Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000601

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 10, 2006


-------------- --------------
Weekly Highlights
-------------- --------------

- The peso depreciated against the USD, closing again
at 3.10 ARP/USD, reaching its lowest value in three
years.
- World Bank will consider USD 3.1 billion loan to
Argentina.
- Telecom agrees to suspend its ICSID arbitration
claim against the GOA.
- GOA suspends beef export for 180 days
- CPI up only 0.4 percent m-o-m in February - well
below market expectations of 1 percent. PPI up 1.4
percent m-o-m.
- March Consumer Confidence Index up 6.5 percent m-o-m
and reaches an all-time high.
- Commentary of the Week: "INDEC's Estimates: a
Methodological Obstacle?"

-------------- --------------
MARKETS
-------------- --------------

-------------- --------------
The peso depreciated versus the USD this week, closing
at 3.10 ARP/USD - its lowest value in three years.
-------------- --------------


1. The peso depreciated versus the USD this week,
closing at 3.10 ARP/USD, reaching its lowest value in
three years. The peso's fall this week resulted from
higher dollar demand by banks, who want to dollarize
their portfolios in expectation of higher U.S.
interest rates, and the Central Bank's (BCRA)
intervention in the FX market, where it purchased USD
169 million and EUR 17.5 million in the first four
days of the week. The BCRA has purchased USD 2
billion since the beginning of the year, compared to
USD 750 million during the same period last year. The
peso exchange rate has depreciated 1.6 percent since
the beginning of the calendar year.

-------------- --------------
Multilateral real exchange rate appreciates 1.7
percent m-o-m in February.
-------------- --------------


2. The BCRA's multilateral real exchange rate index -
- measuring the real exchange rate between the peso
and a trade-weighted basket of currencies --
appreciated 1.7 percent m-o-m in February. The real
appreciation is mainly explained by the appreciation
of the Brazilian real and dollar against the peso,
partially offset by a depreciation of the Euro against
the peso. The index is 2.7 percent above the level of
the last twelve months and 97.8 percent above its
average value during convertibility. [The BCRA's
multilateral real exchange rate index weights the
domestic prices and exchange rates of Argentina's main
trading partners according to their share of
Argentina's exports and imports.]

-------------- --------------
ECONOMY / FINANCE
-------------- --------------

-------------- --------------
World Bank to consider USD 3.1 billion loan to
Argentina.
-------------- --------------


3. After her meeting with the Minister of Economy
Felisa Miceli on March 7, World Bank Vice-President
for Latin America Pamela Cox said that the Bank's
board will discuss the approval of a USD 3.1 billion
loan to Argentina at its April meeting. This loan
would fund improvements in infrastructure and social
development. If approved, the loan will be disbursed
over the next three years.

-------------- --------------
Telecom agrees to suspend its ICSID arbitration claim
against the GOA.
-------------- --------------


4. The GOA and Telecom Argentina signed a Letter of
understanding on March 6 in which France Telecom
agreed to suspend its USD 297 million arbitration
claim against the GOA. The claim is pending before
the International Center for the Settlement of
Investment Disputes (ICSID),an independent division
of the World Bank. The agreement does not include any
direct increase in tariffs. Like the agreement that
Telefonica signed with the GOA in February, Telecom's
agreement will allow it to extend for one hour the
period in which it charges the highest tariff, and to
triple the rates for incoming international calls.
Telecom Argentina President Amadeo Vazquez also
announced ARP 3 billion in investments in Argentina
during the next three years. This is the twenty-fifth
agreement that the GOA has closed with privatized
utility companies.

-------------- --------------
GOA suspends beef export for 180 days
-------------- --------------


5. On March 8, Ministry of Economy Felisa Miceli
announced that the GOA would suspend beef exports for
180 days and raise export taxes on boned cuts and heat-
processed beef from 5 percent to 15 percent. The aim
of these measures is to increase local supply and
avoid further increases in domestic beef prices.
According to GOA officials, around 600,000 tons of
beef should enter the domestic market as a result of
this move. Beef prices constitute 4.5 percent of the
basket of goods used to measure consumer prices, and
the beef sector has resisted the GOA's demands for
voluntary price restraints as part of the GOA's anti-
inflation effort. Beef exports to the European Union
under the Hilton quota program as well as bilateral
beef-import agreements with Argentina are exempt from
the suspension.


6. On March 9, the Argentine Rural Society (SRA)
stated that the beef export ban will cost the GOA USD
600 million in lost exports. The SRA expects that
Brazil and other beef producing countries will fill
the gap left by Argentina, which will lose its markets
in Russia, Israel, Italy, the UK, the Netherlands,
Algeria, Spain and Ukraine, among others. The SRA
also said that the ban will force many exporters and
meatpackers into bankruptcy and result in the loss of
thousands of jobs in the beef industry.

