ARGENTINA SCENE-SETTER FOR CODEL GOODLATTE

UNCLAS BUENOS AIRES 002636

SIPDIS

CODEL
SIPDIS

MONTEVIDEO PLEASE PASS TO CODEL GOODLATTE

E.O. 12958: N/A
TAGS: PGOV PREL ECON PARM SNAR AR
SUBJECT: ARGENTINA SCENE-SETTER FOR CODEL GOODLATTE


1. INTRODUCTION AND SUMMARY: On behalf of Embassy Buenos
Aires, I warmly welcome your visit to Argentina November
29-December 3. As one of the world,s major agricultural
producers and exporters, Argentina,s policies in this sector
have an important impact on U.S. agriculture. You will have
the opportunity during your meetings to encourage your
Argentine interlocutors to develop and implement a sound and
long-term agricultural policy based on the principles of open
and competitive markets. You can also encourage GOA
officials and congressional leaders to take a more active and
constructive approach to the Doha Round trade negotiations.
During your visit, you will hear from U.S. companies doing
business in Argentina, including Monsanto and Cargill, and
some of the problems and challenges they face.


2. Your visit comes at a time of considerable ferment in the
Argentine political and economic arenas. In October 2005
President Kirchner won a resounding victory in mid-term
legislative elections. Based on these results, Kirchner has
further tightened his already firm control of political and
economic policy. Political interest is focusing increasingly
on next year,s presidential elections. The agricultural and
livestock sectors, two of the mainstays of the Argentine
economy (over 50 percent of total Argentine exports are
represented by agricultural, livestock, and food shipments),
have been a focus of GOA policies to maintain low domestic
prices and increase government revenues. These GoA policies,
which include a menu of export tariffs, export quantity
controls and explicit and implicit price controls have been
criticized by agricultural and livestock players.
Nevertheless, Argentina has sustained an impressive economic
recovery since suffering the worst economic crisis in its
history ) including the largest sovereign default in history
and a devaluation of its currency ) in 2001-02. Its
agricultural export-led boom has triggered three consecutive
years of 9 percent real GDP growth beginning in 2003. END
INTRODUCTION AND SUMMARY.

Background
--------------


3. Argentina was once one of the richest countries of the
hemisphere, achieving a GNP per capita that was among the
highest in the world in the early 20th century. However, the
history of Argentina over the last 70 years has been one of
economic decline and political instability. Many Argentines
are at a loss to explain how their country, blessed with rich
natural resources, a fertile land and manageable population
numbers, could have fallen so far. Some blame the military
dictatorships, which predominated between 1930-1983; others
blame Peron and "Peronism;" and a significant number blame
external factors: the IMF, the U.S., and, to a lesser extent,
Europe, especially following the 2001-2002 economic crisis,
the worst in Argentine history. The election of left of
center Peronist Nestor Kirchner in 2003 marked a significant
shift in Argentine foreign policy, aligning the country more
closely with its MERCOSUR partners and less closely to the
U.S. That said, Kirchner has cooperated closely with the
U.S. on a number of issues, including counter-terrorism and
narcotics, and regional problems like Bolivia and Haiti.

Political Landscape
--------------


4. Kirchner is widely perceived to be the strongest Argentine
President since the return to democracy in 1983, and he faces
a weak and divided opposition. Argentines give Kirchner much
of the credit for the country's Phoenix-like recovery from
its 2001-2002 economic crisis, an event equivalent to our
Great Depression. Political interest is focusing
increasingly on next year,s presidential elections. It is
widely thought that, if he chooses to run, Kirchner will win
reelection easily. There has been some speculation,
including from the president himself, that he will not be a
candidate and that his wife, Senator Cristina Fernandez de
Kirchner, will stand in his place. Potential opposition
candidates include former Finance Minister Roberto Lavagna,
businessman and president of the Boca Juniors soccer team
Mauricio Macri, and the counter-left national congresswoman
Elisa Carrio.


5. Argentina has played a positive role in promoting human
rights and democratic institutions in the
hemisphere,particularly in Haiti and Bolivia. Along with a
numbe of its neighbors, Argentina currently has 575
peacekeeping troops in Haiti in support of MINUSTAH,
reflecting its traditionally strong support of UN
peacekeeping operations and commitment to Haiti.


6. Kirchner's administration has strongly supported
counter-terrorism policies, having been a victim itself twice
in the early 1990's of international terrorist attacks. The
GOA has ratified all of the 12 international
counter-terrorism conventions. Argentina is a participant in
the Three Plus One regional mechanism, which focuses on
possible terrorist-related activity in the Tri-border region
between Argentina, Brazil, and Paraguay.


7. The GOA has been a strong international voice on arms
control and nonproliferation issues. On Iran, the GOA voted
to refer Iran's noncompliance to the UNSC at the September 24
IAEA Board of Governors meeting. The GOA has also endorsed
the Proliferation Security Initiative (PSI).

Agriculture
--------------


8. The agricultural and livestock sectors, two of the
mainstays of the Argentine economy (e.g., over 50 percent of
total Argentine exports are represented by agricultural,
livestock, and food shipments),have been negatively affected
by GOA,s policies to contain inflation. This targeting is
due to the fact that food items carry major weights in the
determination of the Consumer Price Index (CPI). The two
principal policy initiatives which the GOA has chosen to curb
inflation have been through price and export controls. The
chief agricultural and livestock products that have been
affected by this policy are grains (wheat and corn),dairy,
and meat. The GOA has watched, with great concern, as the
international price of wheat has sharply increased, due to a
major drought in Australia, and lower than expected
production in the U.S. and Argentina. Argentine exporters,
taking advantage of strong international prices, have rapidly
registered export sales to the point where residual supplies
for domestic consumption, especially for the milling
industry, have become extremely tight. Argentina is the
number 5 exporter of wheat in the world. In an attempt to
maintain the price of bread at what it considers a
&reasonable8 level, the GOA recently has mandated Argentine
exporters to sell 4 million tons of wheat to the milling
industry at a price (US$120 per ton),well below the
international price.


