Argentina Economic and Financial Weekly for the week ending

UNCLAS BUENOS AIRES 001605 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 July 14, 2006 -------------- -------------- Weekly Highlights -------------- -------------- - Argentina and Chile to set new gas price agreement. - Argentina will charge higher diesel fuel prices to foreigners along its borders. - Senate approves budget "superpowers." - Buenos Aires province rescinds water company concession. - Felisa Miceli announces that price agreements will not change until the end of the year. - Commentary of the Week: "Since the crisis, spending has grown ARP 95 billion" -------------- -------------- Argentina and Chile to set new gas price agreement. -------------- -------------- ¶1. The new price agreement between the GOA and the Government of Bolivia will go into effect on July 15, increasing the price of natural gas from USD 3.20 to USD 5 per million cubic meters through the end of 2006. In this context, Chilean Energy and Mining Minister Karen Poniachik met with Argentine Planning Minister Julio de Vido to reach an agreement on a new price for Argentine gas exported to Chile. Poniachik said her government will analyze a variety of tax formulas proposed by the GOA to determine which would be the least harmful. She plans to meet with energy companies that will be affected by the new levy on July 17 before making any decision. Chile buys 90 percent of Argentine gas exports, and this new price agreement is expected to go into effect at the end of the month. -------------- -------------- Argentina will charge higher diesel fuel prices to foreigners along its borders. -------------- -------------- ¶2. On July 10, the GOA announced that fuel stations will be allowed to charge more for diesel fuel sold to foreign-tagged vehicles along Argentine borders, beginning August 10. Since Argentina has frozen diesel oil prices while neighboring countries continue to charge international prices, there has been a 1.5-2 percent increase in demand for diesel fuel at stations along Argentina's borders. According to Energy Secretary Daniel Cameron, this situation contributed to the shortage of diesel fuel during the past few months. Chilean President Bachelet and Foreign Minister Foxley have both said that this measure is discriminatory and an action against regional integration. In Brazil and Chile, a liter of diesel costs USD 0.85 and USD 0.90, respectively; in Argentina it costs just USD 0.48. -------------- -------------- Senate approves budget "superpowers" -------------- -------------- ¶3. On July 12, the Senate approved a measure giving the GOA budgetary "superpowers" sought by the GOA. The bill now goes to the Chamber of Deputies, where it is expected to be approved. The so-called "superpowers" over the national budget would give the GOA the power to modify the Budget Law and give the Chief of Cabinet the power to reallocate funds irregardless of the provisions of the Financial Administration Act or the Fiscal Responsibility Law. The Senate amended the original proposal, adding a clause that these "superpowers" will not extend to SIDE (Argentine intelligence service) or to reserved funds. While past governments also have had similar "superpowers," this bill is different in that the powers granted to the Chief of Cabinet would be permanent. -------------- -------------- The Senate approves amendments to the Money Laundering Law. -------------- -------------- ¶4. On July 12, the Senate approved a GOA-proposed law that would lift bank and stock market secrecy in money laundering investigations by the Argentine financial intelligence unit (UIF). Previously, the UIF needed a court order in order to lift bank and stock market secrecy. The law also revamps the UIF's structure, replacing the current five directors with a single, appointed President, who would have the authority to lift banking and stock market secrecy. Opponents say that the law would concentrate too much authority in a single official, who will be chosen by the executive branch. Thus far, there is no indication who the GOA will pick to be the new president of the UIF. -------------- -------------- Buenos Aires province rescinds water company concession. -------------- -------------- ¶5. The Buenos Aires provincial government rescinded the water and sewage concession contract granted to Aguas del Gran Buenos Aires (AGBA),saying the company had not met its obligations. Italian construction firm Impregilo and Spain's Dragados hold a 43 percent and a 27 percent share in AGBA, respectively, while Spain's Aguas de Bilbao Vizkaia hold a 20 percent stake and the company's workers hold the remaining 10 percent. Governor Felipe Sola said that the decision to rescind the contract was taken to "ensure that running water and sewage drains are expanded in the places that most need them, using a health-based, rather than a business-based, criteria." The AGBA's services will be assumed by Aguas Bonaerenses (ABSA),a company that is 90 percent owned by the province and 10 percent owned by workers, which already operates in many parts of the province. -------------- -------------- Felisa Miceli announces that price agreements will not change until the end of the year. -------------- -------------- ¶6. On