Cablegate: Argentina's 2010 Budget: New Tricks but Same Old Story

DE RUEHBU #1175/01 3032017
P 302017Z OCT 09



Treasury for WLindquist
Sao Paulo for WBlock

E.O. 12958: N/A
SUBJECT: Argentina's 2010 Budget: New Tricks but Same Old Story

Ref: Buenos Aires 1161


1. (SBU) The 2010 Argentine budget does not represent a great
departure from the budgets of past years during the Kirchner era.
It pays lip service to fiscal restraint that is unlikely to be
pursued in practice, and uses numerous accounting tricks and
gimmicks to understate expenditures. However, the GOA's decision to
initiate a deal with the "holdouts" from the 2005 debt restructuring
agreement indicates that it realizes the need to normalize its
relations with the international credit markets to enable easier
borrowing to deal with the large fiscal gap likely to eventuate in
2010. End Summary.

Status of Budget
2. (SBU) On September 15, the GoA formally submitted the 2010
Budget Bill to the Congress for approval. Two days later, Minister
of Economy Amado Boudou presented the main points of the bill to the
Chamber of Deputies. The Lower Chamber approved it on October 14
and the Senate is debating it now. Along with the budget bill, the
Chamber of Deputies approved amendments to the Fiscal Responsibility
Law and the extension of several taxes for another year. The Senate
will take up these issues as well.
Budget Bill Assumptions
3. (SBU) The budget assumes GDP growth of 2.5% in 2010, in line
with many private estimates and even more conservative than some,
whose estimates range up to about 3.9% growth in 2010 versus a
contraction of up to five percent in 2009. The bill revised the
GOA's original 2009 GDP growth estimate downward from 4% to 0.5%.
The CPI is assumed to come in at 6.1%, significantly lower than most
private estimates, which expect inflation of about 15% for 2010.
The inflation figure put out by the GOA's statistical agency INDEC
is the one most criticized by many private analysts, reflective of
continued widespread dissatisfaction with INDEC'S methodologies.
Exchange Rates
4. (SBU) The average exchange rate assumed in the budget bill is
3.95 ARP/USD. The peso has recently exhibited unexpected strength
vis-`-vis the dollar due to a variety of factors, including the
initiation of negotiations to resolve the holdout problem and a rise
in dollar-denominated purchases of Argentine crops. While noting
the recent strength of the peso, most private analysts still expect
it to depreciate slowly over the next year, although the consensus
has moved away from earlier predictions of a sharp devaluation.
Trade Surplus
5. (U) The budget assumes a trade surplus of about $14.2 billion,
with exports of $65 billion and imports of $51 billion. While this
figure is similar to the surplus expected for 2009, the 2009 trade
surplus is a result of much lower absolute levels of both exports
and imports ($57.8 billion and $43.6 billion, respectively). Some
analysts contend that the 2010 export figure is understated due to
the expected return to normal of the 2010 harvest after this year's
severe drought, which could produce upwards of 25 million tons more
of available crop (mainly soy).
Consumption and Investment
6. (U) Consumption is forecast to increase 2.7% y-o-y after
increasing only 0.9% in 2009, while investment is expected to jump
8% y-o-y, substantially recovering from its 9% decline in 2009.
Investment could reach 23% of GDP -- similar to its 2009 level.
Revenue Assumptions
7. (SBU) Total public sector tax collection is projected to
increase 16% y-o-y to ARP 353 billion, increasing slightly to 28% of
GDP in 2010 from 27% in 2009. This increase in tax collection
appears achievable given the expected recovery of economic activity
and continued high inflation. The GOA's 2010 tax structure remains
similar to this year's, and assumes the continuation of all taxes,
including the income tax, the wealth tax, the tax on the final price
of cigarettes, the minimum presumed income tax, and the financial
transaction tax (FTT). The Chamber of Deputies approved the

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extension of these taxes on October 14 and the Senate is expected to
approve the extension as well alongside the approval of the budget
bill. (FTT tax collection -- estimated at ARP 23 billion in 2010 --
is divided 70-30, with 70% going to the Federal government and only
30% to the provinces. Provincial congressmen and governors have
long requested that the FTT be equally shared between the GoA and
the provinces, under Argentina's co-participation law.)
8. (SBU) Collection of export taxes is forecast to increase 35%
y-o-y due to the expected increase in exports and continued
depreciation of the peso. Income tax collection, however, is
expected to increase only 8% y-o-y, less than the 15% inflation rate
most private analysts forecast. Social security contributions are
expected to increase 16% y-o-y, due to higher salaries and an
increase in the number of people employed. This marks a return to
normalcy compared to 2009's social security contribution increase of
over 50% y-o-y as a result of the nationalization of private pension
funds (AFJPs) in 2008.
Non-Fiscal Revenues
9. (U) Non-fiscal revenues are forecast to decrease 2.8% y-o-y to
ARP 15 billion. These revenues are composed of: an ARP 3.8 billion
BCRA quasi-fiscal surplus generated by interest earned on BCRA's
portfolio and exchange rate gains, ARP 8.4 billion in interest
earned on the Social Security Agency (ANSES) portfolio, and ARP 2.2
billion in interest earned on the Provincial Development Fiduciary

