N/A
1-19, 2008


1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period December 1-19, 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.


-- GoA unveils US$3.9 billion stimulus package, expands
public works plan to US$31 billion
-- GoA reveals further details of auto sector stimulus program
-- Senate approves bill to expropriate Flag Carrier
Aerolineas Argentinas
-- Argentine Congress approves Tax Moratorium and Capital
Repatriation bill
-- U.S. Court ruling on private pension funds' US$200 million
assets in U.S.
-- First private debt issuance since AFJP nationalization
-- Congress approves Emergency Economic Law and Financial
Transaction Tax
-- November tax revenue disappoints
-- Economist Miguel Kiguel: Argentine Economy "not as bad as
it looks"

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GoA unveils US$3.9 billion stimulus package, expands public
works plan to US$31 billion
--------------------------------------------- ---------
2. (SBU) President Cristina Fernandez de Kirchner announced
December 4 an ARP 13.2 billion (approx. US$3.9 billion)
stimulus package to foster growth and employment. This
announcement followed her November 25 announcement of a tax
incentive package and ARP 71 billion (approx. US$21 billion)
public works program. Under the announced program, the GoA
plans to finance consumption loans (ARP 3.5 billion), trade
financing for the industrial sector (ARP 1.3 billion) and the
agricultural sector (ARP 1.7 billion), loans for first-time
car buyers (ARP 3.1 billion), and a support package for
small-and medium-sized enterprises (ARP 3 billion).
President Kirchner stated that the package will be financed
with the cash previously held in time deposits by the
nationalized private pension funds (AFJPs), which were
transferred on December 9 to the Social Security
Administration (ANSES) December 9. The President also
unexpectedly announced a five percentage point reduction in
the tax rate on wheat and corn exports, bringing them to 23%
and 20%, respectively. The GoA will grant a further export
tax rate cut of 1 percentage point if wheat and corn
production rise above average annual production of 13 million
tons for wheat and 15 million tones for corn. (Note: local
press has reported rumors that the GoA is considering a
separate 5 percentage point tax cut on both soy and sunflower
exports, currently at 35% and 32%, respectively.)

3. (SBU) On December 15, the GoA announced the expansion of
its previously announced public works program from ARP 71
billion to ARP 110 (roughly US$31 billion). The main
objective of the program is to preserve jobs and will be
centered on infrastructure, energy, and housing projects.
The GoA will implement this program over multiple years,
beginning in 2009 US$16 billion outlay (about 4.4% of
estimated 2009 GDP and almost double the amount expected to
be spent on public works projects in 2008). The GoA has also
stated that about US$21 billion of the program is already
financed, although it has not given details as to the source
of this funding.

4. (SBU) Bankers and business leaders have reacted
cautiously, calling the various stimulus packages a step in
the right direction, but lacking details on implementation.
Banco Macro President Jorge Brito, known to have a close
relationship with the government, stated: "The president aims
to revive the economy in two ways, through credit to
consumers and to producers. The total sum is significant.

BUENOS AIR 00001725 002 OF 006

We'll want to read the fine print, but I see this as very
positive on first glance." However, many local and
international analysts have voiced skepticism about the
impact of the measures, since there is no new funding for
this program. The AFJP deposits were already part of the
banking sector's funding base, so redirecting these monies to
pay for the GoA's announced programs will result in an equal
reduction in bank credit to the private sector.

GoA reveals further details of auto sector stimulus program
--------------------------------------------- ---------
5. (SBU) On December 6, recently appointed Production
Minister Debora Giorgi, along with ANSES Director Amado Bodou
and Secretary of Industry Fernando Fraguio, provided further
details on the ARP 3.1 billion (US$890 million) loan program
to promote the purchase of new cars by first-time car buyers.
Minister Giorgi stated that the six main domestic automakers
will each offer two models selling for ARP 30,000-40,000
apiece, and stated that the purpose of the program is to
"reorient funds from financial speculation to bolster the
economy and maintain jobs in a vital industry for the local
economy." Carmakers participating in the scheme must promise
to retain workers and restrain profit margins on the cars
sold under this program. Buyers can choose a pre-savings
plan under which delivery times are determined by lottery, or
they can take advantage of low-interest financing. Payments
will range at around ARP 800 (US$230) a month with a maturity
of up to 60 months (this monthly installment assumes an
interest rate of 11-12%). The Minister estimated that the
scheme could boost demand by 100,000 units a year.
(January-November car production totaled 570,000 units.)

