Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000706

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 23, 2006


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Weekly Highlights
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- GOA runs an ARP 1.9 billion primary fiscal surplus
in February - better than expected.
- January monthly economic activity index up 9.1
percent y-o-y - stronger than expected.
- GOA rescinds Aguas Argentina's concession contract
and creates state water company.
- The poverty rate dropped 5.1 percentage points to
33.8 percent in the second half of 2005.
- The beef export ban will cost the GOA only ARP 184
million in lost tax revenue.
- GOA reaches a price-restraint agreement with fish
producers.
- GOA issues USD 500 million of the new "Bonar V"
bond.
- Investors concentrated more than 88 percent of their
bids in BCRA Nobacs.
- Attorney General says Argentina "will respect" ICSID
arbitration claims.
- Commentary of the Week: "The Economy Grew 30
percent in Three Years (But It's Not a Record)"

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ECONOMY / FINANCE
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GOA runs an ARP 1.9 billion primary fiscal surplus in
February - better than expected.
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1. The GOA announced a primary fiscal surplus of ARP
1.9 billion in February, above market expectations of
ARP 1.6 billion. This brings the accumulated fiscal
surplus for the first two months of 2006 to ARP 3.5
billion. This better-than-expected February result is
mainly the result of strong revenue collection. In
February, revenues increased 29.4 percent y-o-y to ARP
12.8 billion, while expenditures rose 28.2 percent y-o-
y to ARP 10.9 billion. The primary fiscal surplus
increased 37 percent y-o-y. The BCRA consensus
forecasts an ARP 22.3 billion primary fiscal surplus
for 2006.

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January monthly economic activity index up 9.1
percent y-o-y - stronger than expected.
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2. The monthly economic activity index increased a
strong 9.1 percent y-o-y in January, well above the
BCRA market survey forecast of 8.1 percent. The
index remained flat m-o-m due to technical problems
that halted some production in the industrial sector.
The BCRA consensus survey estimates 7 percent
economic activity growth for 2006. However, some
private analysts predict growth as high as 8 percent.
The monthly economic activity index is viewed as a
reliable leading indicator of GDP.

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The poverty rate dropped 5.1 percentage points to 33.8
percent in the second half of 2005.
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3. On March 21, the GOA announced that the poverty
rate fell to 33.8 percent in the second half of 2005
from 38.9 percent in the first half of the year, and
down from 40.2 percent in the second half of 2004.
The 33.8 percent poverty rate represents 7.9 million
people. The GOA also said that the destitution rate
fell from 13.8 percent to 12.2 percent in the second
half of 2005, the latter representing 2.8 million
people. The poverty and destitution rates are
measured by a survey conducted in the twenty-eight
largest urban areas of Argentina.

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GOA rescinds Aguas Argentina's concession contract and
creates a new state-owned water company.
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4. On March 22, the GOA published a decree rescinding
Aguas Argentinas's concession contract and creating a
state-owned water company to provide water and sewage
services in Greater Buenos Aires. Minister of
Planning Julio De Vido said that the main reason for
rescinding the concession contract was the detection
of high level of nitrates in the water provided by
Aguas Argentinas (controlled by the French Suez
company). The new state-owned water company, AYSA
(Agua y Saneamientos Argentinos SA),will be 90
percent federal government-owned and the remaining 10
percent will be held by workers. According to GOA
officials, tariffs will remain unchanged. Suez has
filed an arbitration claim against Argentina in the
World Bank's International Centre for Settlement of
Investment Disputes (ICSID) for USD 1.7 billion in
losses allegedly caused by the freezing of tariffs in
2002

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The 180-day beef export ban will cost the GOA ARP 184
million in lost fiscal revenue.
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5. According to Embassy estimates, the 180-day beef
export ban will cost the GOA around ARP 184 million in
lost export tax collections, not a significant loss
compared to monthly revenues of ARP 12.9 billion.

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GOA reaches a price-restraint agreement with fish
producers.
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6. On March 20, the GOA closed a new price-restraint
agreement with fish producers, freezing the price of
two fish species until the end of the year. The new
agreement seeks to encourage consumers to buy beef
substitutes and thus indirectly avoid further
increases in beef prices. According to GOA officials,
the accord was signed with seven fishing chambers, and
it is subject to bi-monthly monitoring of any changes
in costs.

