Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 001028

SIPDIS

SIPDIS

PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS
NSC FOR SUE CRONIN
AND OCC FOR CARLOS HERNANDEZ
USDOC FOR ALEXANDER PEACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
USSOUTHCOM FOR POLAD
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI

E.O. 12958: N/A
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for
the week ending May 5, 2006


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Weekly Highlights
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- CPI rose 1.0 percent m-o-m in April - slightly above
market expectations. PPI rose 1.5 percent m-o-m.
- Bolivian President Morales guarantees that Bolivia
will sell gas at reasonable prices.
- The GOA successfully auctions off USD 500 million of
Bonar V bonds.
- Tax revenues increased only 8 percent y-o-y to ARP
10.0 billion in April - below expectations.
- March trade surplus of USD 814 million - in line
with expectations.
- Commentary of the Week: "Dollars from Foreign Trade:
How Long will the Abundance Last?"

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CPI rose 1.0 percent m-o-m in April - slightly above
market expectations. PPI rose 1.5 percent m-o-m.
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1. The Consumer Price Index (CPI) increased 1.0
percent m-o-m in April, slightly above market
expectations of 0.9 percent, following a 1.2 percent m-
o-m increase in March. Last month's increase brought
inflation to 3.9 percent in the first four months of
the year, compared to a 4.5 percent increase in the
same period last year. CPI core inflation was up 0.68
percent, while the seasonal and regulated components
of the index increased 0.27 percent and 0.03 percent,
respectively. The categories with the highest
increase in prices were clothing (+5.5 percent),
leisure activities (1.5 percent - due to the Easter
holiday break),housing (1 percent) and other goods
and services (1 percent). Meat prices (representing
4.5 percent of the consumer basket) decreased 0.6
percent m-o-m due to the price restraint agreements
between the GOA and the meat sector along with the ban
on beef exports. Year-on-year, CPI rose 11.6 percent.
The BCRA consensus survey forecasts 12.0 percent
inflation in 2006, unchanged from last month's
forecast. The 2006 Budget projects a 9.1 percent
inflation rate for 2006 and the Central Bank's
inflation target range is 8-11 percent.


2. Producer prices jumped a strong 1.5 percent m-o-m
in April, due to a 4 percent increase in primary goods
prices and a 0.7 percent rise in the prices for
manufactured goods. The price of electricity remained
unchanged, while prices for imported goods increased
0.6 percent. The PPI index increased 11.0 percent y-o-
y.


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Bolivian President Morales guarantees that Bolivia
will sell gas at reasonable prices.
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3. After meeting for more than two hours on May 4,
the Presidents of Argentina, Brazil, Bolivia and
Venezuela agreed on a final document in which they
supported Bolivian President Morales' decision to
partially nationalize its energy reserves, and
committed to renegotiate the price of natural gas
supplied to Brazil and Argentina. However, the
document leaves the actual price -- as well as
investment decisions -- to be negotiated on a
bilateral basis. The statement also highlighted the
need to preserve and guarantee gas supplies and to
stimulate a balanced development between producer and
consumer countries. [Argentina currently imports 5
percent of its gas consumption from Bolivia at a
"solidarity" price of USD 3.20 per million cubic
meters, while the international price ranges from USD
2.00 to USD 8.00 per million cubic meters.]

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GOA resolutions on electricity sector fail to
materialize.
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4. On May 4, local media reported that the GOA would
soon publish two resolutions affecting electricity
consumption and supply. The first resolution
reportedly would eliminate the existing reward program
for users who reduce their electricity consumption
(compared to their consumption the previous year) and
replace it with a penalty system for users who
increase their electricity consumption. (Low-level
consumers would be exempted from this program.) The
second resolution would try to increase the supply of
electricity by encouraging self-generating companies
to add their supply to the wholesale electricity
market. However, on May 5, newspapers reported that
the GOA halted the publication of the resolutions
(which would bring them into effect) because of their
likely impact on inflation.