6. (SBU) The president of the car dealers association,
Ernesto Baldassare, questioned the idea of promoting
automobile purchases in the middle of a crisis, arguing that
the GoA could have a bigger impact on workers incomes by
reducing the income tax. The car dealer association's
vice-president, Abel Bonrad, further cautioned that the GoA
plan to stimulate car sales would not be a panacea for the
auto companies or car dealers.

Senate approves bill to expropriate Flag Carrier Aerolineas
--------------------------------------------- ---------
7. (SBU) On December 17, the Argentine Senate voted 42 to 21
in favor of a bill to expropriate the troubled national
airline, Aerolineas Argentinas, and its smaller carrier
Austral, marking the end of almost two decades of Spanish
control. (See Nov. 28 Financial and Economic Review for
background.) The Senate's action took place after months of
unsuccessful negotiations between the carrier's Spanish
owners (Madrid-based Marsans Group) and the GoA. The bill
declares the service provided by the carriers to be a vital
public service, given the vast size of the country and the
carrier's duty to serve even unprofitable routes. Ousted
owners Marsans, a Spanish travel company, confirmed that it
would pursue international arbitration via the International
Center for the Settlement of Investment Disputes (ICSID --
allowed for under the Spain-Argentina Bilateral Investment
Treaty), since it considers the takeover "arbitrary and
illegitimate." Aerolineas and Austral control about 80% of
the domestic air market, but reportedly operate all of their
33 routes at a loss. President Cristina Fernandez de
Kirchner is expected to sign the bill into law before the end
of the year.

Argentine Congress approves Tax Moratorium and Capital
Repatriation bill
--------------------------------------------- ---------
8. (SBU) Following a ten-hour debate, and facing stiff
resistance from opposition party members, the Argentine
Chamber of Deputies approved on December 10 the GoA's bill to
provide tax incentives to foster job creation and encourage
the repatriation of funds held abroad (estimated at over
US$130 billion). The Argentine Senate followed suit December
18, with the GoA easily garnering sufficient votes for the
bill, although again in the face of strong criticism from
opposition parties. (Note: President Cristina Fernandez de
Kirchner submitted the law to Congress November 25. For
details, see November 28 Economic and Financial Report). The
bill spawned a major debate in the Congress and in the press
over whether it may facilitate money laundering, and the
Financial Action Task Force sent a letter to the GoA asking
for details on the draft law and emphasizing the need to
include provisions to "verify the origin of the money or
other assets that may be introduced into the financial system
as a result of this act." (The FATF letter leaked to local

BUENOS AIR 00001725 003 OF 006

press December 16). During the Senate debate, the opposition
predicted that the bill will turn Argentina into "a paradise
for money laundering."

9. (SBU) Aside from concerns over money laundering, there is
also disagreement over whether the bill will have any real
impact. For example, well-known local economist Miguel Bein
estimates that the new measures could resultp`:OQzpital, with the
other half from other corporate tax breaks included in the
bill, related to adding new workers and formalizing informal
sector employees.) However, many other analysts discount the
impact. For example, Credit Suisse analysts argue that the
tax amnesty will not result in a significant amount of funds
being repatriated as long as the GoA maintains its current
policies, pointing out that the market's complete lack of
confidence in the Argentine economy, institutions, and
financial system has resulted in large-scale capital
outflows. (Capital flight during the first three quarters of
2008 totaled over US$16 billion, followed by a spike in
outflows of US$4.5 billion in October.)


