ARGENTINA: IF THE FACTS DON,T FIT, PURGE

C O N F I D E N T I A L BUENOS AIRES 000247 SIPDIS SIPDIS WHA/BSC WHA/EPSC PASS NSC FOR JOSE CARDENAS PASS FED BOARD OF GOVERNORS TREASURY FOR ALICE FAIBISHENKO USDOC FOR 4322/ITA/MAC/OLAC/PEACHER US SOUTHCOM FOR POLAD E.O. 12958: DECL: 02/07/2017 TAGS: ECON EFIN ETRD EINV ENRG ELAB PGOV AR SUBJECT: ARGENTINA: IF THE FACTS DON,T FIT, PURGE Classified By: AMBASSADOR E. ANTHONY WAYNE, REASONS 1.4 B. AND D. ¶1. (C) SUMMARY. Perceived heavy handed government intervention in the economy took on a more serious turn with last week's firing of the chief officer responsible for inflation data at the GoA's statistical agency (INDEC),an institution long admired for its independence and integrity. The media, opposition politicians, and well-known economists reacted strongly, accusing the government of tampering with inflation data to hold down the consumer price index. This action reinforces other recent GoA attempts to assert control over economic information. In January, Economy Minister Miceli and Secretary of Internal Trade Moreno dismissed eleven senior officials, who were seen as not supporting the official line. The Economy Ministry and Central Bank have also changed the content and distribution of official economic data, and reduced and restricted the publication of this data, which covers sensitive areas such as inflation, poverty, unemployment, and energy. Some of these measures appear to have backfired, only focusing more attention on the government's decisions and undermining the credibility of official data and economic policies. END SUMMARY -------------- -------------- Economy Ministry Firings: the Night of the Long Red Pencils -------------- -------------- ¶2. (C) Eleven senior and experienced Ministry of Economy (MECON) officials were dismissed in January. The most prominent case, before last week's firing of the INDEC official, was the slow sidelining and eventual dismissal (on January 11) of MECON's highly regarded chief economist, Jose Luis Maia. Maia recently had some limited press exposure, never welcomed by the Kirchner administration. His views were widely known to contradict "official" policy, and was known to be close to former economy minister and now presidential candidate Roberto Lavagna. He was openly critical of the Economy Minister during a conversation with DCM and Econoff in September. Maia had maintained a low profile in recent months, avoiding the press and refusing to meet with Emboffs, but this did not save him. IMF Resident Representative in Buenos Aires, Ernesto Ramirez Rigo, told Econoff on February 2 that Maia told him in confidence, after his firing, that the Economy Minister was acting aggressively to eliminate any and all dissenters from within the Ministry. ¶3. (C) Another three officials recently dismissed ) Carlos Quarracino, Carlos Izurieta, and Horacio Feinstein ) had been working for MECON's Secretary of Political Economy. Although they had also maintained low profiles, MECON employees have told Econoffs in confidence that the dismissals were due to their resistance to MECON's desire to produce reports and interpret economic indicators with a positive bias, highlighting the effectiveness of current economic policy. The same MECON sources allege that the unexpected dismissals of Susana Vega and Alcides Saldivia in the National Budget Agency, within the Treasury Secretariat, were also due to their reluctance to toe the line on budgetary and funding decisions. The removals of Yolanda Eggini and Osvaldo Viset of the Legal and Technical Secretariat, both highly regarded professionals responsible SIPDIS for drafting ministry resolutions and economic-related presidential decrees, were seen as removing technical obstacles (and scrutiny) to the issuance of official GoA economic resolutions. Post's MECON contacts confidentially report (they were unwilling to speak over their office or cell phones, and we had to contact them at home) a general feeling of "despair, anger and frustration" among the ranks, with many wondering who will be next. -------------- Reduced and restricted economic reporting -------------- ¶4. (SBU) GOA agencies have been increasingly restrictive in their release of once timely and accessible economic data, now deemed politically sensitive. Gas regulator ENARGAS, also under MECON, no longer publishes what were once daily reports on capacity constraints. Cammesa, the state electricity wholesaler, has not published an annual report since 2005, and ceased publishing monthly operations reports in February 2006. It has not updated since 2004 what used to be a regular reports on market risks. ¶5. (SBU) Another area of concern is the sensitive area of poverty statistics. INDEC used to release a regular poverty report on greater Buenos Aires. Since 2003, however, INDEC only includes