Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000515

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 March 3, 2006


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Weekly Highlights
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- The peso was unchanged against the USD, closing
again at 3.08 ARP/USD.
- The IDB approved a USD 500 million loan to
Argentina.
- The GOA is considering reopening the Boden 2015.
- Banks pay back ARP 2.4 billion to the BCRA for
rediscount loans.
- The BCRA is considering increasing bank liquidity
requirements.
- Tax revenues rose 27 percent y-o-y to ARP 10.5
billion in February - in line with market
expectations.
- January trade surplus of USD 837 million - in line
with expectations.
- Unemployment down 1.0 percent q-o-q to 10.1 percent
in Q4 2005.
- Commentary of the Week: "Price Agreements Only
Provide Short-Term Help"

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MARKETS
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The peso was unchanged against the USD this week,
closing again at 3.08 ARP/USD.
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1. The peso remained flat versus the USD this week,
closing at 3.08 ARP/USD. The peso depreciated one
cent to 3.09 ARP/USD early in the week, after the
Central Bank (BCRA) purchased USD 29 million in the FX
market on February 27. By mid-week, strong investment
inflows to purchase domestic stocks and bonds, coupled
with seasonal peso demand (due the "beginning of the
month" effect) allowed the BCRA to purchase USD 234
million in the first four days of the week without any
peso appreciation. The BCRA has purchased USD 1.7
billion since the beginning of the year, compared to
USD 734 million during the same period last year. The
peso exchange rate has depreciated 1 percent since the
beginning of the calendar year.

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ECONOMY / FINANCE
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The IDB approves a USD 500 million loan to Argentina.
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2. On March 1, the Inter-American Development Bank
(IDB) board finally approved the USD 500 million
public sector financial management adjustment loan to
Argentina. The board's decision had been delayed
since February 22, because Directors wanted more time
to review it and more details about the purpose of the
loan. This loan is the first adjustment loan received
by the GOA not under the umbrella of an IMF program.
The loan is to support a sector program to increase
effectiveness, efficiency and transparency of public
sector financial management. The program covers four
policy areas: macroeconomic environment, strengthening
of public investment, financial management and public
debt systems. The loan is for a 20-year term, with a
five-year grace period at a variable interest rate, to
be disbursed in two tranches, the first of USD 150
million and the second of USD 350 million. Conditions
for disbursement consist of a matrix of agreed-upon
requirements based on maintenance of a stable
macroeconomic environment and reform measures in each
of the areas covered by the program.

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The GOA is considering reopening the Boden 2015.
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3. On March 2, La Nacion reported that the GOA is
considering issuing a new USD bond. During the week,
Secretary of Finance, Alfredo MacLaughlin met with

SIPDIS
banks and investors in New York and Chicago to explore
the possibility of a new issuance. Reportedly, the
GOA first envisioned issuing a USD bond under New York
legislation, but has decided to issue under domestic
legislation because of the risk of attachment by
bondholders. Press reports speculated that the GOA
will reopen the Boden 2015, a USD-denominated bond
with a 7 percent coupon, amortizing fully at maturity
in 2015 and under domestic legislation. The GOA first
issued USD 632 million worth of Boden 2015 in October

2005. According to traders, the Boden 2015 may be
reopened at a yield of 8.00-8.20 percent.

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The GOA sells USD 308 million worth of Boden 2012 to
Venezuela.
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4. On February 27, the GOA published in the Official
Gazette a resolution authorizing the issuance of USD
308 million worth of Boden 2012 bonds to Venezuela.
This debt sale is Venezuela's third purchase of GOA
debt this year, and had already been leaked to press.
The purchase brings Venezuela's 2006 GOA bond
purchases to USD 929 million (face value) and USD 750
million market value. In 2005, the GOV purchased USD
1.9 billion worth of GOA bonds (USD 1.6 billion market
value).