U.S. Court ruling on private pension funds' US$200 million
assets in U.S.
--------------------------------------------- ---------
10. (SBU) U.S. District Court Judge Thomas Griesa of the
Southern District of New York issued December 11 an opinion
noting that about US$200 million in deposits in the United
States of the private pension funds recently nationalized by
the GoA and currently managed by ANSES, are subject to
attachment to satisfy the claims of holdout creditors.
Specifically, Judge Griesa concluded that he had jurisdiction
over ANSES, that ANSES's assets are subject to attachment and
execution to the same degree as the assets of the Republic of
Argentina, and that the assets of the ten Argentine private
pension funds were used for a commercial activity within the
waiver of sovereign immunity found in the Foreign Sovereign
Immunities Act (FSIA). In response, the GoA promised to
dispute this decision in the U.S. Court of Appeals. (This
legal opinion followed a previous ruling October 31, in which
the Judge issued a temporary restraining order freezing the
transfer of the assets of ten Argentine private pension funds
to ANSES in response to lawsuits filed by holders of
untendered, defaulted Argentine government bonds.)

First private debt issuance since AFJP nationalization falters
--------------------------------------------- ---------
11. (SBU) The market has closely monitored the effort by an
Argentine cement company, Minetti, to become the first to try
to issue debt since the GoA nationalization of the AFJPs sent
local equity and fixed income markets into a tailspin.
Minetti, which is 72% controlled by Spanish company Holcim,
was scheduled to close its ARP 100 million issuance of ONs
(tradable debt instruments) on December 5. However, it was
forced to extend the debt subscription period untilDecember
12 when ANSES unexpectedly decided to withdraw its purchase
orders for the issue just minutes before closing. According
to local press reports, ANSES authorities had previously
confirmed to the company that it would back and participate
in this transaction. Minetti planned to issue ARP 100
million in ONs with a 36-month maturity and a variable rate
pegged to BADLAR (the average interest rate paid on time
deposits of more than ARP 1 million). On December 12,
Minetti announced it would extend the debt subscription
period a second time, to December 19. Local press quoted
stock brokers stating that Minetti's failure to close the
issuance sent a "bad signal" to the private sector, which has
few other sources of large-scale debt financing besides


Congress approves Emergency Economic Law and Financial
Transaction Tax
--------------------------------------------- ---------
12. (SBU) On December 10, the Senate approved the extension
of the Economic Emergency Law and Financial Transaction Tax
(FTT) until December 2009. Given that the Chamber of

BUENOS AIR 00001725 004 OF 006

Deputies had already approved both bills (see Nov. 28
Economic and Financial Review), they will enter into force
after publication in the Official Gazette. The Economic
Emergency 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
renegotiation, extend social assistance plans, implement
measures to foster employment and growth). The FTT's 2009
annual collection is budgeted at ARP 22 billion (about US$6.4
billion), of which 70% goes to the federal Treasury and 30%
to the provinces.

November Tax Revenue Disappoints
13. (SBU) The GoA announced December 3 that November tax
revenues increased 18% y-o-y to ARP 21.7 billion, below
market expectations of ARP 24.5 billion and less than half
the 37.5% growth rate seen in October. For comparison, from
January trough October, tax collection increased 38.5% y-o-y.
Tax collection fell in real terms, when using actual or
"true" estimates for inflation, which according to most
private analysts is approximately 20% (compared to the
official INDEC estimate of 8%). The worse-than-expected
November tax receipts is the result of the sharp economic
slowdown, which affects income taxes and VAT, as well as
lower international commodity prices, which reduced GoA
export tax collection. During November, labor contributions
rose 55% y-o-y, VAT revenues increased 16% y-o-y, and income
tax revenues increased 13% y-o-y. Export trade tax revenues
actually decreased 0.5% y-o-y. VAT collected on imports also
fell on lower growth in consumer spending and investment, and
import restrictions implemented by the GoA. In the first
eleven months of the year, tax revenues reached ARP 246
billion, ARP 28 billion below the Argentine Central Bank's
consensus forecast of ARP 274 billion.

14. (SBU) Analysts expect tax revenue growth to continue to
decline, as the slowdown in economic activity deepens and
commodity prices remain depressed. Analysts also raise the
possibility that tax revenues will further decline due to
reduced compliance, as taxpayers turn to the common local
practice of withholding tax payments during rough times.
According to JPMorgan, November's lower tax collection stands
in sharp contrast with seasonal patterns (November is usually
a high revenue month) and flashes a warning for fiscal
performance. JPM further estimates that the subset of
activity-linked taxes (VAT, FTT, export taxes) have
contracted in real terms, suggesting that economic growth is
likely to decelerate further. (JPM predicts a 1% GDP
contraction in 2009, but with increasing downside risks.)