July 11, Economic Minister Felisa Miceli told the Senate that the GOA intends to continue with its policy of negotiating sectoral price agreements, and that existing price agreements will remain unchanged for the rest of the year. According to Miceli, price agreements have been efficient instruments to reduce inflation expectations. -------------- -------------- Provincial finances increasingly dependent on the GOA. -------------- -------------- ¶7. According to private consultants, Argentine provincial finances are becoming more dependent on discretionary transfers from the GOA. Between 2002 and 2006, the share of discretionary federal transfers (i.e., transfers above and beyond those legally required by the Argentine "co-participation" revenue sharing system) in overall provincial revenues rose from 17 percent to 24 percent, indicating that provinces are increasingly dependent on the federal government. The GOA has seen a significant increase in revenues in the past four years particularly from export taxes, which are not automatically shared with the provinces. -------------- -------------- Kirchner announces the creation of the Southern Market. -------------- -------------- ¶8. At the Argentine stock market's 152nd anniversary on July 10, President Nestor Kirchner announced the creation of the Southern Market, which will be inaugurated with the issuance of the Southern Bond (a bi-national to be issued jointly with Venezuela). The President remarked that these bonds will be priced in both countries' markets and that negotiations are already underway with the Caracas stock market. -------------- -------------- Argentine economic mission visits Washington. -------------- -------------- ¶9. An economic mission headed by Secretary for Economic Policy Oscar Tangelson visited Washington this week. The mission presented a restructuring proposal for the Inter-American Development Bank (IDB),which includes proposals for a redirection of infrastructure loans, a reduction in transaction costs and a credit line in local currency. In an IDB meeting on July 17, the mission will announce its support to forgiving the debt of highly indebted countries such as Bolivia, Honduras, Nicaragua and Haiti. -------------- -------------- Neuquen court orders Chevron to pay royalty in cash. -------------- -------------- ¶10. A court in the province of Neuquen has ordered the local unit of U.S.-based Chevron to pay recently increased provincial royalties in cash. The provincial government decreed an increase in royalties on March 1. Under the new plan, the province calculates the 12 percent nationwide royalty using international oil prices. Previously, companies were required to pay royalties on global oil prices less a federally mandated 45 percent export tax. Oil companies operating in Neuquen have pursued different paths to avoid paying the higher royalties. Chevron offered to pay the additional amount in kind with a portion of its oil production, while Repsol-YPF and Total filed complaints in the Argentine Supreme Court. The Neuquen ruling against Chevron states that only the province, not the company, has the right to offer oil instead of cash payments for disputed royalties. -------------- -------------- The GOA creates a new subsecretary to fight against informal employment. -------------- -------------- ¶11. Minister of Labor Carlos Tomada announced the creation of the Subsecretary of Work and Social Security Control as part of a series of instruments to fight against informal employment. According to an inspection last year of 134,021 private companies, 38 percent had irregularities in their employees' status. Tomada said that most of the companies that have employees who are not registered in the Social Security program are not even officially listed as employers. Tomada also said that the Ministry will simplify the process of employee registration and present a new law to introduce a better mechanism for registering rural workers. -------------- -------------- Consumer Confidence Index down 1.3 percent m-o-m. -------------- -------------- ¶12. The consumer confidence index -- measured by Torcuato Di Tella University -- decreased 1.3 percent m-o-m in July to 57.7 points, down from 58.5 points in June. Only one component of the index decreased: consumer sentiment toward the macroeconomic environment (-5.8 percent m-o-m). The other two components increased: consumer willingness to purchase durable goods and real estate (+0.65 percent) and improvement in personal situation (+1.8 percent m-o-m), but not enough to outweigh the drop in consumer sentiment. The index rose 14.3 percent y-o-y. The index is based on surveys of individual economic sentiment and consumer willingness to purchase durable goods, houses and cars. -------------- -------------- World Bank approves a USD 75 million loan for road infrastructure in Cordoba province. -------------- -------------- ¶13. The World Bank approved a USD 75 million road infrastructure and maintenance loan for the province of Cordoba. The fixed-spread loan is repayable over 13.5 years, including a six-year grace period. The Bank is emphasizing infrastructure projects in its Country Strategy for the 2006-2009 period. Currently, the WB funds several operations that