Argentina Economic and Financial Weekly for the week ending

UNCLAS BUENOS AIRES 002139 SIPDIS SIPDIS E FOR THOMAS PIERCE, WHA FOR WHA/BSC AND WHA/EPSC PASS NSC FOR JOSE CARDENAS PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE PASS USTR FOR SUE CRONIN AND MARY SULLIVAN TREASURY FOR ALICE FAIBISHENKO USDOC FOR ALEXANDER PREACHER AND JOHN ANDERSEN US SOUTHCOM FOR POLAD E.O. 12958: N/A TAGS: EFIN ECON ELAB ALOW AR SUBJECT: Argentina Economic and Financial Weekly for the week ending September 15, 2006 -------------- -------------- Weekly Highlights -------------- -------------- - GDP up 7.9 percent yoy in Q2 2006. - GOA announces 13 percent rise in pension payments. - 2007 budget may incorporate lower GDP growth projection. - Argentina and Venezuela joint oil company plan advances. - Argentine provinces prepares for power shortages. - Argentine and Chilean presidents push economic integration. - Multilateral real exchange rate depreciates 0.3 percent m-o-m in August. - Commentary of the Week: "Disrupted Energy" -------------- -------------- GDP up 7.9 percent yoy in Q2 2006. -------------- -------------- ¶1. The GOA announced that GDP grew 7.9 percent yoy in the second quarter of 2006 -- slightly above the central bank (BCRA) consensus forecast of 7.8 percent -- and 8.3 percent yoy in the first half of ¶2006. Growth derived primarily from strong domestic demand - primarily increased investment and higher private and public consumption - boosted by a 3.1 percent increase in exports. During the second quarter, investment grew 18.5 percent yoy, with increases of 23.2 percent yoy in construction and 11 percent yoy in plant and machinery investment. Private consumption rose 8.2 percent yoy, and public consumption was up 6.5 percent yoy. Goods and services production increased 8.2 percent and 7.5 percent yoy, respectively. The BCRA forecast for GDP growth stand at 7.8 percent for 2006 and 6 percent for 2007. -------------- -------------- GOA announces 13 percent rise in pension payments. -------------- -------------- ¶2. On August 8, the Argentine Supreme Court ruled unconstitutional a GoA plan for selective pension increases that favored low income earners, instead requiring across the board increases to restore pensioner purchasing power. The GoA modified its plan accordingly and, effective January 1, 2007, the monthly minimum pension paid to retirees will increase from ARP 470 to ARP 560. Pensions above the minimum will be increased 13 percent. This will be the second �00A;across the board increase in pension payments since an 11 percent increase in May 2002. The GOA estimates this policy's fiscal cost at approximately ARP 4.1 billion in 2007, roughly 0.55 percent of GDP. -------------- -------------- 2007 budget may incorporate lower GDP growth projection. -------------- -------------- ¶3. Local media reported preliminary macroeconomic projections that the GOA will likely include in the 2007 budget -- which is expected to be sent to Congress on September 15. Reportedly, the projections may include: 4 percent GDP growth, an 8-11 percent inflation band (with a 9 percent average) and primary fiscal surplus totaling 3.2 percent of GDP. Previous reports indicated that the GOA could project GDP growth as high as 4.5 percent. This downward trend is in line with GOA's practice of underestimating growth, only to later recognize "unexpected" revenues to spend out of the budget (BCRA's consensus survey forecasts a 6 percent GDP growth for 2007). -------------- -------------- Argentina and Venezuela joint oil company plan advances. -------------- -------------- ¶4. Argentina's General Inspection of Justice approved the establishment of a joint venture between Venezuela's state-owned oil company PDVSA and GOA-owned Enarsa, with an initial capitalization of ARP 2 billion. PDVSA will hold a 60 percent stake in the joint venture and Enarsa 40 percent. The company will be established under the Energy Cooperation Agreement framework and will be responsible for the production, transportation and sales of national and international hydrocarbons. -------------- -------------- Argentine provinces prepare for power shortages. -------------- -------------- ¶5. Argentine provinces are setting up contingency plans to deal with possible power shortages during the coming austral summer: Misiones is exploring the potential to purchase energy from Paraguay; Catamarca is considering a declaration of a provincial energy emergency in order to permit the provincial government to acquire back-up power generators; Entre Rios is considering extending daylight saving time to save energy; and more industrially developed Cordoba and Santa Fe are following the federal government's policy of imposing administrative controls on industrial power consumption. Only Tucuman's governor Jose Alperovich is considering electricity tariffs increases, saying that a long term solution to Argentina's energy shortage will require appropriate pricing to incent new investment by wholesale electricity suppliers. ¶6. On September 13, the Senate approved a bill to promote electric