these figures as a line item in its general report, reducing its impact. ¶6. (SBU) The nominally independent Central Bank has also gotten into this game, having changed the frequency of its market consensus survey, a forecast based on input from economists and analysts. It was introduced in January 2004 with weekly releases, but since February 2006 has been issued monthly. The Central Bank also delays this release until after INDEC has published the monthly consumer price index, which lessens its impact on inflationary expectations. The Bank also introduced some methodological changes, adding more consulting firms and companies to its forecast survey, with the result that inflation forecasts include input from many companies that have signed price control agreements with the GOA. The Bank also used to release a daily economic and financial report, but has changed this to a weekly report, with restricted distribution. ¶7. (C) Post has encountered increasing difficulties in obtaining official data for economic reports, including for foreign direct investment. When drafting the 2006 Investment Climate Statement, MECON contacts indicated that they had 2005 and 2006 FDI numbers available, but had been instructed not to release them. -------------- -------------- The Ministry cans inflation chief, inciting uproar -------------- -------------- ¶8. (C) By far the most controversial move was MECON's dismissal last week of Graciela Bevacqua, head of INDEC,s hitherto independent office that measures inflation. Bevacqua was replaced with Beatriz Paglieri, an ally of Secretary of Internal Trade Guillermo Moreno, the force SIPDIS behind the GoA's price controls and other heterodox policies to control inflation. (Note: Of all these dismissals, it is not entirely clear whether it was Economy Minister Miceli, or her nominal subordinate Secretary Moreno, who played the dominant role. We know that Miceli and Moreno are not on the best of terms, and suspect that Moreno, who is closer to powerful Planning Minister De Vido and the Casa Rosada than is Miceli, likely fired the INDEC chief, while both of them were involved in various ways with the dismissal of the other MECON officials. End note.) According to press reports and Post's MECON contacts, Bevacqua reportedly opposed the Minister,s attempts to change the index,s methodology, particularly in the calculation of price increases for health services. They reportedly disputed whether to include the 22 percent price increase that health service companies implemented in January in the inflation survey. GoA officials have argued that the 22 percent increase was for "premium services," and not equivalent to the type of service included in the index. Bevacqua, along with many Argentine economists, apparently disagreed. Health services have an important weight in the CPI basket calculation. Bevacqua's firing is also attributed to her refusal to provide details on the locations where CPI survey prices are gathered, which would have violated INDEC's confidentiality provisions. In any event, Post's MECON contacts claim that INDEC's findings on sensitive figures as inflation, unemployment, poverty, and income inequality have long been a target of Minister Miceli and Secretary Moreno. ¶9. (SBU) The press has quoted financial analysts that the GOA's actions may negatively impact bond prices that are adjusted by a CPI-linked index. As of June 2006, 42 percent of GOA debt was linked to inflation, meaning a reduction in CPI inflation would result in lower GOA interest payments. Argentine inflation-linked peso bond yields have risen slightly in recent days. (Note: Yields move in the opposite direction of prices and a rise in inflation drives up the value of the principal on the government's inflation-linked bond. End note.) ¶10. (C) Bevacqua's removal hit the press and ignited a storm that was likely unexpected by the GOA. The issue has been front page news for the last week, with even pro-government commentators raising concerns about government manipulation of statistics. INDEC's cherished and hard-earned reputation with regards to the collection of data, methodology, and calculation of the index has taken a hit. Nevertheless, there were already questions about the legitimacy of the inflation data, due to the government's use of "voluntary price accords" and export bans. The INDEC employee union reacted with small protests outside its office, and in a communique stated that &the government has adopted a totalitarian attitude, and we reject intervention in the CPI. We believe that an institutional coup has occurred against the right to true information on the country's economic conditions." Some independent consultants and opposition figures (including president candidates Lavagna and Mauricio Macri) have already began releasing their own