Identifier
Created
Classification
Origin
06BUENOSAIRES340
2006-02-13 10:33:00
UNCLASSIFIED
Embassy Buenos Aires
Cable title:  

Argentina Economic and Financial Weekly for

Tags:  EFIN ECON ELAB ALOW AR 
pdf how-to read a cable
VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #0340/01 0441033
ZNR UUUUU ZZH
R 131033Z FEB 06 ZDK CT NUM SVCS
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3453
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2075
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
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.
--------------------------------------------- --------

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
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