Expenditures Keep Growing
10. (U) Total expenditures are expected to increase 12.4% to ARP
273 billion, about 22% of GDP, the same as in 2009. The bill also
revises the 2009 expenditure target, which is the base for the 2010
budget figures, upward to ARP 243 billion as opposed to the
projected ARP 233 billion projected in the original 2009 budget
bill. Given that actual expenditures have increased at a 30% rate
in the first seven months of 2009, expenditures for the remaining
five months of the year would need to be drastically reduced to meet
even the revised 2009 target. Given the rapid pace of growth so far
in 2009, this is unlikely to happen, and most analysts doubt the
ability of the GoA to similarly limit expenditures under the 2010
Subsidies Will Decline

11. (SBU) In contrast to the previous four years, in which
transfers (subsidies) regularly doubled from year to year, they are
expected to decrease 14% to ARP 31 billion in 2010. Only transfers
to public companies and to the rural and forestry sector are
expected to increase by 11% (ARP 2.6 billion) and 57% (ARP 1.5
billion), respectively. However, energy and transportation
subsidies, which represent 44% and 32% of total subsidies, are
pegged to decline 16% and 14%, respectively. Therefore, energy
(electricity and gas) and transportation prices will increase in
2010, indicating an attempt by the GoA to unwind part of the
subsidies web it has woven over the last seven years. Finally,
interest expenditures are estimated to increase 8% to ARP 26
billion, about 2% of GDP.

Capital Expenditures

12. (SBU) Capital expenditures counted as part of the formal budget
framework are expected to increase 14% to ARP 37 billion. In 2009,
capital expenditures have already increased 50% in the first seven
months of the year. However, the 2010 budget (article 17) allows
the Ministry of Planning to account for priority social and economic
infrastructure projects in areas such as transportation, energy,
education, environment, and housing as assets rather than capital
expenditures. This contradicts the Financial Administration Law
that requires that investment or capital expenditure be accounted
for as expenditures. Consequently, actual spending is understated
given that financing for numerous major projects is not included in
the budget. In addition, the bill allows the Minister of Planning
to raise up to ARP 4.5 billion and USD 1.2 billion to finance those
priority investments. Furthermore, article 56 allows the Minister
of Planning to grant additional guarantees of up to ARP 2 billion
and USD 5 billion to finance priority projects. Taking into account
these potential expenditures by the Ministry of Planning, total
actual expenditures could increase by about 25% rather than the

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12.4% noted in the bill.

Financial Results
13. (U) According to the bill, the primary fiscal surplus will
reach ARP 28 billion (or 2.3% of GDP) compared to ARP 15 billion
(1.4% of GDP) in 2009. The overall surplus (after interest
payments) will decline to a negligible ARP 620 million (0.06% of
GDP) in 2010, after a deficit of ARP 9 billion (0.8% of GDP) in
2009. The bill calls on the GoA to continue with the financial
strategy pursued in 2009 -- to capture the excess funds of other
public entities through GoA debt issuance, using banking balances in
official accounts at Banco Nacion and BCRA for short-term lending.

