Cablegate: Argentina Economic and Financial Review, November 20-25 2009


DE RUEHBU #1304/01 3351316
R 011315Z DEC 09



E.O. 12958: N/A
SUBJECT: Argentina Economic and Financial Review, November 20-25 2009


1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period November 20-25, 2009. The
unclassified email version of this report includes tables and
charts tracking Argentine economic developments. Contact Econ OMS
Megan Walton 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.

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Rating Agencies unlikely to upgrade Argentina from speculative
grade after debt restructuring

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2. (SBU) Fitch rating agency reported November 19 that Argentina
could be moved out of the current Restricted Default (RD) credit
rating in the near term if the likely offer to holdouts, who did
not participate in the 2005 debt restructuring, is successfully
carried out. However, Argentina's ratings are likely to remain
well into speculative grade territory, not only due to enduring
macro and financial pressures, but because public debt ratios are
still higher that the debt ratios of single B-rated sovereigns.
Fitch believes that limited financing flexibility and concerns
about the transparency of official data are impairing the
creditworthiness of Argentina.

3. (SBU) In tandem, Moody's senior analyst Gabriel Torres stated
November 19 at a conference in Buenos Aires that contentious
politics and a lack of political stability are the principal
negative factors weighing on the outlook for Argentina's credit
ratings. However, he noted that the overall outlook for the
country is trending more toward positive than negative ground.
Torres said that a successful agreement with the remaining holdouts
of Argentine defaulted debt would factor positively in a future
review of the country's ratings status. [Note: Moody's rates
Argentine sovereign debt B3, one of the lowest among
emerging-market countries.]

4. (SBU) Similarly, Joydeep Mukherji, a sovereign ratings analyst
at Standard& Poor's rating agency, stated in an interview November
18 that Argentina's effort to restructure its defaulted bonds is
not a driving factor in S&P's outlook on the credit rating. He
recognized that dealing with holdouts would be positive but, when
asked whether Argentina's rating would be raised, he added that are
other things to look at. [Note: S&P's rates Argentine debt B-,
which is six notches below investment grade.]

5. (SBU) Meanwhile, on November 24 local dailies reported that
even though the GoA is working to launch the debt restructuring
with holdouts this year (by December 15 before the holiday season
begins), the approval of the SEC and other foreign regulators would
likely be later and delay the launching until January 2010.

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A Stocking Full of Coal

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6. (SBU) Just one month before Christmas, the Argentine Domestic
Trade Secretariat suspended Brazilian safety certificates for toy
imports. On November 23, the official gazette carried resolution

894, which suspended recognition of safety certificates issued by
the Brazilian National Institute of Weights and Measures, Standards
and Industrial Quality. This came on the heels of a tense
exchange between the Argentine and Brazilian presidents over trade
restrictions at last week's summit meeting in Brasilia. According
to Argentine press reports, the measure merely aligns the Argentine
policy with existing Brazilian practices which have not recognized
Argentine or any other foreign safety certificates on toys since
2007. Brazil exports three times more toys to Argentina than the
southern trading partner sends north. In 2008, Argentina reportedly
sold $US 1 million worth of toys while Brazil sent over $US 3
million south. As of September this year, the gap was even
greater: Brazil exported $US 1.9 million in toys to Argentina, with
Argentina exporting $US 400,000 in toys to Brazil.

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

October primary fiscal surplus better than expected due to a
deceleration of primary spending: The beginning of a trend?

