Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 001312

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 June 9, 2006


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Weekly Highlights
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- Bolivian and Argentine presidents to meet next week
on price of Bolivian gas exports.
- Argentina and Mexico sign trade agreement.
- IMF mission in Argentina for Article IV review.
- GOA renegotiation of Paris Club debt to take place
after September.
- CPI rose 0.5 percent m-o-m in May -- below market
expectations. PPI rose 0.3 percent m-o-m.
- Commentary of the Week: "Lavagna, Moreno, and the
Felisa Code"

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Bolivian and Argentine presidents to meet next week on
price of Bolivian gas exports.
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1. The presidents of Bolivia and Argentina are
scheduled to meet next week to reach an agreement on
the price of Bolivian gas exports to Argentina. No
specific date was announced, however. There have been
technical level negotiations between the two
governments, but difficulties in reaching an agreement
have delayed the meeting between the two presidents.
Earlier this week, local media reported that the GOA
presented a counteroffer to the GOB to buy Bolivian
gas at a price of USD 5 per million cubic meters
against the Bolivian offer of USD 5.50 per million
cubic meters. [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 between USD 2.00 and USD
8.00 per million cubic meters.] Meanwhile, on June 8,
the GOB warned that it will not be able to fulfill
external demand for gas if it does not start exploring
for new reserves.

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Argentina and Mexico sign trade agreement.
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2. On June 8, Argentina and Mexico signed an
investment agreement to strengthen bilateral trade.
The agreement seeks to double trade between the two
countries in the next four years by increasing the
number of goods given preferential tariffs, as well as
by paving the way for Mexico to join Mercosur.
Bilateral trade between Mexico and Argentina increased
17 percent y-o-y to USD 1.9 billion in 2005.
Argentina's exports to Mexico reached USD 1.1 billion
in 2005, while Mexico's exports to Argentina make up
the remaining USD 800 million.

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Minister of Economy denies radical labor reforms.
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3. On June 7, Minister of Economy Felisa Miceli
denied that labor reforms that would negatively affect
businesses will be passed, as some businessmen fear.
She clarified that only partial amendments to the
Labor Reforms of the 1990's will be implemented. In
her statements to the press, Miceli also recognized
that GOA expenditures will grow only as long as fiscal
revenues grow, in an attempt to eliminate concerns
over the reduction of the GOA primary fiscal surplus
in recent months.

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IMF mission in Argentina for Article IV review.
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4. According to local media, the IMF delegation
visiting Argentina for the Article IV review raised
three major concerns on the Argentine economic
performance: inflation and the GOA strategy to deal

with it (through price restraint agreements); the
investment climate; and renegotiation of privatized
utility contracts. The IMF mission praised GDP growth
and the fall in the unemployment rate. Meanwhile,
Minister of Economy Felisa Miceli and BCRA President
Martin Redrado called for "intellectual honesty" by
the IMF in recognizing its own mistakes in
contributing to Argentina's financial collapse in 2001-
2002 and later failing to correctly diagnose the
recovery of the economy.

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GOA renegotiation of Paris Club debt to take place
after September.
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5. On June 7, Secretary of Finance Alfredo Mac
Laughlin announced that Argentina will delay its Paris
Club debt renegotiations until September -- after the
Soccer World Cup and the northern hemisphere's summer
holidays. He said that the GOA envisions a
renegotiation in which the GOA recognizes the
principal and interest arrears (unlike the GOA debt
restructuring with private creditors who suffered a
seventy percent net present value reduction).
According to the GOA, Argentina's Paris Club debt
totals USD 6 billion, of which 60% is owned to four
countries: Japan, Germany, Spain and the Netherlands.
The Secretary also said that the GOA will discuss its
renegotiation proposal bilaterally with major
creditors, and then seek to reach a global agreement
with the Paris Club as a whole.


6. However, in a conversation with the DCM on June 9,
MacLaughlin said that he was planning to meet with six
key creditor governments this month. He also
clarified that there was nothing being discussed with
the German government that is different from what
Argentina will discuss with the other key Paris Club
creditors.


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GOA financial needs complete for 2006.
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7. In a press conference on June 7, Secretary of
Finance Alfredo Mac Laughlin announced that the GOA
had met its 2006 financial needs with funds from the
primary fiscal surplus and bond issues during the
first half of the year. He recognized that if the GOA
were to issue the remaining USD 500 million Bonar
(which the GOA is authorized to issue),it would have
to accept a yield of more than 9.00 percent --
compared to the 8.09 percent achieved in the last GOA
auction -- due to the recent market instability
affecting all emerging markets. However, he did not
discard the possibility of issuing more Boden 2012
bonds to Venezuela.