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The GOA successfully auctions off USD 500 million of
the Bonar V bond.
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5. On May 3, the GOA announced that it would issue
another USD 500 million of USD-denominated bonds,
known as the "Bonar V," maturing in 2011. In its
second auction, the GOA received bids for USD 2.4
billion, almost five times the auctioned amount. This
allowed the GOA to set a yield of just 8.09 percent --
below the 8.36 percent set at the first Bonar auction
on March 22 and below the 8.18 percent the bonds yield
in the secondary market. [The Bonar V will amortize
principal at maturity while paying interest every six
months. The interest coupon was fixed at 7 percent
per year in US dollars, paying 3.50 percent of nominal
value.] According to GOA data, Deutsche Bank and JP
Morgan accounted for 88 percent of the bids, with
purchases of USD 365 million and USD 73 million,
respectively. Reportedly, the strong demand for the
bond may encourage the GOA to advance a third auction
of the Bonar for an additional USD 500 million later
this month, and also to consider issuing a 10-year
bond later in the year. With these expected Bonar
issuances, along with the issuance of Boden 2012's to
Venezuela and a new international bond issue (under
U.S. law) for a total of USD 3.5 billion, the GOA will
not only have met its 2006 financial needs but also
pre-financed some of its 2007 financial needs,
estimated at USD 2 billion by analysts.

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Tax revenues increased only 8 percent y-o-y to ARP
10.0 billion in April -- below expectations.
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6. April federal tax revenues increased only 8
percent y-o-y to ARP 10.0 billion -- well below market
expectations of ARP 11.5 billion. The worse-than-
expected tax revenue is mainly attributed to two
changes in the tax regime: the increase in income tax
deductions and the postponement of the income tax-
collection deadline until May. Meanwhile, labor
contributions rose 54 percent y-o-y due to increases
in formal job creation and salary increases, while VAT
revenues increased 19 percent y-o-y. Income tax
revenues dropped 30 percent y-o-y while trade tax
revenues decreased 4 percent y-o-y as a result of
lower grain and energy exports. In real terms,
revenues decreased 3 percent y-o-y. Despite the
disappointing April result, tax revenues reached ARP
42.1 billion in the first four months of the year --
ARP 2.5 billion above the target (a 21 percent y-o-y
increase). The BCRA consensus survey forecasts 2006
tax revenues at ARP 142.4 billion.

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GOA to renegotiate its Paris Club debt.
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7. On May 4, Cronista Comercial reported that the GOA
will engage in negotiations to renegotiate its Paris
Club debt in the second half of the year. As of
December 2005, Paris Club debt stock (including
arrears) reached USD 6.4 billion. The GOA reportedly
will seek refinancing over thirty years, with no
principal reduction but at interest rates below those
paid before the GOA default. The GOA's goal is to
gain access to new bilateral credit lines to finance
infrastructure projects.

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March trade surplus of USD 814 million -- in line with
expectations.
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8. The March trade surplus reached USD 814 million,
in line with market expectations of USD 804 million.
Exports increased 16 percent y-o-y to USD 3.5 billion,
maintaining the steady growth of the last two months
with increases in both price (+6 percent) and quantity
(10 percent). Exports were driven by an increase in
fuel and energy (+21 percent y-o-y),agro-industrial
products (+21 percent y-o-y),industrial goods (+13
percent y-o-y) and primary goods (+6 percent y-o-y).
Imports increased a strong 24 percent y-o-y to USD 2.7
billion, showing strong domestic demand, with
increases in both quantity (+18 percent) and price (+5
percent). Imports were driven by increases in
accessories for capital goods (+25 percent),passenger
vehicles (+58 percent),consumer goods (+31 percent),
capital goods (+32 percent),fuel and oil (+29
percent) and intermediate goods (+12 percent).
According to the BCRA consensus survey, the trade
surplus is expected to narrow to USD 10.1 billion in
2006 compared to USD 11.3 billion in 2005.

