Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000340 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 February 10, 2006 -------------- -------------- Weekly Highlights -------------- -------------- - The peso was unchanged against the USD, closing again at 3.08 ARP/USD. - Argentine beef exports at risk due to foot-and-mouth disease. - Venezuela reportedly trading in GOA debt. - Aguas Argentinas withdraws its ICSID arbitration claim, but shareholder claims continue. - GOA to implement supply-side polices rather than increase interest rates to control inflation. - CPI up 1.3 percent m-o-m in January, down slightly from December's 1.5 percent increase. - Nominal wages increased 20 percent y-o-y in 2005. - Commentary of the Week: "What is Needed: A Strategy, with Clear Rules and Prices" -------------- -------------- MARKETS -------------- -------------- -------------- -------------- The peso was unchanged against the USD this week, closing again at 3.08 ARP/USD. -------------- -------------- ¶1. The peso remained flat versus the USD this week, closing at 3.08 ARP/USD. Earlier in the week, the peso depreciated one cent to 3.09 ARP/USD after the Central Bank (BCRA) purchased USD 93 million in the FX market on February 7 and 8. Then the BCRA dropped out of the FX market, allowing the peso to recover its lost cent and close the week at 3.08 ARP/USD -- unchanged from last Friday's close. The peso exchange rate has depreciated 1 percent since the beginning of year. -------------- -------------- ECONOMY / FINANCE -------------- -------------- -------------- -------------- Argentine beef exports at risk due to foot-and-mouth disease. -------------- -------------- ¶2. An outbreak of foot-and-mouth disease in Corrientes Province (25km from the Paraguay border) caused Mercosur (Brazil, Paraguay and Uruguay) Chile, Israel and South-Africa to ban Argentine beef imports, while Russia said it will ban beef imports only from the infected region. The European Union which absorbs �0A;90 percent of Argentine beef exports, has not yet announced any reaction to the outbreak. According to the GOA, the outbreak is limited to a narrow area, but Senasa (the animal health and food safety agency) has imposed a sanitary emergency state to better prevent any spread of the disease. Reportedly, the GOA will slaughter over 3,000 cattle as a precautionary measure. ¶3. On February 9, the association of major beef exporters asked the Minister of Economy to eliminate the recently-created Exporters Registry to obtain export permits beef, and to reduce export taxes on beef exports from the current 15 percent to 5 percent to reduce the negative impact of the outbreak on the beef sector. In 2005, beef exports reached USD 1.4 billion (3.5 percent of total exports). However, the outbreak of foot-and-mouth disease may help the GOA control inflation, since beef prices have increased steadily this year and the GOA was unable to reach a price restrain agreement with the sector. Domestic beef prices are expected to fall as the import bans increase local supply. Venezuela reportedly trading in GOA debt. -------------- -------------- ¶4. On February 9, the GOA published a resolution in the Official Gazette authorizing the issuance of USD 308 million (nominal value - equal to USD 250 million at market prices) of Boden 2012 bonds to the Republic of Venezuela. The resolution's publication created some confusion, because this same transaction had been reported in the press at the end of January, and led some to believe this was a second bond issuance to Venezuela. In 2005, the GOV purchased USD 1.6 billion in GOA bonds. According to press reports, the GOV has sold USD 600 million of these bonds to certain Venezuelan banks at the below-market official exchange rate. The Venezuelan Finance Minister has said that Venezuela still holds USD 1 billion in GOA debt and is willing to purchase USD 2.5-3.0 billion of GOA bonds in 2006. Thus far in 2006, the GOV has purchased USD 500 million. -------------- -------------- Aguas Argentinas withdraws its ICSID claim, but shareholder suits continue. -------------- -------------- ¶5. In its stockholders meeting on February 8, Aguas Argentinas (AA) announced that it will withdraw its USD 1.7 billion arbitration claim against the GOA pending before the International Center for the Settlement of Investment Disputes (ICSID). However, AA said that this withdrawal does not affect claims by its stockholders, suggesting that Suez (the major stockholder of AA) will continue with its claims. AA also reviewed the state of negotiations to sell the company. AA had given two potential buyers - Latin American Assets and Fintech - until February 8 to buy the company under preferential terms, but no agreement was reached. The GOA has proposed the Eurnekian Group as a potential buyer. -------------- -------------- GOA to implement supply-side polices to control inflation rather than raise interest rates. -------------- -------------- ¶6. Minister of Economy Miceli defended the GOA's use of supply-side policies to control inflation rather than apply the "orthodox" remedy of raising interest rates. She argued that an increase in interest rates would only lead to an appreciation of the peso and recession. She reiterated that the GOA will concentrate on price agreements with the help of small- and-medium size enterprises that have agreed to act as supply chain price monitors. -------------- -------------- GOA considers raising the minimum