15. (SBU) Local media has reported rumors that the head of
AFIP (IRS-equivalent) Claudio Moroni will soon be replaced.
Moroni was appointed Head of AFIP in May to complete the term
of prior AFIP-head Alberto Abad. Moroni's appointment
expires December 10, and the press quotes unnamed "senior GoA
officials" stating that the GoA will give Moroni a temporary
renewal, through about March-May 2009, so that he will take
the blame for decreasing tax collection and for any fallout
from defending the GoA's tax moratorium and capital
repatriation bill (currently pending in the Senate). Ricardo
Echegaray, currently Head of the ONCCA (Oficina Nacional de
Control Comercial Agropecuario, National Agriculture Trade
Office), is considered a possible replacement. The name of
Sergio Montoya, the head of Buenos Aries province tax
collection entity ARBA, has also been floated as a potential

Macro Outlook

Economist Miguel Kiguel: Argentine Economy "not as bad as it
--------------------------------------------- ---------
16. (SBU) This item summarizes Economist Miguel Kiguel's
December 10 conference call for his domestic and foreign
clients. Kiguel is the Director of Econviews, an
Argentine-based economic think tank. He is a well-respected
economist who was Undersecretary of Finance at the end of the

-- Overview: While arguing that negative perceptions of
Argentina's economy and outlook are worse abroad than in
Argentina, Kiguel acknowledged that pessimism is widespread,
as reflected in Argentine debt spreads at default levels.
For example, Kiguel noted that the 5-year CDS (credit default

BUENOS AIR 00001725 005 OF 006

swap) reached 4,091 basis points on December 12, compared to
462 bps at the end of 2007. This reflects the market's
nervousness about Argentina's capacity and willingness to pay
its debts (especially the latter). Kiguel said it is
critical to monitor: 1) the peso exchange rate, the evolution
of deposits, and BCRA international reserves levels; 2) the
economic slowdown; 3) the GoA financial program; 4) commodity
prices and the external accounts.

-- The exchange rate and deposit levels: Kiguel noted that a
sharp, rapid depreciation of the peso to levels of 3.80
ARP/USD or higher, as the industrial sector has called for
(in order to keep pace with the depreciation of the Brazilian
Real), could generate a run on deposits. Thus, the Central
Bank (BCRA) prefers to pursue a gradual and managed
depreciation, while using tighter capital controls and "moral
suasion" tactics with financial institutions to limit dollar
purchases (and minimize peso-denominated deposit outflows).
Kiguel explained that the banking sector has already
experienced two mini-runs on the peso: first at the height of
the farm crisis in April-May, and recently in October, when
the GoA announced its decision to nationalize the AFJPs in
the midst of the global credit crunch's intensification.
(Note: private peso denominated deposits plunged 5.2% in
October, compared to the 4.4% drop in May, the worst month of
the farm crisis.) Largely due to the BCRA and GoA regulatory
agencies' unorthodox methods of limiting dollar trading,
deposits have recovered and stabilized. He predicted that
real interest rates will have to remain positive throughout
2009 to maintain deposit levels. Kiguel estimates that the
peso will end 2008 in the range of 3.45-3.50 ARP/USD, but
will further depreciate to about 4.10-4.20 by the end of
2009. He expects the BCRA to continue with its crawling peg
policy and avoid large jumps in the currency. (Post Comment:
According to press and other sources, one negative
consequence of the gradual depreciation is that is creates
incentives for exporters to delay repatriation of foreign
currencies and for debtors to delay payments to creditors.)