-------------- --------------
The GOA sells USD 307 million of Boden 2012 bonds to
Venezuela.
-------------- --------------


7. On March 6, the GOA published in the Official
Gazette a resolution authorizing the issuance of
another USD 307 million worth of Boden 2012 bonds to
Venezuela. This transaction is Venezuela's fourth
purchase this year. The purchase brings the GOV's
2006 bond purchases to USD 1.2 billion at face value
(USD 1 billion at market value).

-------------- --------------
BCRA rolls over its maturities by accepting bids on
longer-term Nobacs.
-------------- --------------


8. The BCRA received ARP 1 billion in bids in its
March 7 Lebac auction, less than the ARP 1.5 billion
in Lebacs that came due during the week. However, the
BCRA received ARP 1.2 billion in bids 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 previous auctions, the
BCRA was more than able to roll over its maturities by
accepting bids for ARP 2.0 billion (ARP 1 billion in
Lebacs and ARP 966 million in Nobacs). The yield on
the 42-day Lebac and the 98-day Lebac remained
unchanged at 6.75 percent and 7.25 percent,
respectively. The yield on the 70-day Lebac decreased
slightly from 6.97 percent to 6.95 percent, while the
yield on the 182-day Lebac reached 8.25 percent.
Lebacs for other maturities were withdrawn due to lack
of interest. Investors concentrated more than 53
percent of their bids in Nobacs of more than 9 months
and the BCRA accepted bids for ARP 966 million of
Nobacs (48 percent of the accepted amount in the
auction). The spread on the nine-month Nobac
decreased three basis points, from 3.12 percent to
3.09 percent, while the spread on the two-year Nobac
dropped 29 basis points from 5.40 percent to 5.11
percent. Investors are increasing their bids in
Nobacs, since these instruments have a variable rate
and provide a higher yield (10.9 percent and 12.9
percent for the 9-month and 2-year Nobac,
respectively). In the first two auctions this month,
the BCRA was able to roll over more than half of the
ARP 5.7 billion maturities coming due in March.

-------------- --------------
GOA closes a price-restraint agreement with the CNG
sector.
-------------- --------------


9. As anticipated in last week's Financial Weekly,
the GOA signed an agreement with the Compressed
Natural Gas (CNG) retail sector on March 8. This new
price-restraint agreement aims to freeze the price of
CNG until the end of the year. However, the accord is
subject to bi-monthly monitoring of any changes in
costs.

-------------- --------------
CPI up only 0.4 percent m-o-m in February - well below
market expectations of 1 percent. PPI up 1.4 percent
m-o-m.
-------------- --------------


10. The CPI increased 0.4 percent m-o-m in February,
well below market expectations of 1 percent and far
below the 1.3 percent m-o-m increase in January. CPI
core inflation was 0.5 percent, but was offset by a
0.1 percent fall in the seasonal component. The
monthly rise was driven mainly by an increase in the
prices of health (+1 percent) and food and beverages
(+1 percent, despite price-restraint agreements
between the GOA and many producers and retailers),but
these increases were offset by a fall in clothing (-
2.1 percent) and leisure activities (-1.0 percent)
both of which are due to seasonal factors. Year-over-
year, the CPI is up 11.5 percent. The BCRA consensus
survey forecasts 12.5 percent inflation in 2006, down
slightly from 12.7 percent forecast last month, and
reflecting a slight fall in inflation expectations.
The GOA has now signed price restrain agreements with
many sectors of the economy including foods and
beverages, apparel, school supplies, toiletries,
physicians fees, and hotels. The 2006 Budget projects
9.1 percent inflation rate for 2006 and the Central
Bank's inflation target range is 8-11 percent.


11. Producer prices increased 1.4 percent m-o-m in
February, due to a 0.6 percent rise in the prices for
manufactured goods and electricity and a 3.3 percent
increase for primary goods prices. The price of
electric energy rose 1.1 percent. Imported goods
prices increased 1.4 percent. The PPI index increased
13.5 percent y-o-y.