income tax threshold, as demanded by unions. -------------- -------------- ¶7. The GOA is considering increasing the minimum threshold for income tax paid by employees. Unions have been demanding this measure for some time, and it played a part in protests and riots in Santa Cruz Province this week that left one policeman dead. According to local media, that tragedy led the GOA to consider the change. Currently, the minimum threshold is ARP 1,835 per month for single employees and ARP 2,235 per month for married employees. A Ministry of Economy spokesman said that the GOA is studying different options, including raising the minimum threshold, increase wage deductions or a combination of the two, and their fiscal consequences. Senator Jorge Capitanich said that increasing the minimum threshold by 25 percent, would generate a fiscal cost of ARP 589 million, ARP 284 million of which would be lost by provinces under the Co-participation revenue sharing plan. -------------- -------------- GOA expects increased investment as a result of the MAC safeguard system agreed with Brazil. -------------- -------------- ¶8. On February 9, Secretary of Industry Miguel Peirano said that the MAC safeguard system agreed with Brazil will result in a sharp increase in investment because it provides certainty to foreign and domestic investors. Last week, the GOA reached agreement with Brazil on an agreement to allow temporary import restrictions in order to protect some industrial sectors. Under the agreement, either country can limit imports of a product from the other country if it can demonstrate that surging imports are damaging their domestic industry. A bi-national committee will analyze complains from industry groups and allow import restrictions for a period of three years, with the option of a one-year extension. The Secretary downplayed the negative effect the agreement may have on Argentine exports to Brazil, which has indicated it may limit imports of Argentine wheat, wine and rice. -------------- -------------- BCRA rolls over its maturities and maintains Lebac interest rates unchanged. -------------- -------------- ¶9. The BCRA received bids of ARP 1.6 billion in its February 7 Lebac auction, in line with the ARP 1.6 billion announced amount and slightly above the ARP 1.5 billion in Lebacs that came due during the week. This allowed the BCRA to roll over its maturities for the second time in several weeks, accepting bids for ARP 1.5 billion. The yield on the 49-day Lebac, 70- day Lebac and the 175-day Lebac remained unchanged at 6.80 percent, 7.00 percent and 7.90 percent respectively. Lebacs for other maturities were withdrawn due to lack of interest. Unlike previous auctions, investors concentrated more than 50 percent of their bids in Nobacs of more than 9 months, which enabled the BCRA to roll over its maturities and extend the maturity profile of its debt. The BCRA accepted ARP 783 million of Nobacs (51 percent of the accepted amount in the auction) with maturities of 238, 434 and 679 days at a yield of 3.08 percent, 6.19 percent and 5.56 percent, respectively. -------------- -------------- CPI up 1.3 percent m-o-m in January, down slightly from December's 1.5 percent. January's PPI also up 1.3 percent m-o-m. -------------- -------------- ¶10. The CPI increased 1.3 percent m-o-m in January, in line with market expectations and following a 1.5 percent m-o-m increase in December. CPI core inflation accounted for 0.53 percent, the seasonal component for 0.66 percent, and the regulated price component explained the final 0.09 percent of the increase. The monthly rise was driven mainly by an increase in the prices of leisure activities (+7.2 percent - reflecting seasonal factors due to the summer holidays),health (+1.8 percent),food and beverages (+0.9 percent despite new price-restraint agreements between the GOA and many producers and retailers, including leading supermarket chains). According to the GOA, the CPI would have increased 1.5 percent m-o-m in January without price restraint agreements, suggesting that price restraint agreement strategy is paying off. Last week, the GOA closed a new agreement with the country's seven leading supermarket chains. These new price-restraint agreements aim to maintain prices on 223 basic goods unchanged for one year, but also are subject to bi- monthly monitoring of any changes in the economic environment. In a meeting with Congress on February 7, Minister of Economy Miceli stated that February's CPI increase is expected to be below 1 percent. Some private consultants are now reducing their inflation forecasts to 0.7 percent as a result of the outbreak of foot-and-mouth disease (beef has a relative large weight of 4.5 percent in the CPI basket) and the new price restrain agreements closed by the GOA with suppliers of the basic basket of school goods (Argentine children head back to school in March). Year-over-year, the CPI is up 12.1 percent. For 2006, the BCRA consensus survey forecasts 12.4 percent inflation in 2006, compared to the 9.1 percent included in the 2006 Budget and the Central Bank's 8- 11 percent inflation target. ¶11. Producer prices increased 1.3 percent m-o-m, due to a 0.2 percent rise in the prices for manufactured goods and electricity and a 4.4 percent increase for primary goods prices, partially offset by a 0.7 percent fall of the price of electric energy. Imported goods prices increased 0.7 percent. The PPI index increased 13.1 percent