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Italian bondholders group says it will file for ICSID
arbitration against the GOA.
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5. On March 2, the Italian association of holdout
bondholders (TFA) stated that it plans to file an
arbitration claim against the GOA before the World
Bank' International Centre for Settlement of
Investment Disputes (ICSID),seeking repayment of its
members' bonds. Reportedly, on March 27 the TFA will
start receiving subscriptions from Italian investors
to negotiate on their behalf against the GOA. The
Italian law firm Grimaldi e Associati and the New York
firm White & Case will be the legal consultants. In
February 2005, the Global Committee of Argentine
Bondholders (GCAB) had announced that it would file
for ICSID arbitration against the GOA, but it did not
follow through, apparently because of the length of
the expected proceedings.

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President Kirchner opens the regular Congressional
session.
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6. In his speech opening the regular Congressional
session on March 1, President Kirchner reiterated his
commitment to fiscal discipline. He referred to
inflation as a transitory phenomenon caused by rapid
economic growth and a rise in export prices, but he
warned businessmen to behave cautiously to avoid "the
greed of some that diminishes the people's consumption
capacity." He also warned union leaders about their
claims for salary increases that might generate price
pressures due to cost increases. Regarding utility
companies, President Kirchner said that his "hand will
not tremble" if it is necessary to nationalize any
privatized company. He also said that the GOA will
not force any company to stay in Argentina if that
company believes it is losing money.

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Aguas Argentinas is unlikely to renew guarantee,
forcing the GOA to rescind its contract.
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7. On February 28, El Cronista reported that Aguas
Argentinas (AA) -- controlled by Suez -- will not
renew an ARP 145 million guarantee. If AA does not
renew this guarantee before the end of March, the GOA
will have the right to rescind the concession
contract. Analysts say that Suez's strategy is to
force the GOA to rescind AA's concession contract.
Suez used a similar procedure to force the Province of
Santa Fe to rescind the concession contract with Aguas
de Santa Fe, which was controlled by Suez.

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BCRA rolls over its maturities. Investors
concentrated more than 65 percent of their bids in
Nobacs.
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8. The BCRA received ARP 723 million in bids in its
February 28 Lebac auction, less than the ARP 850
million in Lebacs that came due during the week.
However, the BCRA received bids of ARP 1.4 billion in
its Nobac auction. [Nobacs are longer term
instruments - compared to Lebacs - and pay a variable
rate composed of base rate called Badlar -- the
interest rate for deposits of more than ARP 1 million,
currently at 7 percent -- plus a spread. The BCRA
auctions the spread on its Nobacs, while the Badlar is
determined by market conditions.] As in the previous
auctions, the BCRA was more than able to roll over its
maturities by accepting bids for ARP 1.8 billion (ARP
723 million in Lebacs and ARP 1.1 billion Nobacs).
The yield on the 49-day Lebac dropped 8 basis points
to 6.75 percent. The yield on the 70-day Lebac
decreased from 7 percent to 6.97 percent, and the
yield on the 91-day Lebac reached 7.25 percent.
Lebacs for other maturities were withdrawn due to lack
of interest. Investors concentrated more than 65
percent of their bids in Nobacs of more than 9 months
and the BCRA accepted bids for ARP 1.1 billion of
Nobacs (61 percent of the accepted amount in the
auction). The spread on the nine-month Nobac
decreased one basis point from 3.13 percent to 3.12
percent, while the spread on the two-year Nobac
dropped from 5.57 percent to 5.40 percent. Investors
are increasing their bids in Nobacs, since these
instruments have a variable rate and provide a higher
yield (10.2 percent and 12.4 percent for the 9-month
and 2-year Nobac, respectively).

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Banks pay back ARP 2.4 billion in rediscount loans to
the BCRA.
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9. On March 2, two banks - Banco Galicia and GOA-
owned Banco Nacion - pre-paid ARP 2.4 billion in
discount borrowing to the BCRA. With this payment,
Banco Nacion has completely repaid its BCRA debt,
while Banco Galicia still holds 58 percent of its
original discount borrowing from the BCRA. This
prepayment, plus the banks' payment of an ARP 275
million installment of the matching system (under
which banks repay the BCRA for financial assistance
received during the 2001 financial crisis) will
generate a monetary base contraction of ARP 2.6
billion. Following these pre-payments, only three
banks - out of twenty-four at the beginning of the
2002 crisis - will have outstanding discount borrowing
from the BCRA, totaling ARP 6.7 billion.