14. (U) Financing sources include: IFIs, whose net financing will
reach USD 2.1 billion, as a result of new lending of USD 3.8 billion
and amortization of USD 1.7 billion; an increase in BCRA short- term
assistance to USD 770 million, using up the full amount of BCRA
financing available to the Treasury; and net long-term bond
issuances of $11 billion (gross issuance of $15 billion minus
amortizations of $3.5 billion). These bond issuances do not imply
market access, because the only entities likely to purchase them are
public entities such as ANSES.
Normalize Relations With Creditors
15. (U) The bill also mentions GOA plans to make progress in
normalizing relations with creditors -- both the holdouts who did
not participate in the 2005 debt restructuring and the Paris Club --
in order to facilitate access to the international credit markets.
The GoA has already taken its first steps towards normalizing
relations with creditors with the Minister of Economy Boudou
announcing October 22 that the GoA is planning to reopen its 2005
debt restructuring (see reftel). Additionally, on October 26 the
GoA submitted a bill to the Congress to suspend the so-called "Bolt
Law" ("Ley Cerrojo") that prohibits the executive from reopening the
2005 exchange for creditors not participating in the 2005 debt
Provinces and the Fiscal Responsibility Law
16. (SBU) Articles 73 and 74 of the Budget Bill allow the GoA to
financially assist provinces through the Provincial Development
Trust. The trust allows the federal government to extend aid in
order to reduce the deficits of provincial governments and pay the
salaries due to civil servants. These clauses contradict the
Financial Responsibility Law (FRL). Therefore, in concert with the
passage of the budget bill, the Congress will also amend the FRL to
allow for this assistance. The reform will allow the provinces to
expand their spending, deficit, and debt issuance limits. The
proposed changes, which will only apply in 2010 and 2011, will allow
the provinces to increase spending above a threshold established by
the law, to issue debt to finance current spending, and to increase
total debt service above 15% of current revenues (excluding
transfers to municipalities). [Note that the FRL, in effect since
2005, was part of the GOA's commitment to reach a formal agreement
with provincial governors on reform of federal-provincial fiscal
relations, under the GOA's IMF program.]
17. (SBU) These amendments come in response to next year's expected
provincial deficit of more than ARP 10-12 billion. If the
amendments are approved as is widely expected (the Senate has
already done so), the provinces will be able to issue more debt and
the GOA will thereby minimize the financing it provides to the
provinces. It will also prevent provincial governments from acting
on their threats to issue quasi-currencies. The Budget Bill does
provide for new GOA financial assistance to the provinces of USD $2
billion via "Financial Assistance Programs" (PAF). This figure
includes USD 3 billion in lending minus amortization payments of USD
940 million. Also, the budget allows the GOA to restructure
provincial debt, including negotiating a write-down, delay, or
rollover of provincial debts to the GOA.
Executive Spending Discretion Maintained
18. (SBU) As in previous budgets, the 2010 budget bill includes
so-called "superpowers," which, along with the 2005 amendment to the
Financial Administration Law, enables the Chief of Cabinet to
redistribute spending without prior Congressional approval. From
2003 to 2008, the underestimation of growth and inflation resulted
in excess revenues, which the GOA spent at its own discretion. This
practice has been denounced by opposition congressmen and private
analysts. Opposition Deputy Claudio Lozano has estimated that from

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2003 to 2008 the GOA managed about ARP 85 billion without
Congressional oversight.
Spend Now, Pay Later
19. (SBU) Unlike in previous years, extra revenues beyond those
projected in the budget bill are not expected in 2010. The GOA
therefore included in the budget bill an amendment to the Financial
Administration Law (article 79) which allows paying for 2010
expenditures with revenues to be collected in 2011. As opposition
Deputy Jorge Sarghini (a dissident Peronist) described it, "up to
now the executive branch hid the surplus to spend at its own
discretion. But now the executive shifts expenditures to the next
fiscal year because it does not have the resources to pay for them.
With this tool along with the off-budget accounting for capital
expenditures, the GOA talks about a surplus that does not exist."
20. (SBU) Most analysts are skeptical of the GOA's ability and
willingness to decrease the expenditure growth rate, as called for
in the 2010 budget bill. The approach outlined in the 2010 budget
would allow the GoA to continue to finance the budget with its own
resources without access to the international capital markets by
using the BCRA's earnings and by taking advantage of the liquidity
of the local financial system. These analysts maintain that the GOA
will not be able to refrain from increasing the expenditure growth
rate and will consequently have a large financing "gap," which can
only be addressed by borrowing on the international credit markets.
Therefore, the GOA's recent moves to try to resolve the "holdout"
problem and pave the way to normalizing relations with global
markets suggests that it too perceives a large fiscal gap that it
will need to address with at least some outside financing.
21. (SBU) As in previous years, the GoA executive branch aims to
maintain its "superpowers" to spend at its own discretion. However,
this year, it is trying to go further than before by introducing new
clauses and amendments designed to lift provincial spending and debt
limits, change accounting rules to pay 2010 expenditure with 2011
tax collection, and build infrastructure without accounting for
project spending in the budget. This relaxation of budgetary
discipline, while politically advantageous, further undermines the
transparency of the budget process and the credibility of the
government's budget package. It will also likely lead to a
considerably higher fiscal deficit than the one announced to the
public, with attendant additional inflationary pressures. According
to private estimates, the ARP 620 million budget surplus projected
in the budget bill is, in reality, an ARP 8.7 billion (0.7% of GDP)
deficit when properly accounted for. Without access to the
international credit markets, this gap will be hard to bridge.

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