Identifier
Created
Classification
Origin
06BUENOSAIRES635
2006-03-20 17:03:00
UNCLASSIFIED
Embassy Buenos Aires
Cable title:  

Argentina Economic and Financial Weekly for

Tags:  EFIN ECON ELAB ALOW AR 
pdf how-to read a cable
VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #0635/01 0791703
ZNR UUUUU ZZH
R 201703Z MAR 06 ZDK
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3869
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2117
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
UNCLAS BUENOS AIRES 000635 

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 17, 2006


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

- GDP growth was 9.2 percent y-o-y in 2005.
- The industrial production index rose 8.8 percent y-o-
y in February.
- President Kirchner urges Argentines not to buy beef
if prices continue to rise.
- The Central Bank (BCRA) increases bank liquidity
requirements for sight accounts.
- The BCRA rolls over its maturities by accepting bids
on longer-term Nobacs.
- The GOA increases the minimum threshold for paying
individual income tax.
- The peso appreciated versus the USD this week,
closing at 3.09 ARP/USD.
- Commentary of the Week: "The Dilemma of Financing
New Infrastructure"

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

--------------------------------------------- --------
GDP up 9.2 percent y-o-y in 2005.
--------------------------------------------- --------

UNCLAS BUENOS AIRES 000635

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 17, 2006


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

- GDP growth was 9.2 percent y-o-y in 2005.
- The industrial production index rose 8.8 percent y-o-
y in February.
- President Kirchner urges Argentines not to buy beef
if prices continue to rise.
- The Central Bank (BCRA) increases bank liquidity
requirements for sight accounts.
- The BCRA rolls over its maturities by accepting bids
on longer-term Nobacs.
- The GOA increases the minimum threshold for paying
individual income tax.
- The peso appreciated versus the USD this week,
closing at 3.09 ARP/USD.
- Commentary of the Week: "The Dilemma of Financing
New Infrastructure"

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

-------------- --------------
GDP up 9.2 percent y-o-y in 2005.
-------------- --------------


1. GDP increased 9.1 percent y-o-y in the fourth
quarter of 2005 - well above the BCRA consensus
forecast of 8.4 percent - bringing annual GDP growth
for 2005 to 9.2 percent. Growth was mainly driven by
investment and strong consumer spending. Investment
increased 27 percent y-o-y in the fourth quarter, due
to a 26 percent y-o-y increase in construction and a
29 percent increase in plant and machinery, while
private consumption increased 8 percent y-o-y.
Production of goods grew 9.6 percent y-o-y and
services were up 8.4 percent y-o-y. The strong GDP
performance at the end of 2005 provides a high 4
percent statistical carryover effect for 2006 GDP
growth, which currently is forecast to reach 6.9
percent in the Central Bank (BCRA) consensus survey.

-------------- --------------
February industrial production index up 8.8 percent y-
o-y.
-------------- --------------


2. The industrial production index rose 8.8 percent y-

o-y in February, above the BCRA consensus of 7.6
percent. During February, the fastest growing sectors
were car production (up 122 percent),tobacco
production (up 23.8 percent),and minerals (up 15.3
percent). There was a slight decrease in paper and
cardboard (down 7.3 percent). The index increased 0.2
percent m-o-m without seasonal adjustment and 3.1
percent m-o-m when seasonally adjusted. The month-on-
month increase in production is mainly explained by an
increase in the automobile industry, up 151 percent m-
o-m after a poor performance in January affected by
plant retooling. The BCRA consensus survey forecasts
6.4 percent industrial production growth for 2006.


3. The industry-wide capacity utilization index
reached 70.6 percent in February, compared to 69.2
percent in February 2005. The sectors showing the
highest capacity utilization were metal based
industries (96.5 percent),oil refining (94.5
percent),textiles (80.2 percent),and printing (76
percent). The sectors with the lowest capacity
utilization were auto production (46.8 percent) and
minerals (58.4 percent).