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The World Bank grants USD 3.3 billion loan to the GOA.
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8. On June 6, the World Bank (WB) approved a USD 3.3
billion program to finance investments in Argentina
for the next three years. This program which is part
of the Country Assistance Strategy, which includes
more than 30 loans for infrastructure, health,
environmental and education projects. WB authorities
stated that loans will only be approved for investment
purposes. The first two loans -- already approved --
will finance improvement of the water supply and
prevention of floods. The WB directors praised
Argentina's economic recovery, but also asked for a
better investment environment, a consolidation of the
fiscal equilibrium, the renegotiation of private
utility tariffs and a solution to the USD 20 billion
in debt holdouts (bondholders who didn't participate

in Argentina's debt restructuring).

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Martin Redrado defends the BCRA's monetary policy.
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9. On June 5, Central Bank (BCRA) President Martin
Redrado defended the BCRA's monetary policy and
assessed it as a success in handling the volatility
that has affected all international financial markets
since mid-May. Redrado explained that the "prudent
and predictable" BCRA monetary policy of accumulating
reserves, as well as bank risk management to
consolidate a strong domestic financial system,
reduced the negative impact of sudden changes in
international markets. According to Redrado, the
BCRA's reserve accumulation strategy is not adding to
inflation because the BCRA's peso emissions are being
sterilized.

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GOA denies rumors about a ban on corn exports.
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10. On June 6, Secretary of Agriculture Miguel Campos
denied that the GOA would implement a ban on corn
exports. This statement came in response to rumors
about limits on corn exports to increase the local
corn supply in an attempt to maintain domestic prices
low, and after the GOA tried to lower flour and bread
prices by "voluntarily" forcing exporters to limit
wheat exports. Corn and wheat exports are subject to
20 percent export taxes. Argentina is the world's
second largest corn-exporter and the fifth largest
wheat-exporter.

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GOA seeks to create a special prosecutor's office to
fight against trademark violations.
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11. The Attorney General's office has proposed a bill
to create a special prosecutor's office to fight
against trademark forgery and counterfeiting. The
bill seeks to increase fines to discourage forgery,
which is estimated to generate loss of USD 500 million
to the owners of trademarks. Also, Congress is
considering a bill to give AFIP -- the tax authority -
- an active role in the criminal process against
trademark violators.

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Tax revenues increase 19 percent y-o-y to ARP 14.3
billion in May, and reach a record high.
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12. May federal tax revenues increased 19 percent y-o-
y to ARP 14.3 billion -- slightly below market
expectations of ARP 14.5 billion -- but still set a
new record high. Labor contributions rose 48 percent
y-o-y due to increases in formal job creation and
salary increases, while VAT revenues increased 19
percent y-o-y mainly due to the increase in economic
activity. Income tax and export tax revenues
increased 14 percent y-o-y and 10 percent y-o-y,
respectively. In real terms, revenues increased 8
percent y-o-y. May tax revenues reached ARP 56.4
billion in the first five months of the year (a 21
percent y-o-y increase),reaching 39 percent of the
BCRA consensus survey forecast of ARP 143.1 billion
for 2006.

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CPI rises 0.5 percent m-o-m in May -- below market
expectations. PPI rises 0.3 percent m-o-m.
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13. The Consumer Price Index (CPI) increased 0.5
percent m-o-m in May, below market expectations of 0.7


percent, and following a 1.0 percent m-o-m increase in
April. The better-than-expected result is due mainly
to decreases in food prices, which represent almost
one-third of the Index. Last month's increase brought
inflation to 4.4 percent in the first five months of
the year, compared to a 5.2 percent increase in the
same period last year. CPI core inflation was up 0.7
percent, while the seasonal component of the index
decreased 0.6 percent and the regulated component
increased 0.2 percent. The categories with the
highest price increases were housing (+2.2 percent),
clothing (+2.1 percent) and education (+1.3 percent).
Meat prices (representing 4.5 percent of the consumer
basket) decreased 2.4 percent m-o-m due to price
restraint agreements between the GOA and the meat
sector and the partial ban on beef exports. Year-on-
year, the CPI rose 11.5 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.
The basic food basket -- used to measure poverty and
indigence -- decreased 1.5 percent mom in May, the
largest decrease since May 2003.