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GOA issues USD 500 million of the new "Bonar V" bond.
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7. On March 22, the GOA announced the issuance of USD
500 million worth of the new USD-denominated bond,
known as the "Bonar V," maturing in 2011. The yield
on the new bond was 8.36 percent, in line with
domestic interest rates. Bids -mainly from foreign
banks and local pension funds (AFJPs) - reached USD
726 million, enough to fill the USD 500 million
auction amount. The Bonar V will amortize principal
at maturity while paying interest every six months.
The interest coupon was fixed at 7 percent per year in
US dollars, paying 3.50 percent of nominal value.

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BCRA rolls over its maturities. Investors
concentrated more than 88 percent of their bids in
Nobacs.
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8. The BCRA received ARP 234 million in bids at its
March 21 Lebac auction, less than the 1.2 billion in
Lebacs that came due during the week. However, the
BCRA received ARP 1.8 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 1.2 billion (ARP 234 million in Lebacs and ARP 994
million in Nobacs). The yield on the 35-day Lebac and
the 70-day Lebac remained unchanged at 6.7 percent and
6.95 percent, respectively. The yield on the 98-day
Lebac dropped seven basis points from 7.35 percent to
7.28 percent, while the yield on the 168-day Lebac
reached 8.35 percent. Lebacs for other maturities
were withdrawn due to lack of interest. Investors
concentrated more than 88 percent of their bids in
Nobacs of more than 9 months and the BCRA accepted
bids for ARP 994 million of Nobacs (81 percent of the
accepted bids in the auction). The spread on the nine-
month Nobac decreased seven basis points, from 3.07
percent to 3.0 percent, while the spread on the two-
year Nobac dropped twenty basis points from 5.02
percent to 4.82 percent. Investors continue
increasing their bids in Nobacs, since these
instruments have a variable rate and provide a higher
yield.

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Attorney General says Argentina "will respect" ICSID
arbitration awards
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9. On March 22, Attorney General for the Treasury
Osvaldo Guglielmino told a press conference that
Argentina "will respect" ICSID arbitration awards
against it, even as he criticized the ICSID process
for encouraging "overvalued" claims because it does
not charge fees based on the amount of the claim (as
Argentina does in litigation). He said that ICSID
claims against Argentina are overvalued by 1000
percent.

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The peso was unchanged against the USD this week,
closing at 3.09 ARP/USD.
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10. The peso remained flat versus the USD this week,
closing at 3.09 ARP/USD. The BCRA purchased USD 102
million in the first four days of the week without any
peso appreciation. The BCRA also purchased EUR 26
million in the FX market in the first two days of the
week. The BCRA has purchased USD 2.1 billion since
the beginning of the year, compared to USD 794 million
during the same period last year. The peso exchange
rate has depreciated 1.3 percent since the beginning
of the calendar year.

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Commentary of the Week: "The Economy Grew 30 percent
in Three Years (But It's Not a Record)". By Abel
Viglione. [Note: Translated and used with permission
of the author, from an article published February 21
in Ambito Financiero. End Note.]
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11. The data published by INDEC about GDP growth for
2005 is very good (9.1 percent, according to the EMAE)
and confirms the strong recovery of the past three
years, which has resulted in an increase in national
wealth of 29.4 percent.


12. Given that the population grew at a 1 percent
annual rate, the recovery in per capita GDP has been
surprisingly high. While it has not reached the
previous high (1998),it is very close, only 2 percent
below it. Of course, measured in constant pesos, or
measured in dollars, it is still far below its peak.


