Argentina Economic and Financial Weekly for the week ending

UNCLAS BUENOS AIRES 001943

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
August 25, 2006

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Weekly Highlights
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- GOA announces nuclear expansion program.
- Minister of Economy Felisa Miceli proposes IMF structural
reforms.
- GOA primary surplus reaches ARP 2.09 billion in July -- in line
with market expectations.
- July industrial production index up 8.8 percent y-o-y.
- July trade surplus of USD 940 million -- below market
expectations.
- Government Confidence Index down 5 percent m-o-m in August.
- Commentary of the Week: "In the shadow of Gath & Chaves"

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GOA announces nuclear expansion program.
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1. Argentina announced that it would expand its nuclear power
program and reactivate a dormant uranium enrichment facility. The
announcement described four pillars upon which Argentina's enhanced
nuclear energy capabilities would rest: The GOA plans to finish
construction of the approximately 700MW Atucha II nuclear reactor in
Buenos Aires province; start design and feasibility studies on a
possible fourth reactor (Argentina currently has two functional
nuclear power plants); extend the life of the Embalse reactor in
Cordoba Province, which had been scheduled to cease operations in
2011; and reopen a uranium enrichment facility in the town of
Pilcaniyeu. Planning Minister De Vido also said that the GOA would
resume production of heavy water at a plant in Neuquen Province,
with a goal of producing 600 tons in three years.

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Economic Minister Felisa Miceli proposes IMF reforms.
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2. On August 22, during a GoA-sponsored seminar, Economic Minister
Felisa Miceli previewed IMF reform proposals the GOA plans to
present in more detail to Mercosur member nations. She hopes to
develop a common Mercosur position prior to the IMF's upcoming
Singapore annual meeting. Proposed measures included:
- A return of the IMF to a more "traditional" lender of last resort
role, including by providing "automatic" credit lines and on-request
loans in case of crises;
- Provision of IMF collateral to support member country bond
issues;
- A reexamination of the IMF quota determination formula.


3. Miceli also noted that Argentina will not support any increase
in member fees to finance the IMF. She lauded Argentina's fiscal
and trade surpluses, calling them the result of a learning process
after 15 years of crises without clear assistance from the IMF.

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GOA primary surplus reaches ARP 2.09 billion in July -- in line with
market expectations.
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4. July GOA's primary surplus reached ARP 2.09 billion, up 13.6
percent y-o-y from ARP 1.84 billion in July 2005. Primary spending
remains high: Capital spending jumped 37 percent y-o-y and
non-interest current expenditures were up 28 percent y-o-y. Current
expenditures are expected to continue their growing trend given
recent hikes in public wages and pensions. On a 12-month rolling
basis, the July primary surplus totaled 3.5 percent of GDP,
unchanged from June. The BCRA consensus survey forecasts a primary
surplus of ARP 21.7 for 2006.

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July industrial production index up 8.8 percent y-o-y.
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5. The industrial production index rose 8.8 percent y-o-y in July,
above market expectations of 8.3 percent and in line with the prior
month's 8.9 percent increase. During July, the fastest growing
sectors included automobile production (+33.9 percent),tobacco
production (+16.8 percent),non-metallic minerals (+13.7 percent),
oil refining (+11 percent) and printing (+8.5 percent). The index

increased 4.9 percent m-o-m non-seasonally adjusted and increased
0.3 percent m-o-m seasonally adjusted. The BCRA consensus survey
forecasts a 7.1 percent industrial production growth for 2006 --
above last month's forecast of 6.9 percent.


6. The industry-wide apacity utilization index reached 72.7
percent in July, up slightly from 72 percent in July 2005. Sectors
with the highest capacity utilization rates were included
metal-based industries (93.3 percent),oil refining (93 percent) and
textiles (87.4 percent). Sectors with the lowest capacity
utilization rates included auto production (55.1 percent),
non-metallic minerals (63.1 percent) and metal-mechanical excluding
cars (65 percent).