-------------- --------------
President Kirchner urges Argentines not to buy beef if
prices continue to rise
-------------- --------------


4. The GOA suspended beef exports for 180 days
starting March 14 to increase local supply and avoid
further increases in domestic beef prices. Beef is a
mainstay of the Argentine diet and is a major
component of the Basic Basket that determines the
poverty, indigence and inflation rates. The price of
beef increased more than 25 percent between November
2005 and the beginning of March 2006. On March 13,
Ministry Miceli said that the suspension could be
extended an additional 180 days if the price of beef
did not come down. On March 14, after a 6 percent
increase in beef prices in just one day, President
Kirchner urged people not to buy beef unless prices
went down, to prevent "extortion" by producers. He
added that nobody could believe that price increases
were solely the result of demand and supply
interaction. Beef prices went up an additional 1
percent in wholesale markets on March 15, and further
increases are expected due to climatic conditions that
complicate the transport of cattle.

-------------- --------------
GOA reaches a price-restraint agreement with pork
producers.
-------------- --------------


5. On March 15, the GOA closed a new price-restraint
agreement with pork producers to maintain pork prices
unchanged. According to GOA officials, the aim of the
agreement is to encourage the consumers to buy pork
instead of beef and thus avoid further increases in
beef prices. The new accord advances the GOA's
strategy of curbing inflation through price-restraint
agreements with producers and retailers.

-------------- --------------
BCRA increases bank liquidity requirements for sight
accounts.
-------------- --------------


6. The BCRA issued a circular on March 13, raising
bank liquidity requirements for sight accounts
(current and savings accounts) by 2 percentage points
to 17 percent, and eliminating the 2.55 percent annual
return rate that the BCRA pays banks for their minimum
reserves. The measure will go into effect at the
beginning of April. The BCRA expects the measure to
absorb ARP 1.9 billion from the financial system,
assuming that private and public sector deposits total
ARP 63.9 billion. The aim of this move is to boost
productive investment and savings by encouraging banks
to pay a higher interest rate for time deposits and,
at the same time, take more pesos out of circulation.

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


7. The BCRA received ARP 749 million in bids in its
March 14 Lebac auction, less than the ARP 1.7 billion
in Lebacs that came due during the week. However, the
BCRA received ARP 1.3 billion in bids in its Nobac
auction. [Nobacs are longer term instruments than
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
able to roll over its maturities by accepting bids for
ARP 1.7 billion (ARP 749 million in Lebacs and ARP 965
million in Nobacs). The yield on the 35-day Lebac
decreased from 6.75 percent to 6.70 percent, while the
yield on the 63-day Lebac dropped from 6.95 percent to
6.85 percent. The yield on the 91-day Lebac remained
unchanged at 7.25 percent. Lebacs for other
maturities were withdrawn due to lack of interest.
Investors concentrated more than 63 percent of their
bids in Nobacs of more than 9 months and the BCRA
accepted bids for ARP 965 million of Nobacs (56
percent of the accepted bids in the auction). The
spread on the nine-month Nobac decreased two basis
points, from 3.09 percent to 3.07 percent, while the
spread on the two-year Nobac dropped nine basis points
from 5.11 percent to 5.02 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).

-------------- --------------
GOA increases the minimum threshold for the income
tax.
-------------- --------------


8. On March 15, Minister of Economy Felisa Miceli
announced that the GOA had decided to raise the
minimum threshold for the income tax for both salaried
employees and the self-employed. The minimum
threshold for the income tax will be increased from
ARP 1,835 to ARP 2,400 per month for single salaried
employees, and from ARP 2,235 to ARP 3,000 per month
for married salaried employees. The minimum threshold
also will be also from ARP 835 to ARP 1,000 for single
self-employed people, and from ARP 1,235 to ARP 1,800
for married self-employed people. Taxes are paid on
income earned that is above this minimum threshold.
According to official estimates, this measure will
have an annual fiscal cost of ARP 1.5 billion.

-------------- --------------
The peso appreciated versus the USD this week, closing
at 3.09 ARP/USD.
-------------- --------------


9. The peso appreciated versus the USD this week,
closing at 3.09 ARP/USD, after reaching its lowest
value in three years last week. The peso's
appreciation early in the week is mainly explained by
lower dollar demand by banks, and by the Central
Bank's (BCRA) intervention in the FX market on Monday
and Tuesday, when it sold dollars to counteract the
effect of its recent large purchases. However, the
BCRA purchased USD 57.5 million and EUR 141.5 million
in the last three days of the week. The peso exchange
rate has depreciated 1.3 percent since the beginning
of the calendar year.

