Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000800 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 April 7, 2006 -------------- -------------- Weekly Highlights -------------- -------------- - CPI up 1.2 percent m-o-m in March - above market expectations. PPI down 0.6 percent m-o-m. - GOA and meat sector reached an agreement to reduce prices of eleven popular beef cuts. - Trucker's union and GOA agree to a 19 percent salary increase - below the 29 percent demanded. - Tax revenues rose 25 percent y-o-y to ARP 10.4 billion in March - in line with market expectations. - BCRA meets its monetary target for the eleventh consecutive quarter. - Commentary of the Week: "There is Space for a New Crisis" -------------- -------------- CPI up 1.2 percent m-o-m in March - in line with market expectations. PPI down 0.6 percent m-o-m. -------------- -------------- ¶1. The Consumer Price Index (CPI) increased 1.2 percent m-o-m in March, well above market expectations of 1 percent following a 0.4 percent m-o-m increase in February. Last month's increase brought inflation to 2.9 percent in the first quarter of the year, compared to a 4 percent increase in the first quarter of 2005. CPI core inflation was up 1.23 percent, but was offset by a 0.06 percent fall in the seasonal component. The monthly rise was driven mainly by an increase in the prices of education (+9.5 percent),clothing (+6.1 percent - due to the beginning of the autumn season) and food and beverages (+1.5 percent, despite price- restraint agreements between the GOA and many producers and retailers). These increases were partially offset by a fall in leisure activities (-3.1 percent). Meat prices (representing 4.5 percent of the consumer basket) increased 3.4 percent m-o-m in spite of the ban on beef exports. Year-on-year, CPI rose 11.1 percent. The BCRA consensus survey forecasts 12.0 percent inflation in 2006, down from 12.5 percent forecast last month, reflecting a slight fall in inflationary expectations that is likely from the GOA having signed price restrain agreements with many sectors of the economy including foods and beverages, apparel, school supplies, toiletries, physicians' fees, pharmaceuticals and hotels. The 2006 Budget projects a 9.1 percent inflation rate for 2006 and the Central Bank's inflation target range is 8-11 percent. ¶2. Producer prices decreased 0.6 percent m-o-m in March, due to a 4 percent decrease in primary goods prices that was partially offset by a 0.7 percent rise in the prices for manufactured goods. The price of electricity remained unchanged, while prices for imported goods increased 0.6 percent. The PPI index increased 10.8 percent y-o-y. -------------- -------------- GOA and meat sector reached an agreement to reduce prices on eleven popular beef cuts. -------------- -------------- ¶3. On April 7, the GOA reached an agreement with the meat sector to reduce the prices of 11 popular cuts of beef and to maintain those prices until the end of the year. As part of the agreement, the GOA eliminated the minimum 280 kg. weight for cattle to be slaughtered, an unpopular rule that the GOA instituted to increase supply. This agreement came after three months of disputes between the GOA and the meat industry, and one month after the GOA imposed a beef export ban. Reportedly, the export ban will be lifted in 30 to 60 days, after domestic market supply reaches normal levels. However, the ban will be lifted first only for the most expensive cuts, frozen beef and thermo-processed meat. According to some reports, the GOA also will implement a 30 percent export quota on the front quarters of the cow. -------------- -------------- Trucker's union and GOA agree to a 19 percent salary increase, less than the 29 percent increase demanded. -------------- -------------- ¶4. Minister of Labor Carlos Tomada announced an agreement with the truck driver's union this week, in which the GOA agreed to a 19 percent salary increase, to be implemented in two installments, a 10 percent increase effective April and a 9 percent increase effective in July. The union had been on strike, asking for a 29 percent increase. The strike threatened to slow exports and created problems in garbage recollection and transportation of cash to bank ATMs. Separate from the agreement, the GOA promised the sector that it would gradually eliminate road-tolls for the transport sector and that it will finance the purchase of new trucks with low interest loans from Banco Nacion. This 19 percent salary increase will set a precedent (and probably a ceiling) for future wage negotiations for other sectors of the economy. Already on April 6, three sectors - including: banking, railroad and building maintenance employees - agreed to wage increases (of 17 percent, 17 percent and 18.5 percent, respectively) all less than 19 percent agreed by the trucker's union. Reportedly, the food sector will follow suit next week. -------------- -------------- The Senate approves the rescission of Aguas Argentina's concession contract . -------------- -------------- ¶5. On April 5, the Senate approved a bill that rescinds Aguas Argentina's concession contract for water and sewer services in Buenos Aires. The Chamber of Deputies had already approved it on March 29, and the bill will become law once it is published in the Official Gazette. The Chamber of Deputies also approved the creation of the state-owned water company AYSA (Agua y Saneamientos Argentinos SA) this week, after having postponed its debate for a week when some deputies questioned the legal structure of the new company and raised concerns about a future re- privatization of the company. -------------- -------------- Tax revenues rose 25 percent y-o-y to ARP 10.4 billion in March - in line with market expectations. -------------- -------------- ¶6. March federal tax revenues increased 25 percent y- o-y to ARP 10.4 billion - in