-- BCRA reserves: Kiguel stated that the BCRA reports
reserves at about US$46 billion, but net of BCRA borrowing
from the Bank for International Settlements are more in the
range of US$40-41 billion. Kiguel still considers this a
solid level, giving the BCRA sufficient means to defend the

-- Economic slowdown: the economy is showing obvious signs of
rapid deceleration (e.g., falling construction, cement, and
car production, plummeting car sales) and he considers
recession likely in 2009. He estimates a 1% GDP contraction
for 2009, and notes that this will have significant adverse
consequences for the fiscal accounts and GoA financial

-- GoA financial program: Although the GoA's financing needs
increase almost 50% in 2009, Kiguel believes the GoA has
sufficient sources of funding to make payment. Giving as an
example a 3% of GDP primary surplus for 2009 (which he noted
may be optimistic due to the slowdown and falling tax
collection), Kiguel believes the GoA will relatively easily
fulfill its financing needs of about US$9 billion. (Note:
Kiguel's estimates for primary surplus include the GoA
accessing the roughly US$4 billion in annual pension flows to
ANSES resulting from the AFJP nationalization.) The amount
is reduced by US$3.5 billion after taking into account the
GoA's enhanced ability to rollover debt with ANSES, now that
it has taken on AFJP assets of about US$25 billion. (Note:
Kiguel predicted that the GoA can rollover US$2 billion of
mandatory debt buybacks and US$1.5 billion of amortizing
bonds previously held by AFJPs. Other Economists have higher
estimates for both the buybacks and bonds coming due.).
Kiguel considers the resulting US$5.5 billion manageable,
particularly since he expects the GoA to attempt a debt swap
for the "P^Ls, financial needs would
reach US$7 billion, or only US$3.5 billion after taking
advantage of the newly acquired AFJP assets to rollover debt
with ANSES. Under the more pessimistic scenario of a 2.5% of
GDP primary surplus, financial needs would increase to US$11
billion (or US$7.5 billion after rollovers with ANSES), which
Kiguel still considers easily manageable. Kiguel
optimistically expects the GoA to show prudence in managing
expenditures during 2009 (based on his assessment of past GoA

BUENOS AIR 00001725 006 OF 006

fiscal prudence). He estimates that the GoA will increase
expenditures by only about 16% in nominal terms, by limiting
nominal increases in salaries and pensions to only about

-- Commodity prices: While they have fallen sharply since the
second quarter of 2008, Kiguel noted that they still remain
at relatively high levels compared to the average of the last
fifteen years.

-- External accounts: Kiguel predicted a US$6 billion trade
surplus in 2009, compared to his estimate for 2008 of US$12
billion. His 2009 estimate is based on expectations of a
US$10 billion decline in exports and US$5-6 billion decline
in imports. The current account will be close to zero in
2009, which along GoA payments abroad and capital flight
should result in a US$8 billion decline in international
reserves (with BCRA reserves ending 2009 at about US$32

-- Concerns and Downside Risks:

(a) Under the outlook as depicted above, Kiguel believes
Argentina's economic situation is manageable. However, he
acknowledged that the GoA has made many mistakes in the past,
and noted that many observers believe the Kirchner
administration is prepared "to do anything to maintain
power." This uncertainty about GoA policies and actions
undermines confidence in the financial sector, and could lead
to accelerating capital flight.

(b) Kiguel noted that 2009 is an election year, and in normal
times the Kirchners would look to increase spending leading
up to the October elections (as the GoA did prior to the
October 2007 presidential elections). However, Kiguel argued
that the GoA has little ability to pursue counter-cyclical,
stimulative policies, given that it does not have access to
sufficient financing to increase spending and lower interest
rates stemming from stimulative monetary policies would
likely trigger capital outflow and higher inflation. (Note:
Kiguel said that the inflation rate is decelerating, but will
still end 2008 around 20% and will not fall below the
mid-teens in 2009.)

(c) Argentina is facing a difficult international
environment, with high financial volatilityand falling
commodity prices. Nevertheless, Kiguel argued that the
current situation is different from that of 2001-2002, when a
crisis in Argentina was all but unavoidable. In particular,
Kiguel highlighted the following differences to the 2001
situation: 1) BCRA reserves are currently high and can be
used, unlike in 2001 when they had to back the monetary base;
2) the BCRA has a role as lender of last resort, since the
banking system works in pesos; 3) GoA financial needs are
much lower; 4) the exchange rate can serve as escape valve
and is not overvalued; 5) export prices are still at
reasonable levels.


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