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The BCRA is considering increasing bank liquidity
requirements.
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10. The BCRA is considering increasing bank liquidity
requirements for sight accounts (current and savings
accounts). According to the local media, the BCRA is
considering a 3 percentage point increase in bank
liquidity requirements from their current level of 15
percent. If the measure is implemented, ARP 1.9
billion would be absorbed from the financial system,
assuming that private and public sector deposits total
ARP 63.9 billion. The BCRA is considering the
increase as a way to withdraw money from the market in
order to curb inflation.

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GOA closes new price-restraint agreements.
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11. On February 27, the GOA reached a verbal
agreement with the Compressed Natural Gas (CNG) retail
sector to freeze the price of CNG until the end of the
year. This new price-restraint agreement is expected
to be formalized next week, because the GOA has to
reach an accord with the leading CNG producers in
advance. Reaching an agreement with the CNG sector,
which is being used increasingly as a vehicle fuel in
Argentina, is key to the GOA's anti-inflation effort.
Separately on February 28, the GOA closed a new price-
restraint agreement with representatives of the
Pharmaceutical Chamber. The agreement aims to
introduce a 10 percent discount on 216 basic medicines
for a period of 2 months.

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Tax revenue rose 27 percent y-o-y to ARP 10.5 billion
in February - in line with market expectations.
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12. February federal tax revenue increased 27 percent
y-o-y to ARP 10.5 billion - in line with market
expectations of ARP 10.4 billion. The results
reflect strong economic activity. Labor contributions
jumped 44 percent y-o-y due to increases in formal job
creation, salary increases and the inclusion of past
increases into the base salary used to compute
benefits. VAT revenues rose 31 percent y-o-y. Income
tax and trade tax revenues increased 24 percent and 20
percent y-o-y, respectively. According to the GOA,
the increase in tax collection is due to VAT, income
tax revenues and labor contributions, which together
provided 73.2 percent of February tax collection. In
real terms, revenues increased 13 percent y-o-y. The
BCRA consensus survey forecasts 2006 tax revenues at
ARP 137 billion.

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January trade surplus of USD 837 million - in line
with expectations.
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13. The January trade surplus reached USD 837
million, in line with the BCRA consensus forecast of
USD 823 million and similar to last January's surplus
of USD 872 million. Export revenues increased 14
percent y-o-y (decelerating slightly from 2005 average
growth rate of 16 percent) to USD 3.2 billion, with
increases in both prices (+10 percent) and quantities
(+4 percent). Exports were driven by an increase in
agro-industrial products (+24 percent y-o-y),fuel and
energy (+17 percent y-o-y),primary goods (+12 percent
y-o-y) and industrial goods (+2 percent y-o-y).
Imports increased 22 percent y-o-y to USD 2.3 billion,
with increases in both quantities (+18 percent) and
prices (+3 percent). Imports were driven by increases
in vehicles for passengers (+ 121 percent),capital
goods (+26 percent),consumer goods (+25 percent),
intermediate goods, fuel and oil (+15 percent) and
accessories for capital goods (+12 percent),but were
partially offset by a drop in other goods (-18
percent). According to the BCRA consensus survey, the
trade surplus is expected to narrow to USD 10 billion
in 2006 compared to USD 11.3 billion in 2005.

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Unemployment down 1.0 percentage points q-o-q to 10.1
percent in Q4 2005.
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14. The GOA announced that the unemployment rate
dropped 1.0 percent q-o-q to 10.1 percent in the
fourth quarter of 2005, reflecting the strong economic
growth during the period. According to the GOA
survey, a total of 1.1 million people are unemployed
out of a workforce of 10.8 million. Unemployment
decreased 2.0 percentage points y-o-y. Excluding Head
of Households Plan participants, the unemployment rate
stood at 12.7 percent, versus 16.2 percent in Q4 2004.

