Argentina Economic and Financial Weekly for

UNCLAS BUENOS AIRES 000859

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 13, 2006


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Weekly Highlights
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- Wage increases may jeopardize price restraint
agreements with supermarkets.
- Guillermo Moreno to negotiate and control price
restraint agreements.
- Gas Ban tariff increases for residential users will
not go into effect in 2006.
- FDI in Argentina increased 9 percent y-o-y to USD
4.6 billion.
- The peso appreciated 0.3 percent against the USD
this week, closing at 3.09 ARP/USD.
- Private sector external debt fell 5 percent q-o-q to
USD 49.5 billion in Q3 05.
- Commentary of the Week: "The Worries of Autumn".
(Note: Thursday, April 13 and Friday, April 14 are
holidays in Argentina. End Note.)

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Wage increases may jeopardize price restraint
agreements with supermarkets.
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1. Supermarket representatives warned this week that
their agreements to keep prices unchanged on 200 basic
goods may not be possible if their costs increase as a
result of the wage negotiations with the commercial
employees union. The union is asking for a 28 percent
wage increase but reportedly they are willing to
accept a 10-15 percent increase, following last week's
precedent set by the transport union, which accepted a
19 percent wage increase. Wages account for 30
percent of supermarket costs. The Vice-Minister of
Labor said that wage negotiations will not generate
wage increases that increase inflation. On April 13,
El Cronista reported that the commercial employees
union agreed to a 19 percent wage increase (to be
implemented in three installments) which will be
formalized next week.

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Moreno to lead the Secretariat of Coordination to
negotiate and control price restraint agreements.
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2. On April 13, local media reported that President
Kirchner decided to appoint Guillermo Moreno,
currently Secretary of Communications of the Ministry
of Planning, as Secretary of Technical Coordination of
the Ministry of Economy. Moreno will replace Lisandro
Salas, who will take Moreno's place as Secretary of
Communications. The move reportedly reflects
President Kirchner's displeasure with the lack of
success of his efforts to force the private sector to
hold down consumer prices. According to sources,
Kirchner is convinced that Salas was not aggressive
enough in security private sector cooperation.
Moreno, a hardliner, is expected to put more pressure
in enforcing the existing price agreement. The GOA
is concerned that wage demands may jeopardize price
restraint agreements because of the cost increases
they may generate. Many analysts see Moreno's
appointment as another step in Planning Minister De
Vido's intervention in the Ministry of Economy,
although outgoing Secretary Salas was also a De Vido
loyalist. The latest BCRA consensus survey forecasts
a 0.9 percent m-o-m inflation increase for April and a
12 percent y-o-y rise for 2006.

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Economy Minister Miceli leads Argentine delegation to
the IMF/WB meetings next week.
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3. Minister of Economy Felisa Miceli will travel to
Washington DC on April 20 to participate in the IMF
and World Bank Spring Annual Meetings. Reportedly,

she will meet with IMF Director Rodrigo Rato, U.S.
Treasury Secretary John Snow and World Bank President
Paul Wolfowitz. During the meetings, Miceli will
reportedly ask that IFIs redirect loans to the
productive sector and suggest eliminating
conditionality in loans granted by IFIs. The
Argentine delegation will also include BCRA President
Martin Redrado, Secretary of Finance Alfredo Mac
Laughlin and Secretary of Economic Policy Oscar
Tangelson.

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Gas Ban tariff increases for residential users will
not go into effect in 2006.
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4. On April 10, the GOA issued a decree authorizing a
15 percent average tariff increase for Gas Ban
customers (including commercial, industrial and
residential consumers). Gas Ban is one of the main
providers of natural gas in the city of Buenos Aires.
The decree stated that the increase would be
retroactive to November 1 for commercial and
industrial users, and to January 1 for residential
users. However, the same day that the decree was
published in the Official Gazette, a spokesman for the
Ministry of Planning said that tariff increases will
not go into effect until 2007, despite the published
decree. On April 11, Minister of Planning De Vido
said that there is no time frame to implement the gas
tariff increase and that the GOA will seek to ensure
that any tariff increase does not increase inflation.

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Bolivia limits gas exports to Argentina to supply
Brazil.
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5. On April 7, after a pipeline break caused by bad
weather, Bolivia started limiting its gas exports to
Argentina in order to guarantee its exports to Brazil.
The President of YPFB company said that the company
gave priority to supplying Brazil because it has a 20-
year agreement with Brazil, but only a temporary
agreement with Argentina to supply 4.5-5 million cubic
meters of gas per day. The reduced gas exports to
Argentina did not cause shortages because temperatures
were low and industries are not at their peak
production. However, Argentine gas companies
responded by cutting exports to northern Chile to
maintain supply in Argentina.