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April labor demand index up 1.0 percent mom -- first
increase in five months.
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9. The April labor demand index calculated by Di
Tella University increased 1.0 percent mom to 111.54
points, the index's first increase in five months and
bringing the index almost back to where it was in
November. The increase is mainly due to stronger
demand for employees in the service sector (up 7
percent) followed by commercial personnel (up 4
percent) and technical employees (up 2 percent). The
index is up 12 percent y-o-y. [The index is based on
comparisons of job vacancy announcements printed in
the two largest newspapers of the country.]

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BCRA President sees no risk of an inflation spike and
praises the BCRA's sterilization policy.
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10. In his speech at the annual Council of the
Americas conference on May 3, Central Bank President
Martin Redrado said that there is no risk of a spike
in inflation given the solid fiscal and monetary
policies that anchor prices. He estimated that 2006
inflation will be within the 8-11 percent band
announced by the BCRA in its monetary program. He
praised the BCRA's sterilization policy of issuing
notes ranging from 30-days to 2 years, and of
encouraging banks to prepay their discount lending to
the BCRA, which he noted also helps to strengthen
banks' net worth.

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Banks pay back ARP 141 million in rediscount loans to
the BCRA.
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11. On May 3, three banks (Banco Galicia, Banco
Provincia and Banco Bisel) repaid ARP 141 million in
discount borrowing to the BCRA. This prepayment
repays the BCRA for financial assistance received
during the 2001 financial crisis. Following these
payments, the financial system will have outstanding
discount borrowing from the BCRA, totaling ARP 6.0
billion --compared to ARP 21 billion at the beginning
of the crisis.

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BCRA rolls over its maturities.
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12. The BCRA received ARP 1.3 billion in bids at its
May 2 Lebac and Nobac auction, compared to the ARP 629
million in Lebacs that came due during the week. The
yield on the 35-day Lebac decreased slightly from 6.60
percent to 6.57 percent, while the yield on the 63-day
Lebac reached 6.85 percent and the yield on the 91-day
Lebac reached 7.08 percent (the two latter Lebacs were
not issued last week). Lebacs for maturities of more
than one-year were withdrawn due to lack of interest.
The spread on the one-year Nobac decreased thirty
basis points from 2.50 percent to 2.20 percent, while
the spread on the two-year Nobac also dropped thirty
basis points from 3.70 percent to 3.40 percent. The
Badlar rate (the base rate for Nobacs) is currently at
9.0 percent.

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Average time deposit increases to 67 days; private
sector credit maturities increase to 268 days.
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13. According to BCRA data, the average length of
time deposits had increased to 67 days in December
2005, compared to 35 days in June 2003, its lowest
level following the 2001 financial crisis. The
increase in the average life is due to time deposits
from institutional investors -- mainly pension funds
(AFJPs) -- and the surge of instruments adjusted by
CER (CPI-linked index),which by regulation cannot
have maturities of less than one year. However, banks
still face funding problems since time deposits
maturities are still shorter than the credit
maturities offered to the private sector. The average
maturity of credit to the private sector had increased
to 268 days in December 2005, compared to 95 days in
June 2003.


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The peso was unchanged against the USD this week,
closing at 3.06 ARP/USD.
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14. The peso remained flat versus the USD this week,
closing at 3.06 ARP/USD. The BCRA's strong
intervention in the foreign exchange market this week
prevented the peso from appreciating due to the large
dollar sales by exporters from the harvest season.
The BCRA purchased USD 301 million in the FX market in
the first four days of the week, with a record high
purchase of USD 109 million on May 2. The peso
exchange rate has depreciated 0.3 percent since the
beginning of the calendar year.

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Commentary of the Week: "Dollars from Foreign Trade:
How Long will the Abundance Last?, by Jorge
Vaconcelos. (Note: from an article published on April
6 in El Cronista Comercial. End Note.)
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15. All indications are that during the first
quarter, aggregate demand will continue driving the
Argentine economy. The wage base, driven by

increasing employment and increasing salaries, along
with the expansion of credit, will provide all the
fuel needed. While many observers have noted that
these trends could push inflation above the official
estimates -- now at 11 percent for 2006 -- one can
also outline a "third position," focusing on the
external sector: that the trade surplus could fall
unexpectedly rapidly if local supply (which is
dependent on investment) cannot keep up with the
increase in demand.


