ARGENTINA: POST RESPONSE TO INFORMATION GATHERING

C O N F I D E N T I A L BUENOS AIRES 001497 SIPDIS E.O. 12958: DECL: 10/29/2018 TAGS: EFIN ECON PREL PGOV AR SUBJECT: ARGENTINA: POST RESPONSE TO INFORMATION GATHERING REQUEST FOR NOVEMBER 15 SUMMIT ON FINANCIAL MARKETS AND THE WORLD ECONOMY REF: A. STATE 114420 ¶B. BUENOS AIRES 1495 ¶C. BUENOS AIRES 1493 ¶D. BUENOS AIRES 1491 ¶E. BUENOS AIRES 1490 ¶F. BUENOS AIRES 1489 ¶G. BUENOS AIRES 1477 ¶H. BUENOS AIRES 1475 ¶I. BUENOS AIRES 1466 ¶J. BUENOS AIRES 1458 ¶K. BUENOS AIRES 1456 ¶L. BUENOS AIRES 1443 ¶M. BUENOS AIRES 1442 ¶N. BUENOS AIRES 1427 ¶O. BUENOS AIRES 1417 ¶P. BUENOS AIRES 1415 Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d) ¶1. (C) Post provides the following response to Ref A request for information on Argentina in advance of the November 15 G-20 meeting in Washington. Relevant financial and political reporting from October provided reftels. ¶I. Key Objectives and Priorities/Desired Outcomes of the Summit: President Cristina Kirchner de Fernandez will likely use the summit as a platform to justify recent expanded GoA interventions in Argentine markets, using developed nations' recapitalization of their financial markets to validate the GoA's current initiative to nationalize its private pension system. Kirchner may also rationalize her declaration of an "administered trade" policy (expedited anti-dumping investigations and expanded non-tariff barriers) as a mechanism to counter substantial devaluations by key trade partners (e.g., China, Brazil) and so preserve Argentine industrial production and job creation. Argentine government officials say that the GoA is seeking to coordinate positions with Brazil, to be discussed further during the November 8-9 Mercosur summit in Sao Paulo. II. Key Concerns: Argentina is concerned about: 1) decelerating GDP growth and its impact on employment and on GoA spending in the run-up to the 2009 mid-term elections; 2) greater difficulty in arranging financing to cover debt maturity spikes in 2009-2011; and 3) a declining trade surplus due to agricultural commodity price drops and seeing Argentina placed at a possible competitive disadvantage due to significant depreciations of key trading partner currencies, e.g., Brazil. III. Impact of the Financial Market Crisis on the Financial Sector: The direct impact on the Argentine financial sector has been limited due to the relatively low level of private credit (only 13% of GDP) and GoA's isolation from international capital markets. No Argentine financial institutions have failed and credit rating agencies' outlook for the sector is stable. Nevertheless, in the face of slowing domestic growth, high domestic inflation, rising interest rates, and the proposed nationalization of private pension funds, Argentine banks are taking precautionary measures, including reducing lending. The difficult environment is likely to expose banks to higher credit risks and to pressure their profitability. In response to the October 21 pension nationalization announcement, and heavily influenced by the deteriorating global environment, local equity and bond markets plunged, Argentina's country risk premium spiked to almost 2,000 basis points, capital outflows have increased sharply, and there is increasing pressure on the peso to depreciate further. IV. Actions Taken to Address the Financial Crisis: The GoA's initial response was to form an inter-Ministry "Coordination Council" and announce an "administered trade" policy, consolidating domestic protections via expanded reference price lists, expedited anti-dumping rulings and enhanced non-automatic licensing measures. Other measures include increasing electricity and transportation tariffs to cut the burden of government subsidies; allowing a 10% devaluation of the Argentine peso since mid-September, and attempting to normalize relations with Paris Club creditors and private bondholders (these latter two are currently on hold, pending improvement in the international financial context). The GoA also proposed the nationalization of the private pension system, ostensibly to protect pensioners from market volatility, but also to gain access to the systems' $30 billion in assets and $4-5 billion in annual worker contributions so as to reduce perceived default risks and obviate the need for cuts in government spending prior to the October 2009 mid-term elections. This move set off the negative reaction cited in section III above. ¶V. Current economic situation/near-term outlook: 2008 GDP growth estimates have dropped from 7% to 4-6%, while 2009 estimates have dropped from 6% to 1-2%, with a number of economists predicting recession. Estimated actual annual inflation has dropped from around 25% to around 18% currently. Capital outflows have accelerated over the last month, increasing pressure on the Argentine Central Bank to maintain a stable exchange rate. The peso has depreciated over 10% since August, and further depreciation is expected. ¶2. (SBU) Embassy Points of Contact: Primary: Douglas Climan, Economic Counselor, ClimanDP@State.Gov, 54-11-5777-4609. Back-up: Chris Landberg, Deputy EconCouns, LandbergCA@State.Gov, 54-11-5777-4589. WAYNE