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July trade surplus of USD 940 million -- below market expectations.
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7. The July trade surplus reached USD 940 million, below market
expectations of USD 1.1 billion. Exports increased 6 percent y-o-y
to USD 3.8 billion, following 12 percent y-o-y growth in June, with
an increase of 9 percent in price, partially offset by a 3 percent
decrease in quantity. Exports were driven by increases in
industrial goods (+21 percent y-o-y),agribusiness (+11 percent
y-o-y) and fuel and energy (+6 percent y-o-y),while primary goods
decreased 22 percent y-o-y. Imports increased 21 percent y-o-y to
USD 2.9 billion, with increases in both price (+2 percent) and
mainly in quantity (+19 percent). Imports were driven by increases
in capital goods (+32 percent),consumer goods (+26 percent),
passenger vehicles (+23 percent),accessories for capital goods (+22
percent),fuel and oil (+17 percent) and intermediate goods (+14
percent). The accumulated trade surplus reached USD 6.9 billion
during the first seven months of 2006 and according to the BCRA
consensus survey, it is expected to narrow to USD 10.6 billion by
the end of the year, compared with USD 11.3 billion in 2005.

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2007 national budget could include higher expenditures.
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8. On August 21, El Cronista reported that the 2007 national budget
may include expenditures of more than ARP 130 billion. One of the
major causes for the expected rise in expenditures is a Supreme
Court ruling dictating that the GOA should include pension
adjustments in the 2007 budget (at an estimated cost of ARP 5.2
billion annually). The 2007 budget is expected to be sent to
Congress on September 15. In 2006, budgeted expenditures totaled
ARP 93.7 billion but, according to local consultants, could reach
more than ARP 110 billion by the year end.

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Government Confidence Index down 5 percent m-o-m in August.
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9. The Government Confidence Index decreased 5 percent m-o-m in
August to 2.41 points, 0.18 below the average during the Kirchner
administration and well above the 1.2-point level in May 2003 when
Kirchner took office. Confidence in the GOA's ability to solve
citizens' problems decreased 5 percent m-o-m, but remained the
single factor generating the highest level of confidence. Public
opinion about the honesty of GOA officials and the efficiency of
public spending increased 3 percent and 1 percent m-o-m
respectively, while the perception of the GOA's general performance
decreased 9 percent m-o-m. The index slightly fell 0.4 percent
y-o-y. [The Government Confidence Index is a survey-based index
prepared by Di Tella University. It varies from zero to five points
and seeks to measure public opinion of GOA's general performance,
efficiency of public spending, honesty of GOA officials and the
government's ability to solve problems.]

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Unemployment officially fell to 10.4 percent in Q2 of 2006.
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10. On August 22, INDEC (National Bureau of Statistics) officially
announced that the unemployment rate dropped to 10.4 percent in the
second quarter of 2006, vs. 11.4 percent in Q1 of 2006 and 12.1
percent in Q2 of 2005. This figure was in line with President
Nestor Kirchner's preliminary announcement made July 27. The GOA

projects unemployment will be below 10 percent by the end of the
year for the first time in 13 years, while analysts in a Reuters'
survey expect the rate to fall to 9.3 percent by December. INDEC
also publishes the unemployment rate that results from considering
as unemployed those receiving State Head of Household benefits,
which reaches 12.8 percent.

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BCRA rolls over maturities and decreases rates for Lebacs and
Nobacs.
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11. The BCRA received ARP 1.3 billion in bids at its August 22
Lebac and Nobac auction, and no Lebacs or Nobacs came due during the
week. It accepted ARP 697 million in Lebac bids and ARP 288 million
in Nobac bids. The yield on the 154-day Lebac decreased from 8.39
percent to 8.30 percent and the yield on the 238-day Lebac decreased
from 9.95 percent to 9.90 percent. The yield on the longest term
instrument, the 350-day Lebac, dropped from 11.75 percent to 11.65
percent. Lebacs for maturities of more than 350 days were withdrawn
because of the BCRA's decision not to validate the yield proposed by
the market. The spread on the one-year Nobac decreased from 1.30
percent to 1.15 percent and the two-year Nobac from 2.98 percent to
2.68 percent. The Badlar rate (the base rate for Nobacs) is
currently at 9.4 percent. Rates fell for the fourth consecutive
week due to strong market demand and the BCRA's decision to accept
more Lebacs rather than Nobacs bids.