14. Producer prices increased 0.3 percent m-o-m in
May, due to a 1.6 percent decrease in primary goods
prices and a 0.9 percent rise in manufactured goods
prices. The price of electricity remained unchanged,
while the price of imported goods increased 1.7
percent. The PPI index increased 11.4 percent y-o-y.


15. In a press release from June 2, Indec -- the
National Bureau of Statistics responsible for
calculating the CPI -- defended itself from criticisms
from consumer defense associations complaining that
the CPI does not reflect the inflation suffered by the
population, saying that the CPI's calculation follows
specific norms and internationally regulated
standards.

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May labor demand index down 5.56 percent m-o-m.
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16. The May labor demand index calculated by Di Tella
University decreased 5.56 percent m-o-m to 105.35
points, the index's fifth fall in six months after a
1.0 percent increase in April. Labor demand has
decreased 7.65 percent so far during 2006. The
decrease is mainly due to a fall in the demand for
professionals (-15.39 percent) followed by technical
employees (-14.98 percent) and commercial personnel (-
4.69 percent). The index is up 3.1 percent y-o-y.
[The index is based on comparisons of job vacancy
announcements printed in the two largest newspapers of
the country.]


17. Separately, Indec announced the results of its
unsatisfied labor demand index which attempts to
measure the difficulties that companies have finding
skilled employees. According to the survey, 40 percent
of companies looked for employees in the first quarter
of 2006, out of which 12 percent could not fill their
open positions. The unmet demand is composed of 39
percent technical employees, 33 percent professionals
and 28 percent operational employees.

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April wage index increased 1.62 percent m-o-m
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18. The GOA announced that the wage index increased
1.62 percent m-o-m in April. This index defines wages
as a price, without considering hours effectively
worked or special payments for productivity gains.
This index surveys the formal and informal private
sector and the public sector, which increased 1.99
percent, 2.31 percent and 0.16 percent, respectively.


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BCRA rolls over its maturities and shifts its issuance
policy to short-term Lebacs.
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19. The BCRA received ARP 1.6 billion in bids at its
June 6 Lebac and Nobac auction, compared to the ARP
841 million in Lebacs that came due during the week.
It accepted Lebac bids totaling ARP 1.2 billion,
representing 98 percent of the total, with Nobac bids
accepted for the remaining 2 percent. The yield on
the 91-day Lebac was 7.25 percent, while the yield on
the 168-day Lebac remained at 8.36 percent and the
yield on the 259-day Lebac decreased 16 basis points
from 10.38 percent to 10.22 percent. The yield on the
longest term Lebac, the 357-day Lebac, remained 11.90
percent. Lebacs with maturities of more than 357 days
were withdrawn due to lack of interest. The spread on
the one-year Nobac decreased from 2.28 percent to 2.13
percent and from 3.35 percent to 3.10 percent for the
two-year Nobac. The Badlar rate (the base rate for
Nobacs) is currently at 9.1 percent.


20. During May, the BCRA changed its monetary policy,
shifting from long-term instruments with variable
rates (Nobacs composed 33 percent of the month's total
issuance) to shorter-term instruments with a fixed
rate (Lebacs made up the remaining 67 percent of May's
total issuance). The share of new Badlar issuance
increased from 24 percent in January to as high as 73
percent in April, and fell again to 33 percent in May.
Also in May, the BCRA again started issuing 1-year
Lebacs -- the longest maturity available for these
instruments.

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BCRA's financial result reached ARP 2.6 billion in

2005.
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21. The BCRA's financial result (the difference
between financial income and outflows) reached ARP 2.6
billion in 2005, more than double the 2004 result of
ARP 1.3 billion. The net financial result (which also
includes operational expenditures and valuation
differences due to exchange rate changes) stood at ARP
5.0 billion (up 45 percent y-o-y).


22. According to some private analysts, last year's
strong balance obviates concerns about a BCRA quasi-
fiscal deficit for 2006. Fears of a quasi-fiscal
deficit arose because of the difference between the
interest rate earned on reserves (BCRA assets) and the
interest paid on Lebacs and Nobacs (BCRA liabilities),
as well as the reduction in the BCRA's discount
lending stock due to bank prepayments. (Discount
lending is one of the best performing BCRA assets, as
it earns 3.5 percent plus CER -- a CPI-linked index.)
Analysts project an ARP 1.5 billion financial result
for 2006, a significant drop from 2005 due to the drop
in income from BCRA discount lending mentioned above,
as well as from the expected increased interest that
the BCRA will pay on Lebacs and Nobacs due to higher
sterilization requirements (assuming that the BCRA
maintains its current reserve accumulation policy and
that discount loan prepayments will not be able to
help the BCRA sterilize its FX intervention as much as
it did last year.