16. Perhaps because the 2005 trade surplus was USD
11.3 billion, many people believe that the abundance
of dollars coming into the local market from foreign
trade is here to stay. Nevertheless, to consolidate
this new situation, we will have to deepen the
"exporter bias" of the economy, given that, as we will
see, the exchange rate alone will not be sufficient to
maintain the surplus.


17. At the outset, it is helpful to keep in mind that
the performance of the Argentine external sector in
recent years has not been extraordinary: exports have
followed the worldwide trend, and imports have
recovered at a good pace after they contracted sharply
during the 2001-02 crisis.


18. The record exports we experienced in 2005,
reaching USD 40 billion, occurred in an external
environment that was particularly favorable to trade.
From 2000 to 2005, Argentine exports increased 52
percent. That sounds impressive at first, but not
when put in the context of worldwide exports
increasing 60 percent in the same period. In fact,
Argentina's share of world exports decreased slightly
in the past five years, from 0.41 percent to 0.39
percent. Contrast this trajectory with that of
Brazil, which increased its exports 115 percent in the
same period, and increased its world market share from
0.86 percent in 2000 to 1.16 percent in 2005.


19. In addition to looking at this in the context of
exports, it is useful to disaggregate the trade
surplus into its principal parts: on the one hand, the
external balance of the petroleum and fuels sector,
which totaled USD 5.4 billion in 2005; and on the
other hand, the trade surplus from manufacturing and
agriculture, which totaled USD 5.9 billion.


20. Concerning the fuels segment, the current trend
of a 4 to 5 percent annual decrease in production of
petroleum indicates a reduction in the trade surplus
of USD 1 billion per year. To prevent this reduction
of the surplus, it would require either that the price
of a barrel of oil continue rising or that the
domestic situation changes completely and investment
in exploration and production doubles. The latter is
probable, but we cannot count it until it actually
starts to happen.


21. In regard to the trade balance for the non-
petroleum segment, we had a 2005 surplus of USD 5.9
billion. An important amount, but lessened by two
factors: (1) the trend, and (2) its significance in
comparison to manufacturing and agricultural
activities.


22. The trend of the trade surplus from the non-
petroleum sector: In the first two months of 2006,
the quantities exported from the non-petroleum sector
increased 7 percent. Price increases added another 6
percent, for a total increase of 13 percent. Looking
only at quantities and extrapolating from the first
two months to the rest of the year, non-petroleum
exports should reach USD 35.3 billion, and due to
price factors perhaps they will increase an additional
USD 1 billion. What is happening with imports at the
same time? In the first two months, purchases from
abroad (excluding fuels) increased nearly 24 percent,

meaning that if this trend continues until the end of
2006, imports will reach USD 33.7 billion. The non-
petroleum trade surplus would then total just USD 2.5
billion, after reaching USD 5.9 billion in 2005. But
non-petroleum export prices threaten to stall in the
latest data and, even more importantly, imports could
surge even more, driven by domestic demand.


23. Foreign trade versus the value added by
manufacturing and agriculture: non-petroleum exports,
which last year totaled USD 33 billion, represent 60
percent of the valued added by industry and
agriculture, a number that is necessarily limited in a
relatively small country such as Argentina.
Furthermore, this percentage has remained the same for
the past four years. On the other hand, non-petroleum
imports represented 50 percent of the value added by
industry and agriculture. What is notable is that,
despite the current exchange rate, the share of
imports is 5 percent above the share of imports in

1998. This data could be indicating a tendency for
manufacturing to specialize, but it also indicates
that local supply cannot keep up with the growth in
demand, and that imported products are filling the gap
(despite the 3-to-1 exchange rate). (Note: 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.)

GUTIERREZ