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GOA studying new measures to avoid electricity
shortages in 2007-2008.
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6. At a seminar on April 11, Secretary of Energy
Cameron said that the GOA is planning new and
innovative measures to avoid the threat of a power
supply shortage in 2007 and 2008. The GOA will
encourage large electricity consumers to have their
own capacity generation and avoid buying in the
wholesale electricity market during seasonal peaks in
consumption. In return, the GOA would subsidize or
reimburse those companies for the additional cost of
producing their own electricity.

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Ciganotto appointed President of Banco Nacion to
replace Lospinato.
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7. On April 7, the GOA issued a decree appointing
Gabriela Ciganotto as President of Banco Nacion (the
largest bank in Argentina, wholly owned by the GOA),
replacing Ricardo Lospinato. Lospinato has been
President of Banco Nacion only since November 2005,
when Felisa Miceli took office as Minister of Economy.

Reportedly, Lospinato resigned due to differences with
Miceli over the management of the bank. Ciganotto is
an accountant who has worked at Banco Nacion for
several years and has close contact with First Lady
Cristina Fernandez de Kirchner.

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BCRA rolls over its maturities at lower interest
rates; Investors concentrated their bids in Nobacs.
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8. The BCRA received only ARP 213 million in bids at
its April 11 Lebac auction, compared to the ARP 1.4
billion in Lebacs that came due during the week.
However, the BCRA received ARP 1.7 billion in bids in
its Nobac auction. As in previous auctions, the BCRA
therefore was able to roll over its maturities by
accepting bids for ARP 1.7 billion (ARP 110 million in
Lebacs and ARP 1.6 million in Nobacs). The yield on
the 35-day Lebac decreased from 6.67 percent to 6.61
percent, the yield on the 56-day Lebac remained
decreased from 6.85 percent to 6.80 percent, while the
yield on the 84-day Lebac decreased slightly from 7.35
percent to 7.29 percent. Lebacs for other maturities
were withdrawn due to lack of interest. The spread on
the nine-month Nobac decreased twenty basis points
from 2.75 percent to 2.55 percent, while the spread on
the two-year Nobac dropped twenty-four basis points
from 4.67 percent to 4.43 percent. Investors continue
concentrating their bids in Nobacs (88 percent of
total bids),since these instruments have a variable
rate and provide a higher yield, which has enabled the
BCRA to continue decreasing their spread.

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GOA financial needs easily achievable for 2006.
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9. According to the Embassy's analysis, the GOA will
have little difficulty meeting its financing needs in

2006. Using conservative assumptions, the GOA will
face payments of USD 11 billion and have resources of
USD 12.3 billion and a financial surplus of USD 1.3
billion. This assumes at least USD 2 billion in new
debt issuance, which appears easily achievable given
that the GOA already has issued USD 500 million and is
preparing to issue an additional USD 500 million in
the near future. The USD 1.3 billion surplus also
assumes that the IADB refinances USD 1.4 billion and
that the BCRA provides another USD 600 million in
financing. Resources could reach USD 15.3 billion
under a more optimistic scenario, in which Venezuela
buys another USD 1.5 billion in GOA debt and the
market absorbs another USD 1.5 billion in new debt.
This seems possible if the current strong appetite for
emerging market debt continues and given the recent
S&P upgrade in Argentine debt.

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Private sector external debt fell 5 percent q-o-q to
USD 49.5 billion in Q3 05.
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10. According to a BCRA report, the private sector's
external debt decreased 5 percent q-o-q in the third
quarter of 2005. Private sector debt totaled USD 49.5
billion in September 2005 (27 percent of GDP),of
which 90 percent (USD 44.4 billion) was in the non-
financial private sector and 10 percent (USD 5.1
billion) in the private financial sector. The private
sector has reduced its external debt by USD 28.4
billion since December 2001.

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The peso appreciated 0.3 percent against the USD this
week, closing at 3.09 ARP/USD.
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11. The peso appreciated 0.3 percent the USD this


week, closing at 3.09 ARP/USD. This week's
appreciation is mainly attributed to increased sales
by exporters due to the harvest season as well as
increased dollar sales by companies in need of pesos
to pay taxes and the relatively high level of the call
rate (11 percent). The BCRA did not prevent the
peso's appreciation despite its stronger intervention
of USD 82 million on April 12 (its largest
intervention since March 1). It accumulated USD 178
million in reserves in the three working days of this
week. The BCRA has purchased USD 2.6 billion since
the beginning of the year and its reserves reached USD
21.8 billion on April 10. The peso exchange rate has
depreciated 1.3 percent since the beginning of the
calendar year

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75 percent of companies surveyed by CEP plan to
increase production in 2006.
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12. A survey by the Centro de Estudios para la
Produccion (CEP) - a research center under the
Secretary of Industry - showed that 75 percent of the

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companies consulted plan to increase their production
in 2006, and that 50 percent of those companies plan
to increase production by more than 5 percent. The
sectors planning the largest increases in production
in terms of volume are food and beverages,
petrochemicals, rubber and plastics and construction
inputs. Also, 80 percent of the companies surveyed
expect sales increases and 70 percent of the companies
believe that they will increase their exports compared
to 2005. The CEP prepares its report by surveying one-
hundred large industrial companies.