power production from renewable resources via tax reimbursements. The GoA's goal is to have renewable resources (wind power, biogas and geothermic power) contribute 8 percent of electric power consumption by the year 2015. -------------- -------------- Multilateral real exchange rate depreciates 0.3 percent m-o-m in August. -------------- -------------- ¶7. The BCRA's multilateral real exchange rate index -- which measures the real exchange against a trade-weighted basket of currencies -- depreciated 0.3 percent m-o-m in August. This weighted real depreciation is largely explained by the depreciation of the peso against the Brazilian real (35.3 percent weight) and the Euro (19.2 percent weight),partially offset by an appreciation against the dollar (14.5 percent weight). The index is 3.8 percent above its level twelve months ago and 106.1 percent above its average value during convertibility. -------------- -------------- Argentine and Chilean presidents push for further economic integration. -------------- -------------- ¶8. On September 12, Argentine and Chilean presidents Nestor Kirchner and Michelle Bachelet agreed to reopen, by the end of 2009, a cross-Andes cargo and passenger train route that has been idle since 1984. Both presidents called the initiative a move to further economic integration and to better manage growing cross-border trade. ¶9. The presidents also discussed gas pricing, an ongoing source of bilateral friction. Local media reported that President Kirchner denied President Bachelet's request to maintain the cost of gas exports to Chile below levels Argentina currently pays for Bolivia gas. Following a re-negotiation of gas supply prices in June 2006, Argentina currently pays Bolivia in the $5/million BTU range, roughly 55 percent above the $3.20 /MBTU price Argentina had previously paid. Current Bolivian deliveries to Argentina are in the 4.5 million cubic meters/day range, with plans to increase imports to as high as 20 million cubic meters a day following planned construction of additional pipeline capacity. For its part, Argentina currently supplies Chile roughly three times the amount Argentina imports from Bolivia - in the range of 15 million cubic meters/day of natural gas per day. The price of Argentine natural gas exports to Chile rose to the $4.80/million BTU range - roughly equivalent to Argentina's current cost of gas imports from Bolivia - following an increase in Argentina's gas export tax this past summer (austral winter) from 20 percent to 45 percent. -------------- -------------- Minister of Economy at annual Bank/Fund meeting in Singapore. -------------- -------------- ¶10. Economic Minister Felisa Miceli, will speak on behalf of her Mercosur colleagues at the IMF's International Monetary and Financial Committee meeting September 18. -------------- -------------- National public sector' debt decreased 0.1 percent between December 2005 and March 2006. -------------- -------------- ¶11. According to Argentine Secretariat of Finance, national public sector's stock of debt totaled USD 152 billion in March 2006, approximately 80.4 percent of GDP (including debt owed to holdout investors). Public debt decreased USD 157 million between December 2005 and March 2006. With valuation adjustments due to exchange rate changes, inflation, capitalization and interest payments delays excluded, public debt rose USD 165 million. -------------- -------------- Banco Nacion holds 24.6 percent of outstanding BCRA debt instruments. -------------- -------------- ¶12. State-owned Banco Nacion remains the primary holder of BCRA debt instruments, with 24.6 percent of the outstanding Lebac and Nobac stock. BBVA Banco Frances is second, with 5.31 percent of the stock. -------------- -------------- Petrobras and YPF announce participation in GOA's oil exploration program. -------------- -------------- ¶13. A unit of Brazil's state energy company Petrobras will team up with Repsol unit in Argentina YPF and GOA-owned energy company Enarsa, to expand oil exploration off Argentina's Atlantic coast. This consortium will search for hydrocarbons in waters about 155 miles off Mar del Plata. Petrobras and YPF will finance all exploration efforts, with Enarsa reimbursing them for its share of the total investment if commercially viable resources are found. [Enarsa owns all exploration permits and production concessions for offshore areas that were not under license when it was created by law on November 2, 2004] -------------- -------------- The GOA launches mortgage loan access plan. -------------- -------------- ¶14. On September 14, the GOA launched its plan to ease mortgage loan access, in an effort to control rising rent prices. As expected, state-owned Banco Nacion announced the most "aggressive" credit line, with an 8.4 percent annual fixed rate, a 30-year term and a maximum amount of between ARP 200,000 and ARP 300,000. Private banks offered more conservative programs, with fixed rates ranging from 9.05 percent to 9.75 percent. -------------- -------------- BCRA president Redrado on importance of independent