-------------- --------------
Commentary of the Week: "The Dilemma of Financing New
Infrastructure". By Daniel Montamat. [Note:
Translated and used with permission of the author,
from an article published March 7 in El Cronista
Comercial. End Note.]
-------------- --------------


10. With sustained annual GDP growth of between 3 and
5 percent, we will need to invest between USD 1.5
billion and USD 3.5 billion in the energy sector
alone. A CEPAL study projecting investment in
infrastructure to 2010 found that at a growth rate of
3 percent per year, we will need to invest USD 6
billion in infrastructure (part of that in maintenance
and replacement, the rest in new investments).
Neither public investment nor international financial
institution financing will be sufficient. There must
be private investment and financing. Because of the
intrinsic business risk and the Argentine uncertainty
factor, new investment will be either expensive or
insufficient.


11. Transport, energy and telecommunications
infrastructures have high fixed capital costs. As
long as capacity exists in the system, the cost of
providing additional units is low in relation to the
total cost. The problem comes when networks are
saturated or the capacity of infrastructure reaches

its limit and one has to face new and high fixed
costs. Who will invest in these durable capital
goods? How will they be financed, and at what cost?
And who will pay for these works?


12. To resolve these questions, it is important to
distinguish between the concept of accounting cost and
economic cost. An accountant works with variable and
fixed costs from a historical point of view; an
economist talking about economic costs is thinking of
present alternative uses for the resources used
(opportunity cost). Ronald Coase used a simple
example to make clear the difference between an
accounting view of costs and the economist's concept:
An accountant would say that the cost of a machine is
its depreciation; the economist would say that it is
the income that could have been obtained by using the
machine for another purpose. If the machine has no
alternative use, the economic cost is zero. Because
of this, John Hicks, another Nobel Prize-winning
economist, maintained that when an enterprise invests
in fixed capital, it "makes itself a hostage to the
future." Its capital is sunk because usually there
are no alternative uses for fixed capital goods. In
turn, while capacity exists in the system, the cost of
producing an additional unit is low. This is why,
when there is a need to expand or create new
infrastructure, investors think not only about the
cost of the work, but also the time during which they
will be held hostage while recovering his investment.
If they lack confidence in the future, they will
discount fixed capital investments at high rates to
shorten the time needed to recover his investment.
High discount rates make public works projects -- and,
as well, the mechanism of repayment -- expensive. If
the resulting public service tariffs are expensive for
the average consumer's budget, the project won't be
built, or the State will have to build it with tax
revenues that also are taken from the public. But
public resources are not sufficient to pay for all the
needed investments in infrastructure.


13. Accounting was born as a commercial tool when
trade did not require large investments in fixed
capital. The original principles of accounting did
not include amortization of capital expenses. The
focus was on variable costs and these old accounting
practices were decisive for crystallizing the concept
of marginal costs in economics. Accounting principles
had to be revised to take capital depreciation into
account after the railroad crisis in the United States
in the 19th century (until then, accounting rules
produced profits that ignored the need to renew fixed
assets and resulted in tariff rates that did not even
recover marginal costs). When the importance of fixed
capital in new manufacturing processes became clear,
it became accepted in accounting practice to include
their relative weight in total costs. But economic
theory continues to cling to the marginal cost
paradigm. If a machine can't be put to some
alternative use and has the capacity of producing one
additional unit, we use it as long as it lasts. Both
orthodox and heterodox economists, for different
reasons, subscribe to this short-term logic, which is
disruptive for long-term capital investments, and
which plays into the hand of demagogic politicians.


14. Argentina's infrastructure suffers from the lack
of a long-term development strategy and is entangled
in a short-term viewpoint that drives away investors
and raises costs. The State has taken over some
infrastructure works that would never have been
completed on "auto-pilot" (the Federal Plan for
Electricity Transport),and has to create ad hoc rules
to force investment with high costs when private
companies invest (expansion of gas pipelines). But
there is a growing gap between the investment needed
and what is being completed and infrastructure is
becoming a barrier to sustaining the economic

expansion. What is urgently needed is to establish
mechanisms that stimulate investments in
infrastructure. [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.]


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

GUTIERREZ