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

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Weekly Highlights
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- 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"

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CPI up 1.2 percent m-o-m in March - in line with
market expectations. PPI down 0.6 percent m-o-m.
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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.


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GOA and meat sector reached an agreement to reduce
prices on eleven popular beef cuts.
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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.

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Trucker's union and GOA agree to a 19 percent salary
increase, less than the 29 percent increase demanded.
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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.

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The Senate approves the rescission of Aguas
Argentina's concession contract .
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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.

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Tax revenues rose 25 percent y-o-y to ARP 10.4 billion
in March - in line with market expectations.
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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.

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A federal judge from San Luis province rules against
the GOA beef export ban.
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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.

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BCRA meets its monetary target for the eleventh
consecutive quarter.
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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.

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Banks pay back ARP 527 million in rediscount loans to
the BCRA.
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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.

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BCRA rolls over its maturities. Investors
concentrated their bids in Nobacs and short term
Lebacs.
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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.

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Employment index increased 0.5 percent m-o-m in
February - according to Ministry of Labor survey.
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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.

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March labor demand index down 0.3 percent m-o-m -
fourth consecutive fall.
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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.]

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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.)
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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