monetary and financial institutions. -------------- -------------- ¶15. On September 13, during a meeting of central bankers held in Manila, BCRA president Martin Redrado discussed the importance of maintaining independent monetary and financial institutions to guard against "fiscal domination" by the state. Redrado praised Argentina's "strength" in confronting global financial "turbulence" via a combination of fiscal solvency, exchange rate flexibility and cautious monetary policy. -------------- -------------- BCRA rolls over maturities. -------------- -------------- ¶16. The BCRA received ARP 1.1 billion in bids at its September 12 Lebac and Nobac auction, vs. ARP 767 million in Lebacs that came due this week. BCRA accepted ARP 625 million in Lebac bids and ARP 255 million in Nobac bids. The yields on the 175-day Lebac and 224-day Lebac were 8.41 percent and 10.30 percent. The yields on the 357-day Lebac and on the longest term instrument, the 609-day Lebac, decreased from 11.55 percent to 11.54 percent and from 12.25 percent to 12.20 percent, respectively. The 504-day Lebac was withdrawn because of the BCRA's decision not to validate the yield proposed by the market. The spread on the one-year Nobac increased from 1.18 percent to 1.19 percent and for the two-year Nobac decreased from 2.84 percent to 2.76 percent. The Badlar rate (the base rate for Nobacs) is currently at 9.4 percent. Rates fell in most segments, but not as much as in recent weeks, even though demand for these instruments remained strong. -------------- -------------- Peso depreciates against the USD, closing at 3.12 ARP/USD. -------------- -------------- ¶17. The peso depreciated slightly vs. the USD September 12 and remained at 3.12 ARP/USD for the rest of the week. Recent peso fluctuations are a function of active BCRA intervention in the dollar market. The peso exchange rate has depreciated 2.3 percent since the beginning of the calendar year. BCRA's reserves stood at USD 27.6 billion as of September 13, and have increased USD 9.1 billion, or 49 percent, since the GOA prepaid its entire IMF debt on January 2, 2006 -------------- -------------- Commentary of the week: "Disrupted Energy", by Federico Thomsen, informal translation of an article published September 7 in El Cronista Comercial. -------------- -------------- ¶18. The government dislikes rumors about an energy crisis. It says that, even though consumption of gas and electricity grew in Argentina, residential consumers did not suffer from cuts and productive sectors are growing and investing strongly. The government adds that it is adopting measures to increase energy supply. ¶19. This is true. What is unclear, however, it is why the Executive Branch is dismantling, without public debate, an energy sector structure that was working very well. ¶20. In 1993, the government concluded world class gas and electricity market reforms. With legislation approved by Congress, electricity production, transportation and distribution systems were separated, companies were privatized and competition was introduced whenever possible. The system served the economy's energy needs very well. ¶21. Once the 2001-2002 crisis passed, an energy sector transition could have been justified in order to adjust the system to the new economic realities. Sadly, the Government took another direction: - The Government fixed tariffs via political criteria; current low tariffs neither promote proper rationing of demand nor stimulate supply. There was no move to create a "social tariff" to accommodate low income consumers, while normalizing tariffs for the remainder to market rates. - Even though the Government criticized Argentine energy sector regulatory agencies because of their alleged inefficacy, it did nothing to improve them. By the end of 2003, instead of filling vacant posts on ENRE and Enargas boards by merit according to law, the government filled vacancies by decree using political criteria. - The Government became an energy sector investor given that, without proper tariffs nor credit access, private companies will not invest to expand the system. Therefore, authorities decide what to expand, which companies will do it, how to finance them, and who and how they are paid, with the subsequent risks of politicization, inefficiency and lack of transparency. - The Government created a State Energy Company, Enarsa S.A. which, though resource poor, is acting in the market. ¶26. All these steps have shifted the organization of the energy sector, without a clear view of just where this new hybrid state-private sector model is going. Are we going back to a desirable private and competitive energy market or, are we going to recreate, step by step, a state system similar to the one that failed in the past? Numerous current and potential investors want to know the answer to this question. According to the Spanish Royal Academy, "crisis" means a decisive moment for an important business, with profound consequences. In this sense, the Argentine energy system is in crisis. (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 2