promote more efficient public expenditure and sustainability in road infrastructure, including the National Highway Asset Management Project for USD 220 million, the Provincial Roads II Project for USD 150 million, and the Buenos Aires Province Sustainable Investment Development Project for USD 200 million. -------------- -------------- May wage index increased 1.53 percent m-o-m. -------------- -------------- ¶14. The National Bureau of Statistics (INDEC) announced that the wage index increased 1.53 percent m-o-m in May. This index defines wages as a price, without considering hours worked or special payments for productivity gains. This index surveys the formal and informal private sector and the public sector, which rose 1.62 percent, 1.80 percent and 1.10 percent, respectively. INDEC also announced that the basic food basket -- used to measure poverty and indigence -- increased 0.04 percent m-o-m in June, showing a slight increase after experiencing its sharpest drop in three years in May. ¶15. According to INDEC, inequality has also increased in Argentina. The difference between the medium income of the richest 10 percent of the population and the poorest 10 percent increased from 32 to 36 times between Q3 of 2005 and Q1 of 2006. -------------- -------------- The BCRA reduces the limit on the amount of public debt that banks can hold. -------------- -------------- ¶16. The BCRA will reduce the regulatory limit on the amount of GOA, provincial and municipal debt that banks may hold to 35 percent of their total assets, down from 40 percent. The aim of this measure is to generate greater liquidity, promote private lending and limit bank financing to the GOA and trying to prevent the crowding out of the private sector in favor of public sector financing that has occurred at various times in the past. Currently, banks' assets are ARP 233 billion, of which ARP 63 billion are held as public debt (27 percent of the total). This measure will not affect the BCRA's Lebacs or Nobacs and will be effective as of July 1, 2007. -------------- -------------- BCRA rolls over its maturities. Investors keep concentrating their bids in Nobacs. -------------- -------------- ¶17. The BCRA received ARP 2.3 billion in bids at its July 11 Lebac and Nobac auction, compared to ARP 1.1 billion in Lebacs that came due during the week. ARP 118 million came from the fixed peso segment and ARP 1 billion from the pesos indexed by CER segment. It accepted ARP 416 million in Lebac bids and ARP 1.6 million in Nobac bids. The yield on the 70-day Lebac and the 168-day Lebac remained at 7.10 percent and 8.50 percent, respectively. The yield on the 245-day Lebac decreased from 10.18 percent to 10.06 percent and for the 364-day Lebac the yield was 12.15 percent. The yield on the longest term instrument, the 490-day Lebac, was 12.56 percent. Lebacs for maturities of more than 490 days were withdrawn due to lack of interest by the BCRA. The spread on the one-year Nobac decreased from 2.19 percent to 2.10 percent and on the two-year Nobac increased from 3.74 percent to 3.75 percent. The Badlar rate (the base rate for Nobacs) is currently at 9.2 percent. Investors continue concentrating their bids in Nobacs; this was a response to the BCRA's downward movement in the Lebacs yield and to a high Badlar rate. -------------- -------------- The peso is unchanged against the USD this week, closing at 3.10 ARP/USD. -------------- -------------- ¶18. The peso remained flat versus the USD this week, closing at 3.10 ARP/USD. On Wednesday, the BCRA purchased USD 89.5 million to keep the peso unchanged against the USD. In the first three days of the week, the BCRA purchased USD 170 million. The peso exchange rate has depreciated 1.6 percent since the beginning of the calendar year. The BCRA's reserves stood at USD 26.1 billion as of July 11, and have increased USD 7.5 billion, or 41 percent, since the GOA prepaid its entire IMF debt on January 2. -------------- -------------- Commentary of the Week: "Since the crisis, spending has grown ARP 95 billion", by Jos Luis Espert, from an article published in Ambito Financiero on June 14. -------------- -------------- ¶19. In the last quarter century, Argentina has stood out among those countries that have had very frustrating experiences with respect to economic growth. Between 1980 and 2006, real GDP per capita grew at an insignificant annual average of 0.50 percent, a figure similar to Brazil (0.51 percent) and countries that were communist until 1989 such as Romania (0.4 percent) and Bulgaria (0.5 percent). In the same period, Chile grew 2.9 percent per year, China 8 percent, Ireland 4.2 percent and India 4 percent. Quite a contrast, no? ¶20. A major explanation for such poor performance has been the recurring financial collapses brought on by enormous -- although decreasing -- fiscal deficits, with the exception of 2001. When the "Rodrigazo" occurred in the middle of 1975, the budget deficit reached 14 percent of GDP. At the end of the Martnez de Hoz's "tablita" in January of 1981, it was 11.5 percent of GDP. During the hyperinflation of 1989, it was at 8.3 percent. When the Tequila crisis hit in 1995, it was 3 percent and when convertibility shattered in 2001 it was 5.3 percent of GDP. Today we