y-o-y. -------------- -------------- Nominal wages increased 20 percent y-o-y in 2005. -------------- -------------- ¶12. On February 8, the GOA announced that the nominal wages increased 20 percent y-o-o in 2005. However, real wages increased only 7 percent due to the 12.3 percent increase in prices. The highest increase was in formal private sector wages, up 26 percent in 2005, while informal private sector and public sector wages increased by 13 percent. The strong growth of nominal wages is mainly attributed to the robust pace of GDP growth in 2005. Final GDP figures are expected to show growth last year of 21-22 percent in nominal terms (and 9 percent in real terms). -------------- -------------- Kirchner- poverty decreased to 34 percent in the fourth quarter of 2005. -------------- -------------- ¶13. At a housing program ceremony on February 10, President Kirchner announced that poverty dropped four percentage points in the fourth quarter of 2005, to 34 percent of the population, while indigence decreased one percentage point to 12.5 percent. President Kirchner's statement came in response to a report by INDEC (the government statistics bureau) showing that the richest 10 percent of the population earned 30.8 times more than the 10 percent poorest of the population in the third quarter of 2005, up from 24.8 times in the second quarter. -------------- -------------- February Consumer Confidence Index down 1.5 percent m- o-m. -------------- -------------- ¶14. The Consumer Confidence Index- published by Universidad T. Di Tella - decreased 1.5 percent m-o-m in February to 57.1 points, after increasing 12 percent in January. The fall in February was highest in consumer's willingness to purchase durable goods and real estate (-1.8 percent m-o-m) and consumers' sentiment towards the macroeconomic environment (-1.3 percent m-o-m),followed by negative expectations on individual's personal situation (-1.4 percent). The index is now 6 percent below its all-time high, reached in February 2004. The index increased 0.4 percent y-o-y. The index is based on surveys of individual economic sentiment and consumer willingness to purchase durable goods, houses and cars. -------------- -------------- Commentary of the Week: "What is Needed: A Strategy, with Clear Rules and Prices". By Daniel Montamat, former president of YPF oil company and a former Minister of Energy. [Note: Translated with permission of the author from an editorial published in La Nacin on February 6. End Note.] -------------- -------------- ¶15. The steady drop in oil production and reserves is a clear sign of the lack of confidence that exists about the long-term energy situation in Argentina. ¶16. Proven reserves of gas now are estimated at 10 years at current production levels, and at 9 years for petroleum. ¶17. With a barrel of crude at 65 dollars, how is it that exploration has not intensified, including in high risk basins? ¶18. It is true that 65 dollars in Texas translates into about 41 dollars here -- after discounting for average quality adjustments, transportation and export taxes of 45 percent, and from that we still have to deduct the impact of royalties and other taxes. ¶19. But with average production costs of around 9-10 dollars per barrel, the revenues earned by producers should permit higher levels of exploratory drilling. ¶20. Above all, oil companies are valued by their principal asset: their reserves. If they don't replace the reserves that they put into production, or only replace them in part, the stock market will punish their stock price. We saw this in the case of the Repsol oil company. ¶21. But what we forget in Argentina, without a little introspection, is that international oil companies can replace their reserves in the deposits in our country or deposits in other countries that offer safer opportunities and/or more attractive profits. ¶22. If long-term uncertainty continues to exist, the dollars that companies earn from exploitation will not be re-invested in Argentina, much less in high-risk exploration activity, which is what could provide us with new oil and gas. ¶23. We also cannot forget that YPF [the former state oil company] no longer exists to carry out exploration as the operational arm of official petroleum policy. And ENARSA (the state entity created by the current government),omnipotent on paper, has no financial wherewithal. Thus, private enterprises will have to carry the major investment burden in this area. ¶24. A new Hydrocarbons Law is about to be introduced in Argentina. The practical significance of the approval of the law is linked to the regime for authorizing exploitation concessions and their extension. The majority of the petroleum and gas concessions were authorized between 1991 and 1992 and will remain in force until 2016-17. Almost all of them will expire at the same time. When the expiration period draws near, if there are no clear rules, operators will begin to reduce their investment and over-exploit the remaining reserves, without replacing them. ¶25. Together with approval of the new Hydrocarbons Law, I would urge Argentina to offer a new exploration proposal to national and international investors. That proposal should feature other incentives than those in the official proposal under study in the Congress, and not mandate the forced participation of ENARSA. What does the country need? A strategy, clear rules of the game and clear signals on prices. [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