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FDI in Argentina increased 9 percent y-o-y to USD 4.6
billion.
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13. The Economic Commission for Latin America and the
Caribbean (ECLAC) reported that foreign direct
investment in Argentina increased 9 percent y-o-y to
USD 4.6 billion, reaching its highest level since the

2001 financial crisis. According to the report,
increased exports and economic growth improved
investment perspectives for the country. Strong
domestic demand also encouraged some manufacturing
companies to increase their production capacity.

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Provincial growth rates averaged 10 percent in 2005.
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14. According to a report by Economa & Regiones,
provinces grew at an average rate of 10 percent in

2005. The provinces showing the highest growth rates
were Chaco, La Pampa and Entre Rios, all provinces
where agriculture, forestry and cattle are major
industries. The provinces with the lowest growth
rates were Santa Cruz, Chubut and Neuquen, where oil
and gas are the major industry. The oil sector's slow
growth is due to high export taxes and price caps
adverse impact on investment. The report concludes
that in the economic model adopted after the 2002
financial collapse, provinces with agriculture and
primary goods production were the winners along with
the city of Buenos Aires and the Province of Buenos
Aires, which benefited from import substitution. The
report forecasts that provincial differences will
deepen under the current economic model.

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Commentary of the Week: "The Worries of Autumn"
by Andres Chambouleyron. (Note: Translated and
published with permission of the author from an
article published in La Nacion on April 9. End Note)
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15. With 2006 growth projections about 6 percent and
with autumn about to arrive, worries are returning
about the capacity of producers and transporters of
natural gas to supply the growing demand of gas in
time and on location.


16. Aggregate natural gas consumption has grown at an
average rate of 4.3 percent per year since the
beginning of the economic recovery in 2002, compared
to an average of 6.5 percent per year in the period
1995-2001. Production, on the other hand, has been
growing at a 2.9 percent rate during 2002-2005,
compared to an 8.2 percent rate during 1995-2001. How
have reserves developed? ... reserves have fallen
from 20 years of production in 1994 to 9.3 years in

2005. This is the result of two factors: first, that
today we produce double the amount of gas that we
produced in 1994 (51 billion cubic meters versus 26
billion cubic meters) and second, that the gross rate
of increase in reserves (discoveries of more gas
through greater exploration) has fallen at a 5.5
percent annual rate from 1995 to 2001, and at a 10.2
percent annual rate between 2002 and 2004.

--------------
A Dangerous Path
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17. Assuming a future path of gas prices and
projections of economic growth for the period 2006-
2008, aggregate consumption of gas could grow at an
annual rate of 3.2 percent. If, assuming further,
that from 2006 onwards, gas production grows at the
same rate as it did during 2002-2005 (2.9 percent
average annual growth) and the gross rate of growth of
reserves is similar to that during the 2002-2004
period (-10.2 percent average per year),the stock of
reserves would fall from 9.3 years of production today
to 5.2 years of production in 2008. ....


18. What are the solutions that will prevent this?
One is to import gas from Bolivia or Venezuela at
prices higher than local prices. Nevertheless, this
strategy won't increase the stock of reserves, and
will only reduce the rate of loss, given that the
increase in local demand is being met today with
imports and not with reserves and increased local
production. While the major producers of gas in
Argentina are announcing more investment in the
sector, it is aimed mainly at greater production to
supply the local market and meet growing internal
demand, with only marginal amounts being invested in
exploration.


19. The only way to reverse this sustained drawing
down of reserves is through greater private investment
in exploration. The latest estimates from the
Secretary of Energy put probable reserves (those that

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are not yet proven but likely to be so) at 262 billion
cubic meters as of December 2004. This is equal to 5
years of production, which indicates that with
adequate policies to encourage private investment
(freedom to set prices and sell resources, contractual
and regulatory certainty) the stock of proven reserves
could be maintained over time at the 9-to-10 year
level that now exists, and reduce our dependence on
imported gas from countries that are politically and
economically highly unstable. (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