have surpluses of 1.5 percent of GDP after interest payments, a historic record not only in the last quarter-century but also in the last half-century. But we have to be cautious, as this is happening in the middle of a cycle of large capital inflows to emerging markets and an increase in our terms of trade rarely seen in history. ¶21. Although in all the crises suffered in the past 26 years (except the end of convertibility) the fiscal deficits were increasingly smaller, public spending has continued to grow. If we analyze the federal-plus-provincial fiscal results, that is, if we exclude public service entities/companies whose services were not eliminated but rather were replaced (up until now) by private concessions and we keep in mind that interests on public debt averaged 1.6 percent of GDP with little variation (except 1982 and 2001, with 4.5 percent),primary public spending was 21.8 percent of GDP in 1981, 22.3 percent prior to hyper inflation, 24 percent before the Tequila crisis, and 25 percent before the collapse of convertibility. And it (primary public spending) increased so much since the launching of the "productive model" that it has already reached a historic record (in the last quarter century as well as in the last half century) of 35.5 percent of GDP. ¶22. In other words, little by little, the federal government has continued gaining positions despite the fact that the economy, relative to the world, went backward (probably the country lagged because the state moved forward). Furthermore, as capital expenditures began the period at 5 percent of GDP and fell to 1 percent of GDP in 2002, the bulk of the rise in primary spending was for increased current spending without interest (salaries, pensions, goods and services, transfers to the private sector). The jump in current spending was even greater than in primary spending: it went from 14 percent of GDP in 1982 to 22 percent in 2006. Too much for an economy that was almost stagnant for more than 25 years. -------------- New Record -------------- ¶23. However, if fiscal deficits have been decreasing and public spending increasing, this means that tax collection has consistently increased. The average during the 1980s was 18.4 percent of GDP (with value-added tax (VAT) making up 2.7 percent of GDP); during convertibility it was 23.5 percent (VAT 6.4 percent) and today we are already scratching off another historic record of 29 percent of GDP (VAT 7 percent) -- a record for the last quarter century as well as the last half century. ¶24. Certainly, after a 26-year period (1980-2006) in which Argentina had the poorest economic growth in its entire history, even worse than the period between the two world wars with the Great Depression included (0.74 percent real per capital GDP growth per year between 1913 and 1950),the "lesson" that we have apparently learned is that one must not have a fiscal deficit. The level of public spending doesn't matter at all. Public spending can always grow because taxes, sooner or later, can also increase indefinitely. It is so today, that those who are in the formal sector pay the equivalent of nearly 45 percent of GDP in taxes (assuming that evasion is 1/3),as if we were a rich country. This is nonsense. ¶25. It is very likely that our sudden fiscal discipline is directly connected to the inability to finance fiscal deficits after having bastardized the currency with hyperinflation and the public debt with various defaults. One also must not underestimate Kirchner's tricky and Machiavellian interpretation in the sense that he knows that within the political "class," the party loyalties of factions and even of ideologies change and switch fluidly, as if it were a market for the buying and selling of stinking cauliflower or an endless soap opera. ¶26. From January 2002 and until the end of this year (according to the figures from the Secretary of the Treasury),that is, after the last five years of the productive model, consolidated public spending of the federal and the provincial government will have increased ARP 95 billion (120 percent) consisting of, among other things, an additional ARP 25 billion in salaries, ARP 9 billion in goods and services, ARP 13 billion in social security, ARP 18 billion in transfers to the private sector, ARP 6 billion in transfers to municipalities and ARP 20 billion in capital expenditures. Tax collections will reach ARP 182 billion, ARP 118 billion more than in 2001, with an additional ARP 53 billion going to the provinces. Provinces have no right to go into deficit as is being announced. Is there never enough money to meet their desires? ¶27. But what is most serious is that society hasn't realized that having a fiscal surplus is important not only in order to avoid the explosion of public debt that led to crises in the past. It is also crucial, for long-term growth, to minimize public spending. It is stable private spending subject to competitive rules (not corporate rules like in Argentina) that will give us a healthier future than that of the "fakirs" of the last quarter century. Public spending that is clientelist in the best case and corrupt in the worst does not appear to be the solution to our decadence. (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 2