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

7. (SBU) The GoA announced November 19 that the October primary
fiscal surplus declined 73% y-o-y to ARP 700 million from ARP 2.5
billion a year ago but was better than private analysts' estimate
of ARP 500 million. The better-than-expected result was due to a
strong deceleration of primary expenditure, whose growth rate
decreased from 28% in the first nine months of the year to 17% in
October. This decline in primary expenditure is due to a reduction
in subsidies to both provinces and the private sector. However, it
is still unclear whether this reduction in expenditures is
temporary or the beginning of a trend. In October, revenues
reached ARP 21.1 billion (driven mainly by VAT, fuel taxes and
social security contributions) and primary expenditure totaled ARP
20.4 billion (mainly social security payments and capital transfers
to provinces to improve infrastructure, transportation and
housing). Taking interest payments into account, the overall
fiscal balance for October is a deficit of ARP 1.8 billion.
Year-to-date the primary surplus is at ARP 9.4 billion. Private
analysts estimate that the primary fiscal surplus will reach only
0.7%-0.8% of GDP in 2009, compared to 1.4% included in the 2009
Budget and 3.1% achieved in 2008.

8. (SBU) In a press conference, the Minister of Economy Amado
Boudou and Secretary of the Treasury Juan Carlos Pezoa highlighted
that the October results mark the end of a downward trend of the
primary fiscal surplus after reaching the lowest level of the year
in September at ARP 223 million. In previous months, GoA officials
attributed the weak fiscal results to the international financial
crisis and the implementation of a counter-cyclical fiscal policy
to alleviate the effects of the global crisis.

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GDP recovery on the way: September monthly economic activity index
up 0.6% y-o-y, second increase in a row

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

9. (SBU) INDEC announced November 20 that EMAE (the Monthly
Economic activity index - an indicator of real GDP growth)
increased 0.6% y-o-y in September, after increasing only 0.1%
y-o-y in August and following a -1.5% y-o-y fall both in June and
July. This increase was also stronger than the 0.2% increase
private forecasters expected INDEC to announce. In the first nine
months of the year, EMAE increased a cumulative 0.3% y-o-y, which
contradicts many leading micro indicators and sector-level data
that suggest a severe y-o-y contraction of activity to date. Most
independent private sector estimates and surveys show that the
economy has clearly been contracting since the fourth quarter of
2008 and estimate that GDP will contract by 2-3% in 2009. However,

after depressed domestic demand conditions in the first half of the
year, there are signs that the economy has stabilized and is
moderately recovering, leading most analysts to revise upwards
their estimates for 2010. GDP private estimates range from a mild
2-3% recovery to an optimistic 5-6% growth, especially under a
scenario of very supportive external factors.

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Industrial production index up 1.5% y-o-y in October

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10. (SBU) INDEC announced November 20 that industrial production
increased 1.5% y-o-y in October, better than the market's forecast
of a 0.5% increase. According to INDEC, during the first ten
months of the year, industrial production declined 1.0% y-o-y. In
October, the fastest growing industries were textiles (+9% y-o-y),
paper and cardboard (+9% y-o-y), and chemicals (+8% y-o-y), while
the oil refining and basic metals industries sub-indices decreased
18% and 8% y-o-y, respectively. Most analysts expect that the
industrial sector will continue to show signs of recovery in the
near future as the inventory cycle stabilizes and foreign demand
strengthens. Growth is resuming in some of the country's main
trading partners, especially Brazil, which is the destination of
about 20% of Argentine exports.

11. (SBU) The industry-wide capacity utilization index reached 76%
in October compared to 77% in October last year, recovering from
its low of 67% in January, 2009. The sectors showing highest
capacity utilization are textiles, printing and cardboard, and
basic metal industries. The sectors with the lowest capacity
utilization are auto production, and metal-mechanic and plastics

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Official unemployment rate increases to 9.1% in the third quarter
of 2009, about 2 percentage points lower than private estimates

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12. (SBU) INDEC (National statistical agency) announced November
23 that Argentina's unemployment rate increased to 9.1% in the
third quarter of 2009 (about 1.5 million people are unemployed),
compared to 8.8% in the second quarter of 2009 and 7.8% in the
third quarter of 2008. In sharp contrast to INDEC's statistics,
non-government figures suggest that the actual unemployment rate is
at least 2 percentage points above the official figures. This
deterioration in the labor market is consistent with a decline of
real activity between the fourth quarter of 2008 and the second
quarter of 2009 (while the INDEC figures show just a mild
deceleration of the economy).

© Scoop Media

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