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The peso was unchanged against the USD this week,
closing at 3.10 ARP/USD.
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23. The peso remained flat versus the USD this week,
closing at 3.10 ARP/USD. At mid-week, the peso had
appreciated slightly to 3.09 ARP/USD but then lost the
recovered ground. The BCRA's intervention in the

foreign exchange market this week prevented the peso
from appreciating despite large dollar sales by
exporters. In the first four days of the week, the
BCRA purchased USD 216 million. The peso exchange
rate has depreciated 1.6 percent since the beginning
of the calendar year. The BCRA's reserves stood at
USD 24.3 billion as of June 6, and have increased USD
5.7 billion, or 31 percent, since the GOA prepaid its
entire IMF debt on January 2.

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Consumer Confidence Index up 3.1 percent m-o-m.
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24. The consumer confidence index -- measured by
Torcuato Di Tella University -- increased 3.1 percent
m-o-m in June to 58.5 points, from 56.8 points in May.
All three index components increased: consumer
sentiment toward the macroeconomic environment (+6.8
percent m-o-m),consumer willingness to purchase
durable goods and real estate (+1.6 percent m-o-m, to
a new record high) and improvement in personal
situation (+0.6 percent m-o-m). The index increased
15.6 percent y-o-y. The index is based on surveys of
individual economic sentiment and consumer willingness
to purchase durable goods, houses and cars.

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Commentary of the Week: "Lavagna, Moreno, and the
Felisa Code". By Jorge Oviedo. (Note: Translated
from an article published May 26 in La Nacin. End
Note)
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25. The opinions of the general public and of
business leaders converge on one thing: Nestor
Kirchner can point to significant economic growth,
fairly reasonable inflation rates up to now, and the
maintenance of a fiscal surplus as his achievements.
But the opinions of those who have business
responsibilities and of those who do not begin to
sharply diverge when one goes deeper into other
issues. For example, take the inflation control
policy.


26. To the general public, it seems praiseworthy that
the government is trying to control prices, although
it doesn't believe that price controls work.
Businesses, in many cases, are alarmed by the attitude
of the Secretary for Technical Coordination, Guillermo
Moreno. "I have known him for many years, to the
point that I can say we have been quite good friends.
But in my modest opinion, he has always been a little
crazy," said someone who says that the stances that
have been attributed to Moreno are alarming, although
he clarified that they did not surprise him.


27. The divergence between public opinion and that of
business leaders is the division that Roberto Lavagna
wants to exploit. Polls among businessmen show a
strong deterioration of the government's image since
the departure of Lavagna, ex-Minister of Economy and
founder of the consulting company Ecolatina. "The
problem that Roberto has is that to be a candidate, he
is going to have to convince far more than just a
handful of company owners that everything has gotten
worse since he left," said one businessman.


28. Outside of the corridors of power, the ex-
minister's image is one of moderation and rationality,
but that has not stopped him from being a critic of
current policies. However, it is notable that he has
been very careful not to criticize Kirchner.


29. During the last few days, the surprise has been
that Minister of the Economy Felisa Miceli has again
publicly aligned herself with her predecessor and one-
time promoter: Miceli appeared in public with Lavagna
during the most recent meeting of the Inter-American

Development Bank, at a time when tensions with Lavagna
in the Casa Rosada already were high.


30. This week, she met with textile businessmen who
had a meeting with Moreno not too long ago that,
according to accounts, had been very tough. The
minister didn't receive them in her office, but rather
visited them at the ProTejer Foundation headquarters.
She said, very reasonably, that annual 9 percent
growth rates cannot be expected to continue, and that
less must be anticipated: "barely" 5 percent annually.
All this would be nothing more than a demonstration of
rationality, if one looks at it benevolently, or as an
excess of optimism, if one wants to be critical.


31. But everything changes when one realizes that,
according to the business owners he meets with, Moreno
tells his audiences that he wants to end this year
being the "Nine Man." He would earn the title by
achieving 9 percent growth, 9 percent inflation and 9
percent unemployment.


32. Very casually, Minister Miceli just said in
public that 9 percent growth will be difficult to
achieve. The agriculture sector is finding it
difficult this year to increase growth, and the meat
export ban made things even worse. Moreno will
realize that the message in the "Felisa code" was
intended for him. The arm-wrestling between the two
officials seems far from over. (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.)


GUTIERREZ