9. Corn prices have also caught the attention of the GOA.
What with uncertainty in the U.S. over availability of
supplies for ethanol and food and feed stocks, which has
boosted prices, Argentine corn exporters (Argentina is the
number 2 exporter of corn in the world) have registered
export sales at a record pace (10.5 million tons have been
registered on next year,s corn crop, estimated around
17.6-18 million tons),taking advantage of favorable external
conditions. The GOA has reacted by freezing further
registrations, hoping to ensure sufficient corn for domestic
use (the corn is used, in the main, as feed for livestock and
poultry, and for food) without putting upward pressure on
prices. Earlier this year, as prices of dairy products rose,
the GOA reacted by increasing export taxes on cheese and
powdered milk. These taxes undercut previously strong growth
by this industry, and have led one of the main dairy
enterprises, which was suffering from heavy indebtedness and
low profitability, to seek to merge with ADECOAGRO, a U.S.
investment group led by George Soros.


10. Since Argentina has the highest per capita beef
consumption in the world (about 63 kilograms per capita),the
GOA has been extremely concerned about the price of this
commodity. Late last year, in the face of rising domestic
prices, the GOA increased the export tax on fresh beef from 5
to 15 percent, and the minimum slaughter weight to 280
kilograms. In March, it banned almost all fresh beef exports
(except those destined to fulfill the European Union,s
Hilton Quota, and those involved in country-to-country
agreements). The GOA hoped that a ban on beef exports would
translate into increased domestic supply, which would put
downward pressure on ascending domestic prices, fueled by the
economic recovery, and the shortage of beef in international
markets due to food-and-mouth disease outbreaks in Brazil.
Over the last five months, the GOA has relaxed some of these
restrictions, after it realized that market intervention had
become counterproductive. It is, however, again poised to
intervene aggressively if it believes that beef prices are
increasing at an &unreasonable8 rate.

Economic Situation
--------------

11. Argentina has had an impressive economic recovery since
suffering the worst economic crisis in its history --
including the largest sovereign default in history and a
devaluation of its currency -- in 2001-02. An export-led
boom triggered three consecutive years of 8.8-9.2% real GDP
growth beginning in 2003, with GDP reaching $182 billion in
2005, approximately $4,700 per capita. The Kirchner
Administration has ably managed the nation's public finances
and achieved large budget surpluses. Industrial and
construction activity are growing rapidly, and tourism has
boomed, with a record high of an estimated 3.7 million
foreign tourists visiting in 2005. Economic expansion is
creating jobs and unemployment dropped from 20.4% in the
first quarter of 2003 to 10.2% in the third quarter of 2006.
Investment in real terms jumped 22.7% in 2005. Poverty has
also fallen from the post-crisis level of 60 percent, but
remains stubbornly high. During the first half of 2006, 31%
of the population was living below the poverty line.
Argentina negotiated a debt exchange with 76% of its
creditors in 2005 (paying 30 cents on the dollar),and paid
off its nearly $10 billion debt to the IMF on January 3, 2006.


12. Argentina,s impressive recovery, which has led to
improvements in key socio-economic indicators, can be
attributed to a number of factors. First, following a decade
of market reforms, the economy was fundamentally sound except
for the high level of indebtedness. Second, the adoption of
a market-based exchange rate regime in early 2002 and the
combination of high commodity prices and low interest rates
catalyzed Argentina,s export-led boom. Exports are at
record levels and Argentina,s trade surplus totaled $11.3
billion in 2005. Foreign trade equaled approximately 38% of
GDP in 2005 (up from only 11% in 1990) and plays an
increasingly important role in Argentina's economic
development. The government has maintained a primary fiscal
surplus and continues to accumulate reserves, which exceeded
$30 billion in October 2006. Argentina should continue to
perform well in 2007 with GDP growth projected at 7% and
inflation in the 7-10% range. Nevertheless, slowness in
addressing public service contract renegotiations, capacity
constraints, potential energy shortages in the face of high
growth and distorted energy prices, inflation and the
government's heterodox policies to contain it (including
pressure on the private sector to maintain price controls),
and a still-weak investment climate are potential obstacles
to sustaining the recovery.


13. U.S. agribusiness companies have invested heavily in the
Argentine economy for many decades, and have made major
contributions to the agricultural and livestock sectors. You
will be meeting with representatives of a number of these
enterprises at an American Chamber of Commerce breakfast and
will be hosted to lunches by two: Cargill and Monsanto.
Cargill is making investments valued at $330 million in
agricultural processing facilities (soybeans, malt),a
packing house, and port facilities. Over the last two years,
business and profitability in this sector have been
challenged by GOA intervention exemplified by the ban on
exports of fresh meat, price controls imposed on wheat, and
the freezing of export sales of corn. Monsanto faces major
challenges, in particular its inability to collect royalties
on the Round-Up Ready soybean technology, which has
revolutionized soybean production in Argentina. It has
attempted to negotiate a solution to this issue with seed
companies, farm organizations, and other stakeholders and
launched court cases in Europe. Unfortunately, Monsanto and
GOA authorities have not found a meeting of the minds to
solve this important issue of intellectual property rights
protection.
WAYNE