line with market expectations of ARP 10.7 billion. Labor contributions jumped 60 percent y-o-y due to increases in formal job creation and salary increases. VAT revenues rose 30 percent y-o-y, reflecting strong economic activity. Income tax and trade tax revenues increased 15 percent and 14 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 75 percent of March tax collection. In real terms, revenues increased 12 percent y-o-y. The BCRA consensus survey forecasts 2006 tax revenues at ARP 139 billion. -------------- -------------- A federal judge from San Luis province rules against the GOA beef export ban. -------------- -------------- ¶7. On April 4, a federal judge in San Luis province issued an injunction against the GOA beef export ban. [The GOA suspended beef exports for 180 days starting March 14 to increase local supply and avoid further increases in domestic beef prices in an attempt to control inflation.] The injunction was granted in favor of the San Luis Rural Society and may eventually lead to a temporary suspension of the beef export ban. However, some legal experts questioned the decision because the injunction was granted to the Rural Society, not to exporters. Chief of Cabinet Alberto Fernandez severely criticized the ruling and predicted that the GOA will appeal the measure. -------------- -------------- BCRA meets its monetary target for the eleventh consecutive quarter. -------------- -------------- ¶8. On April 3, the Central Bank (BCRA) announced that it fulfilled its monetary target for the first quarter of 2006, the eleventh consecutive quarter in which the BCRA has met its target. According to preliminary BCRA data, the average M2 (cash plus public and private sector current and saving accounts) level during the quarter was close to the lower end of its Monetary Program target of ARP 104.4 billion, and ARP 4.7 billion below the upper limit of ARP 110.9 billion. The BCRA began this year to target M2 instead of the monetary base because M2 better reflects monetary conditions due to the increase in the money multiplier. The BCRA was aided in meeting its monetary target by a contraction in the monetary base -- caused by bank repayment of discount window loans taken out during the 2001 financial crisis (see story below),the BCRA's issuance of Lebacs and Nobacs, and the GOA's repayment of short-term loans to the BCRA -- that more than offset BCRA purchases of foreign currency in the FX market. The 2006 monetary program envisions an expansion of M2 of 21.2 percent in 2006, well below the 36 percent, 33 percent and 25 percent increases seen in 2003, 2004 and 2005, respectively. -------------- -------------- Banks pay back ARP 527 million in rediscount loans to the BCRA. -------------- -------------- ¶9. On April 4, Banco Galicia pre-paid ARP 527 million in discount borrowing to the BCRA. This prepayment, plus the banks' payment of an ARP 59 million installment of the matching system (under which banks repay the BCRA for financial assistance received during the 2001 financial crisis) generated a monetary base contraction of ARP 586 million. 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 6.1 billion. With this pre-payment, Banco Galicia still holds 48 percent of its original discount borrowing from the BCRA. -------------- -------------- BCRA rolls over its maturities. Investors concentrated their bids in Nobacs and short term Lebacs. -------------- -------------- ¶10. The BCRA received ARP 513 million in bids at its April 4 Lebac auction, less than the ARP 1.2 billion in Lebacs that came due during the week. However, the BCRA received ARP 958 million in bids in its Nobac auction. As in previous auctions, the BCRA was able to roll over its maturities by accepting bids for ARP 1.3 billion (ARP 493 million in Lebacs and ARP 768 million in Nobacs). The yield on the 28-day Lebac decreased from 6.69 percent to 6.62 percent, the yield on the 63-day Lebac remained unchanged at 6.85 percent, while the yield on the 84-day Lebac decreased slightly from 7.18 percent to 7.15 percent. Lebacs for other maturities were withdrawn due to lack of interest. The spread on the nine-month Nobac decreased five basis points from 2.80 percent to 2.75 percent, while the spread on the two-year Nobac dropped six basis points from 4.73 percent to 4.67 percent. Investors continue concentrating their bids in Nobacs, since these instruments have a variable rate and provide a higher yield and short-term Lebacs given that these instruments do not have any adjustment in its interest. -------------- -------------- Employment index increased 0.5 percent m-o-m in February - according to Ministry of Labor survey. -------------- -------------- ¶11. The Ministry of Labor announced that its employment index increased 0.5 percent m-o-m in February. (The index is based on surveys from the cities of Buenos Aires, Mendoza, Rosario and Cordoba). The trade and services sector had the highest job creation in February (up 0.5 percent m-o-m) followed by manufacturing (up 0.4 percent m-o-m). These gains were partially offset by a slight decrease in the construction sector (down 0.1 percent m-o-m). The index increased 9.8 percent y-o-y. -------------- -------------- March labor demand index down 0.3 percent m-o-m - fourth consecutive fall. -------------- -------------- ¶12. The March labor demand index calculated by Di Tella University decreased 0.3 percent m-o-m to 110.39 points. Labor demand has decreased 3.23 percent so far during 2006. Despite the fall for the fourth consecutive month, the index is still above its pre- 2001 crisis level. The labor demand index is up 29.7 percent y-o-y. [The index is based on comparisons of job vacancy announcements printed in the two largest newspapers of the country.] -------------- -------------- Commentary of the Week: "There is Space for a New Crisis", by Aldo Abram, from an article published in La