-------------- --------------
March Consumer Confidence Index up 6.5 percent m-o-m
and reaches its all- time high.
-------------- --------------


12. The Consumer Confidence Index -- published by
Universidad T. Di Tella -- jumped 6.5 percent m-o-m in
March, reaching its all-time high of 59.9 points. The
March increase came in consumer's willingness to
purchase durable goods and real estate (+7.5 percent m-
o-m) and consumer's sentiment towards the
macroeconomic environment (+7.3 percent m-o-m),
followed by positive expectations on individual's
personal situation (+4.9 percent m-o-m). The index
increased 2.6 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: "INDEC's Measurements: A
Methodological Obstacle?" by SEL Consultores, February

2006. [Note: Translated and used with permission of
the author. End Note.]
-------------- --------------


13. The Economy Minister's reaction to an
announcement by the official statistics bureau (INDEC)
of increase in the income gap between the richest and
the poorest during the third quarter of 2005 was to
claim that INDEC's calculation methodology was
incomplete. Felisa Miceli's argument is that INDEC's
methodology "does not include all the efforts made by
the Government to improve income distribution; it only
takes into account monetary income . numbers that show
monetary inequalities are softened if you take social
expenditures into account, which have increased
significantly since May 2003 and continue to rise."


14. The Minister is right when she emphasizes the
redistributive effect of public social expenditures.
Free access (that is, access financed by budgetary
resources) to education, health care, or nutrition
programs - to name the most relevant - have a
significant impact on the welfare of low income
households although, unlike other programs such as
Heads of Households, they are not recorded as monetary
income. Consolidated public expenditures that are
mainly directed to low income households (elementary
education, public health care, and public social
promotion and assistance) totaled more than ARP 26.5
billon in 2004. In 2005, they must have reached ARP
30 billion. Assuming that what reaches the poor is
equal to the percentage of all consumers of these
services that live in the 30 percent of households
with the lowest per capita family income level, one
can estimate a gross transfer-in-kind (not counting
administrative bureaucratic expenditures) of around
ARP 20.6 billion for 2005. This suggests an
unregistered, gross redistributive impact on monetary
income of around ARP130 per month. Obviously, if this
value is imputed, as Minister Miceli suggests it
should, the gap between the rich and the poor would be
substantially smaller.


15. Up to this point, Minister Miceli is correct.
But she is wrong in about two principal issues.


16. Firstly, public expenditure has a redistributive
effect not only in favor of the poorest, but also in
favor of those who aren't so poor, and even to the
richest. The most obvious case of this is public
university education. 85 percent of public university
students belong to households that are above the
poverty line. Moreover, the percentage of public
university students who are from the richest 10
percent of households (whose income, according to
INDEC's latest report, is 31 times above the income of
the poorest 10 percent) is equal to the percentage of
students coming from all poor households. The 2005
budget for public universities was ARP 26 billion; the
portion of that which benefited students from the
richest third of the population equals the federal
government's total expenditures on programs for
nutritional assistance, maternal-infant healthcare,
distribution of medicines, social promotion, emergency
assistance, and compensatory education action. The
2005 budget for this last program, which provides
school supplies, books and scholarships for children
and youngsters from disadvantaged socio-economic
conditions, was ARP 268 million; public university
expenditures that benefited students from the richest
10 percent households were ARP 382 million.


17. Secondly, social public expenditures on non-
monetary transfers targeted mainly to low income
households -- the State's major effort to meet social
needs -- are still noticeably less than they were
during the crisis period 1998-2001, and even less than
the average expenditures during the 1990s. In 2004 -
the latest data available - consolidated public
spending on basic education, public health care, and
public social assistance and promotion was, in
constant prices, 20 percent below levels of 1998-2001,
and 5 percent below the 1991-2001 average. The source
for these figures is the Ministry of Economy. If you
adjust these figures for the incidence of poverty (it
was 29 percent in 1991-2001, 5 points less than it is
now),the in-kind social expenditure gap would be even
larger. This suggests that if one were to impute non-
monetary transfers to the entire statistical series,
inequality would not diminish, but in fact would
increase.


18. This is more than a "methodological vice." The
cause of persistent high levels of income inequality
is the segmentation of the labor market, and
particularly in the disparity in the evolution of
formal and informal salaries. The salary gap between
these segments grew by almost 12 percent in 2005 (it
had been stable in 2004). At the same time, job
creation was cut in half (to 4.5 percent from 8.4
percent in 2004) and was almost zero in the informal
sector. Finally, unemployment in the informal sector
continues to be very high (around 20 percent) while
the formal sector is experiencing almost full
employment. The combination of these factors has
caused incomes in the lowest deciles, where informal
labor mainly is found, to grow more slowly than
incomes in the medium and high deciles, where formal
labor is concentrated. The key to improving
distributive equity therefore is reducing the dual
nature of the labor market, as well as re-orienting
social public spending. [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.]


19. To see more Buenos Aires reporting, visit our
classified website at:
http://www.state.sgov.gov/p/wha/buenosaires

GUTIERREZ