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February labor demand index down 2.81 percent m-o-m.
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15. The February labor demand index calculated by Di
Tella University decreased 2.81 percent m-o-m to
123.55 points. The decrease is mainly due to weaker
demand for commercial employees (down 5.24 percent),
service sector employees (down 4.23 percent) and
professional employees (down 3.11 percent). The index
is increased 26.2 percent y-o-y. [The index is based
on comparisons of job vacancy announcements printed in
the two largest newspapers of the country.]

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February Government Confidence Index down 0.4 percent
m-o-m.
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16. The Government Confidence Index decreased 0.4
percent m-o-m in February to 2.62 points, but is still
3 points above the average during the Kirchner
administration, and well above the 1.2 point reading
in May 2003 when President Kirchner took office.
Confidence in the GOA's ability to solve citizens'
problems is still the factor generating the most
confidence and it increased 1 percent m-o-m. Public
opinion of GOA general performance and efficiency of
public spending decreased 3 percent and 1 percent m-o-
m, respectively. The index rose 10 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 general performance, efficiency of
pubic spending, honesty of GOA officials and the
government's ability to solve problems.]

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Commentary of the Week: "Price Agreements Only Provide
Short-Term Help". By Ernesto Gaba. [Note: Translated
and used with permission of the author, from an
article published January 31 in El Cronista Comercial.
End Note.]
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17. The country's economic recovery continues at full
speed: in 2005 GDP will show 9 percent growth while in
2006 we expect growth to reach 7 percent. Salaries
will continue to grow and spur private-sector
consumption in 2006, but with a slowing in employment
growth and in real salaries.


18. Among economic sectors, the strongly cyclical
activity in construction will continue to be a leader
in growth. Despite cost increases, cQstruction
remains an attractive investment opportunity because
of high real estate asset values in dollar terms.
During 2005, the growth differential between goods and
services decreased, with service costs being propped
up by the increase in financial intermediation for the
first time in four years. The gradual normalization
of the financial system has fostered a recovery of
profitability and solvency among banks, although
banks' net worth in real terms remain lower than they
were pre-crisis.



19. The dynamism of exports in 2005 is supporting the
recovery for the first time since the abandonment of
convertibility in 2002. The lag -- relative to Brazil
-- that Argentina's exports have experienced in
responding to a relatively cheap peso was likely due
to the economic disruption that followed the
devaluation, in addition to climatic and technological
factors affecting primary goods.


20. The new Minister of Economy, Felisa Miceli, will
maintain the fiscal surplus and depreciated peso
policies, since these have the backing of President
Nestor Kirchner. It is possible that in this new
stage, there will be less reliance on adjustments via
market mechanisms than on price agreements in the
fight against inflation. Such a policy of price
agreements can help contain inflation in the short
run, but it is not a substitute for a combination of
monetary and fiscal policies geared toward
stabilization in the medium term.


21. President Kirchner's announcement that Argentina
would prepay its IMF debt of approximately USD10
billion with Central Bank reserves came as a surprise.
The goal of this decision was to increase the GOA's
flexibility in its political and economic decision-
making, which traditional IMF conditionality limits as
part of its financial assistance programs. Paying the
Fund has no economic implications in a static sense,
since the consolidated public sector net external
assets (Treasury + Central Bank) do not change when
debt is reduced at the same time that Central Bank
reserves are reduced. Moreover, after the IMF payout,
Central Bank reserves have continued supporting the
monetary base (defined as money in circulation +
banks' deposits in the Central Bank) at the exchange
rate of 3.00 ARP/USD.


22. Nevertheless, in a dynamic sense, the IMF payout
could create two weaknesses, under certain
circumstances. First, if Argentina were to need
liquidity because of an external shock, there would be
questions about its ability to turn again to the IMF,
while market financing would come at a much higher
cost. Second, the Central Bank acquired reserves in
recent years by issuing debt (repo agreements and
LEBACs). As a consequence, the Central Bank's
reserves/liabilities ratio could be adversely affected
by the IMF payout. In this new environment, it is
possible for the market to discount a relatively cheap
peso as well as higher inflation and higher domestic
interest rates. [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