Nacion. (Note: Translated and used with permission of the author, from an article published April 2 in La Nacion. End Note.) -------------- -------------- ¶13. With the fall of the Berlin Wall and the USSR, some people rushed to announce "the end of history." Now, they are predicting "the end of crises," given the large earnings of investors and the bonanza that the worldwide boom in stock and real estate markets has brought to Latin American countries, based on immense international liquidity and economies of East Asia that are growing strongly as capitalism advances there. Could it be true, or is it only a necessity to believe that earnings and trees can grow infinitely? ¶14. Let's look at the world. There are no crises now, but: ¶15. United States: Faced with an economic slowdown since 1999 and the low level of inflation, the Federal Reserve decided to lower interest rates from 6 percent to just 1 percent in the third quarter of 2003. While this produced favorable results, the US Government ha been running a rampant budget deficit since 2001 and the economy has begun to grow rapidly. Both of these resulted in an important increase in credit demand and pressure to raise interest rates, which the Federal Reserve refused to recognize. To cover the increase in credit demand, the Fed had to emit huge quantities of dollars that people didn't demand to save, but to spend. ¶16. The US dollar began to depreciate and, towards the middle of 2004, inflationary expectations turned worrisome. To change this trend, the Federal Reserve began gradually raising its reference rates, which will neutralize the pressures caused by increasing credit demand. Although the dollar is not strengthening, the general bet in the market is that the increase in the Federal Funds rate from 5 percent or 5.5 percent will maintain the current low level of price indexes. But if it is necessary to increase it to 6.5 percent? Would not the resulting strong contraction in liquidity affect capital flows? Wouldn't the rapid appreciation of the dollar cause a drop in commodity prices and stock and real estate markets? Won't an aggressive increase in US interest rates pull along with it those of Europe and Japan? How would all of this affect emerging markets? ¶17. Europe: The principal countries of Europe are finding it politically difficult to face the structural reforms needed to minimize welfare costs, and economic changes that will require the adoption of a new media and information revolution. Despite the excellent work of the European Central Bank to maintain the stability of the Euro, it suffers constant attacks by those who don't want to confront a world that is changing and find it easier to blame the new unified currency instead. Could the social unrest and the resistance to change of the Germans, French and other Europeans break the solidity of the Euro? Will the birth pains of the new European economy kill the process of deepening the European Union? Could an increase in risk perception or a strong contraction in international liquidity provoke a new economic crisis in the EU? ¶18. Argentina: The economic recovery process of the past few years has been based on a monetary and exchange rate policy that produces a controlled but high rate of inflation and a high primary fiscal surplus. Nevertheless, the government sees the state as the motor of growth. Taking a peso from the private sector and spending it through the public sector generates growth. Because of this, the tax burden is at record levels and there is no interest in using a part of the enormous increase in revenues to look for a more just or efficient tax system. Maintaining fiscal solvency is a necessary cost to bear so that the government can apply the rest of its policies. ¶19. The State determines the economic model, and therefore it should intervene to fix relative prices, direct investment to projects it considers convenient, arbitrarily influence businesses' cost structure, nationalize infrastructure projects or directly take over public service companies (mail, energy, air navigation, railroads, water and sewer, etc.) ¶20. The basic policy principle of the administration is distribution of income, not only through state spending on assistance programs, but also through salary increases imposed by decree, changes in labor conditions, the freezing of public service tariffs, agreements or controls on prices, restrictions on exports, etc. ¶21. With a monetary policy supporting a high exchange rate that carries with it high levels of inflation, won't people begin to flee from the peso? Won't price agreements lead to the establishment of maximum prices? Won't increases in export taxes and bans on exports become the norm? ¶22. Public service companies saw their contracts and the regulations that govern their operations broken unilaterally by the State. There will not be investment in public services while tariffs are frozen and great uncertainty remains about their future evolution. The higher inflation goes, the less likely it is that the government will allow tariff increases, while the real value of what public service providers recover in tariffs is going down. How can this vicious circle be broken? For how long will the accumulated investment made prior to the crisis sustain the quantity and quality of public services? How many services will ultimately end up being wholly or partially re-nationalized? ¶23. Conclusion: There is no crisis at the moment, but they do continue to exist. ¶24. In fact, one can come up with other possibilities in addition to those noted, ranging from an avian flu epidemic to some major conflict in some sensitive part of the world. ¶25. For these reasons, governments, businesses and investors should act with caution keeping these risks in mind and positioning themselves adequately to confront them. (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