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Peso unchanged against the USD this week, closing at 3.10 ARP/USD.
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12. The peso depreciated slightly versus the USD after remaining
flat most of the week, closing at 3.10 ARP/USD. The BCRA is still
not reporting daily transactions in the dollar market, reducing
market transparency and depriving investors of useful information.
The peso exchange rate has depreciated 1.6 percent since the
beginning of the calendar year. The BCRA's reserves stood at USD
27.2 billion as of August 23, and have increased USD 8.7 billion, or
47 percent, since the GOA prepaid its entire IMF debt on January 2.

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Commentary of the Week: "In the shadow of Gath & Chaves", by Ricardo
Esteves, from an editorial printed in La Nacion on July 25.
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13. On the corner of Florida and Peron, where once stood the symbol
of Argentine business -- the department store Gath & Chaves -- today
hosts a flagship of Chilean expansion and commerce: Falabella.


14. This is good news, because Falabella is an efficient provider
of goods at convenient prices and helps meet the demand of Argentine
consumers.


15. Seen from a business perspective, it is a painful reminder of
the slowdown of the Argentine business sector, bothered by systems
and models that ignore businesses and the accumulation of capital.
This process explains why Argentina today has a poverty rate of 32
percent, while Brazil's is only 22 percent. Just thinking of this a
few decades ago would have been the result of a sick mind.


16. If Buenos Aires was 30 or 40 years ago the mecca to which
Chileans flocked in search of high quality articles that they
couldn't find in their own country, today it is where they come for
the bargains a favorable exchange rate provides.


17. In the case of Falabella, by basing its business in a country
with stable policies, it can develop a supply structure around the
world and grow in other markets


18. If a market suddenly contracts, as tends to happen in
Argentina, this obliges local firms to discontinue foreign
operations, break their contracts and lose ground. The Chileans, on
the other hand, can maintain a flow of international purchases based
on a constant level of consumption in Chile.


19. The stability of economic policies is a fundamental condition
for the financing of any enterprise. In our country, however,
changes are typically 180 degrees. We move to the beat of immediate

political interests, without thinking in the long term. And despite
having the largest business structure in Latin America in the middle
of the 20th century, today it is insignificant compared with that of
Chile, Brazil or Mexico


20. Hampered by laws and adverse conditions, businesses have known
only retreat in the past decades. These negative factors also
affect foreign investment, which has been insufficient to make up
for the deteriorating state of the national business sector.


21. The lack of businesses - national and foreign - is at the root
of high poverty rates. There is poverty because there is a lack of
employers. That why it is so fundamental for the country to
recreate favorable business conditions that are based on
profitability and trust in the laws and institutions. It is also
essential to protect small and medium enterprises, so that they are
started, grow, and one day turn into large companies. If not, there
will be fewer national enterprises and their owners will become
renters.


22. Argentine businesses must compete not only with multinational
corporations, but with businesses from other Latin-American
countries, which don't repudiate their debts and therefore can
finance themselves in the long run and at reasonable interest rates.
Although no one in his right mind would question the right of
workers to improve their working conditions, changes must be made in
a way that does not discourage business ventures, so that
entrepreneurs grow and can employ more and more people. Although
workers may achieve new prerogatives, unemployed and underemployed
would remain excluded from the system.


23. The insensitivity toward businesses' needs and the lack of
strategic vision caused the country to squander sectors as its vital
cultural industries: motion pictures and publishing were among the
most important in Latin America.


24. It is as if the country renounced businesspeople, globalization
and the future, without realizing that it still possesses the human
resources (so long as the effects of its old, competitive, education
system lasts) to contribute in the global economy provide a more
decent standard of living to its citizens, reducing the number of
impoverished people


25. We must have faith in our own strengths and faith in the
future. Paradigms are shifting, leaving past arguments without
backing.


26. Right in the cradle of untamed capitalism, one of those
paradigm shifts came about that will determine the future.


27. The two richest men in the world, Bill Gates and Warren Buffet,
whose fortunes sum to tens of billions of dollars - together
equivalent to half of Argentina's GDP in a year - have decided to
donate a good part of their fortunes to humanitarian foundations.
Their money goes not exactly to construct museums or hospitals in
the United States, their home country, but rather to fight against
the sickness and catastrophes devastating Africa, and to promote its
development.


28. If the partnership between opportunities and entrepreneurs has
committed abuses and blunders in the international field hand in
hand with their political leaders, the action of its greatest
entrepreneurial leaders vindicates them. (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.)


MATERA
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