13. Let's forget about dollars and analyze everything
in local currency. Argentine history shows five
significant three-year economic expansions, and the
expansion of the past three years is in fourth place,
as you can see from the table below:

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Argentina during Three-Year Expansions
(In Percentages )
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Period GDP Consumption Investment Exports Imports
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1887-1889 44.5 - - - -
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1903-1905 43.2 40.7 145.1 62.7
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1918-1920 31.7 21.2 118.9 95.9 52.1
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2003-2005 29.4 25.1 121.2 27.4 135.0
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1991-1993 28.2 36.8 98.7 -0.1 242.7
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Period GDP growth in President
3 previous years
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1887-1889 6.0 Juarez Celman
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1903-1905 3.7 Roca/Quintana
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1918-1920 -10.3 Yrigoyen
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2003-2005 -15.5 Kirchner
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1991-1993 -7.9 Menem
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14. Periods of greater growth than the current period
occurred during the governments of Juarez Celman (in
the three year period 1887-89, when the economy grew
44.5 percent),of Roca and Quintana (1903-05, with a
GDP increase of 43.2 percent),and that of the first
period of Yrigoyen (1918-20, with a 31.7 percent
increase). The current expansion exceeds by only one
percentage point the growth during the decade of the
90's (Menem),when GDP grew 28.2 percent between 1991
and 1993.


15. What differences can we observe between these
three-year periods of strong growth?


16. That those at the end of the 19th century and
beginning of the 20th came after prior periods of
growth, for which they were "disadvantaged" in
comparison to the present period; nevertheless, they
produced higher rates of growth.


17. That in the years prior to the last three great
expansions, GDP had contracted. That the largest
contraction of GDP occurred prior to the currnt
recovery; the GDP fell 15.5 percent between 2000 and
2002, for which the current recovery was "advantaged"
from the outset in comparison with other expansions.


18. That GDP per capita rose in all cases in
comparison with the three years prior to the
expansion. In the expansion of 2003-05, the rise in
per capita GDP was only 2.6 percent compared to that
of 2000, while in the other four cases the increase
was between 22.3 percent and 28.8 percent, a rate
almost 10 times higher than the current one.


19. That consumption rose during all the expansions,
and in that of 2003-05, it rose 25.1 percent.
Nevertheless, consumption per capita remained below (-
3.2 percent) the level prior to the crisis. The
inverse occurred in the other expansions; it always
increased, and did so by between 14 percent and 32

percent, even though the population increased at a 3.6
percent rate at the beginning of the 20th century.


20. Given that consumption represents 75 percent of
demand, it is clear that the variation in GDP will be
similar to that of consumption. In two periods, that
is not what happened: in the expansion of 1918 to
1920, the drivers were investment and exports. In
that of 1991 to 1993, the drivers were consumption (it
was higher than the increase in GDP, which indicated
an elevated increase in consumption by Argentine
society) and investment.


21. The expansion of 2003-05 had as its drivers
investment and exports. It is true that investment
has increased substantially, 121.2 percent, but from
practically nothing. It is enough to note that
investment in 2002 was the lowest in Argentine
history, not reaching 12 percent of GDP that year.


22. The most relevant point about this last expansion
has been the strong growth in exports (27.4 percent),
given that it follows a trend of 8 percent annual
growth since 1987. In the decade of the 1990's, this
didn't happen. In the other expansions, the growth of
exports was much higher, which is reasonable given the
greater openness of the economy to trade during those
periods.

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Conclusions
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23. The current expansion has not been the most
important of the past 100 years, as has been commented
in some press reports in recent days.


24. The departure point for this expansion was very
low. It is enough to recall that GDP fell 10.9
percent in 2002, the biggest drop in percentage terms
in Argentine history along with 1891, the only years
in which GDP fell by more than 10 percent. This gave
it a handicap in comparison with other expansions.


25. It is the only expansion in which per capita
consumption remained below the year prior to the
expansion, which indicates that the population as a
whole consumes less than it did in 2000. The inverse
occurred in the 1991-93 expansion, when exports per
capita were reduced, i.e., we consumed locally a part
of what had been dedicated to export, which also was
not wise.


26. Argentina is not an island in regards to
economic growth. The majority of the countries of
Latin America grew in the past three years, producing
double-digit rates of growth and taking advantage of
the favorable international situation.


27. In conclusion, the current recovery has been
excellent and, if we want it to rise in the historical
rankings, we will need to increase investment in a
very serious way to maintain GDP growth rates of 5
percent per year. It will be necessary for investment
and exports to increase faster than GDP, which implies
that consumption will have to grow at lower rate,
resulting in a drop in the consumption-GDP ratio.
[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