ARGENTINE GOVERNMENT FAILS CREDIBILITY TEST ON

UNCLAS BUENOS AIRES 001545 SIPDIS SENSITIVE SIPDIS NSC FOR DAN PRICE, DAN FISK PASS FED BOARD OF GOVERNORS FOR KROSZNER, ROBITAILLE PASS EXIM BANK FOR MICHELE WILKINS PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI USDOC FOR 4322/ITA/MAC/OLAC/PEACHER E.O. 12958: N/A TAGS: EFIN ECON ETRD AR SUBJECT: ARGENTINE GOVERNMENT FAILS CREDIBILITY TEST ON INFLATION STATISTICS REF: BUENOS AIRES 1496 Summary -------------- ¶1. (SBU) On August 6, the Argentine statistical agency, INDEC, reported monthly inflation of 0.5%, once again below even the lowest private sector estimates, indicating continued GoA manipulation of the data. This dashed market hopes that new Economy Minister Miguel Peirano (reftel) would use this first announcement of monthly CPI numbers under his mandate to begin the long process of rebuilding the credibility of official statistics. Bond prices reacted negatively to the inflation news, and concerns are rising about the longer-term impact of unreliable statistics on investment, GoA finances, and economic growth. End Summary. July Inflation Numbers Disappoint -------------- ¶2. (SBU) INDEC reported that the July month-on-month CPI increase was 0.5%, or 8.6% year-on-year. Most analysts, both international (JPMorgan, CreditSuisse, Citigroup) and local (Miguel Angel Broda, Miguel Kiguel, Research for Traders) had expected a month-on-month increase of at least 0.6 - 0.7%, with several noting that the market would interpret an even higher number as a signal of new Economy Minister Peirano's intention to roll back the GoA's 7-month long campaign of manipulating inflation statistics. (Comment: The idea was not so much "no" manipulation as just "less" manipulation. End Comment). ¶3. (SBU) Peirano and other GoA officials have come out in force to justify the INDEC report. These include Secretary of Internal Trade Guillermo Moreno, known as the price control czar and alleged to be behind the worst of the manipulation of INDEC statistics, who argued to the press that the inflation number "reflected reality." However, in comments to the press (and to Emboffs) the private sector has roundly rejected GoA explanations, demonstrating that at least the informed public has completely lost faith in GoA officials' pronouncements on the economy. INDEC Statistics: "Fantasy and Lies" -------------- ¶4. (SBU) Local papers have reported local economists' estimates of "actual" inflation for July of over 1%, while an anonymous group of INDEC workers, protesting the Economic Ministry's interference, estimated the month-on-month increase at 1.6%. A Citigroup August 6 publication estimated that accumulated 2007 inflation through June would be 7.08% without the "methodological innovations" that INDEC introduced several months ago in its inflation calculations. This compares to INDEC's official CPI increase through June of 3.9%, which is even lower than the 4.9% accumulated inflation for the same period in 2006. Citigroup also notes that the protesting INDEC workers estimate January-June inflation at 10.1% (or on a pace to exceed 20% for the year). ¶5. (SBU) INDEC's low numbers are also at odds with anecdotal evidence of higher inflation, especially as reported by consumer groups, who allege much higher food prices, as well as in reports from the provinces, some of which are reportedly seeing inflation of over 20%. Without exception, Post's private sector contacts predict actual 2007 annual inflation in the range of 12-15%, and the press is increasingly quoting local economists with estimates as high as 15-20%. ¶6. (SBU) There are also reports of increasing concern over the veracity of INDEC's other statistical reports. Not only are doubts increasing over poverty and indigence numbers, which use official inflation statistics in their calculations, but there are even questions about GDP growth and industrial production data. Argentine Daily "Clarin" quotes one prominent, local economist as calling INDEC statistics "fantasy and lies." Negative Affect on Argentine Bond Prices -------------- ¶7. (SBU) Local press reports allege that the market's disappointment in the INDEC announcement has driven down prices of Argentine bonds, especially those linked to inflation (which comprise over 50% of total Argentine debt outstanding). Argentine bonds lost an average of two percent on August 6 (in anticipation to and following the 4:00 p.m. announcement),with the largest hit being the peso-denominated bonds that are adjusted by an inflation-linked index. The reality is, however, that INDEC's influence on bonds will be statistically difficult to prove at this time, given the sudden and severe global flight to quality and repricing of risk over the last few weeks. Nevertheless, the INDEC debacle clearly has compromised the credibility of the GoA and is a key factor in the perception of Argentina as an increasingly high-risk market (as measured by Argentina's high country risk relative to other similar economies in the region). Comment: Credibility going, going, gone -------------- ¶8. (SBU) The fact that no one knows the actual rate of inflation complicates not only investor decisions but monetary policy and wage negotiations. Add to this volatile mix of Argentine risks price controls, the rapid increase in spending in 2007, loose monetary policy, normal election year uncertainty, and the President's penchant for blaming foreigners for Argentina's problems, and it answers one Argentine University Professor's question to his students: how could Colombia, with its fiscal deficit and drug and insurgency problems, have a lower country risk than Argentina? ¶9. (SBU) Private Argentine economists and analysts -- who understand that the lack of untrustworthy data will undermine the long-term health of the Argentine economy -- are clamoring for a restoration of the credibility of official statistics. U.S. and Argentine financiers at this week's Council of the Americas seminar expressed serious concerns privately to the Ambassador and others that worsening inflation and its root causes -- expansionary fiscal and monetary policies -- will undermine GoA finances and the longer-term health of the economy, if credibility is not restored soon. Unfortunately, new Economy Minister Peirano has not yet acted to restore confidence among key actors in the economy. End Comment. WAYNE