figures. -------------- -------------- After delays and speculation, January inflation only 1.1 percent -------------- -------------- ¶11. (SBU) From the time of Bevacqua,s firing, there followed several days of media coverage leading up to INDEC,s February 5 announcement ) three hours late ) of the January CPI inflation. The announcement occurred amidst the bizarre specter of security forces in INDEC's offices, to limit entry and ensure a strict media blackout, which only served to further highlight the apparent politicization of these reports. The figure of 1.1 percent was below what many private economists projected (1.4 to over 2 percent),and reportedly below what INDEC itself had plnned to publish. The most surprising and suspicious results of the index were for health services and tourism (the latter within the leisure category). INDEC reported health costs increasing only 1.5 percent, despite health care companies' 22 percent price increases (mentioned above). Note that the increased health costs will be factored into the February inflation figures. Tourism costs came in at 3.7 percent month-on-month, compared to the 16.7 percent increase in January 2006 (inflation in tourism is usually high in January due to the summer season). Entertainment costs rose just 1.8 percent, its lowest increase since 1993 and well below the 7.1 percent in January 2006. -------------- Despite the storm, GOA digs in its heels -------------- ¶12. (C) Despite widespread skepticism about the firings and inflation numbers, the GOA, including President Kirchner and his ministers, have struck out hard at the detractors, labeling them a "mafia," and questioning the "bureaucracies and corporations" that have criticized the GOA actions. Kirchner even accused &analysts and economists8 that have criticized the data as &being paid by other political interests, and we all know how they made out when they were in the government.8 Interior Minister Anibal Fernandez accused INDEC employees of being &crooks,8 and accused the "squalid opposition" of trying to score points ahead of presidential elections due in October. -------------- COMMENT -------------- ¶13. (C) While we cannot be certain that the GoA is using its tighter control over INDEC to manipulate inflation figures, the lower than expected January CPI numbers certainly fuel suspicion about the veracity of the official numbers. Added to the firings and tighter control over information, this has increased the perception in the press, public, and financial community that the GOA is politicizing its economic figures. Up to now, government attempts to control inflation have consisted of such heterodox measures as price agreements, export bans and export taxes. Direct manipulation of GOA statistics would be an unsettling next step. GoA motivations for keeping the appearance of low inflation are obvious: inflation is still a sensitive issue, particularly with the poor. It is a key indicator for calculating poverty levels, so lower figures enable the GoA to argue that poverty is decreasing. The CPI is also a key reference for the unions to use in upcoming wage negotiations, and the GoA is seeking to restrict wage increases this year. Unions are already demanding bigger wage rises, which if granted would further aggravate inflation. The damage to the credibility of inflation data is also expected to undermine the attractiveness of Argentine inflation-linked debt. Finally, many observers feel that these actions were not even necessary: even the higher end of inflation estimates, about 15 percent, are not that bad in such a booming economy. All this took place during a time when Argentina's risk rating dipped below that of Brazil's. ¶14. (SBU) Many observers have opined that the GOA was caught off guard by the strong reaction to the firing of the INDEC inflation chief. On the other hand, the GOA has been able to get its way for some time with other controversial decisions, riding the wave of generally good economic news in the past few years. GOA officials may be calculating that this will blow over during the height of the summer holiday season, and hope for continued good economic news. ¶15. (C) Indeed, for the vast majority of the public, and precisely the block the Casa Rosada assiduously courts, the economic and statistical arguments of "elite" economists and journalists are far beyond their everyday concerns, whose main worries are simply personal security in the face of ever increasing crime, and daily economic survival. On the other hand, much of the public and media have little faith in the official inflation numbers anyway, being first hand witnesses to the clearly higher prices they face every day. End Comment. ¶16. (U) To see more Buenos Aires reporting, visit our classified website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a> WAYNE