ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JANUARY

UNCLAS SECTION 01 OF 05 BUENOS AIRES 000245 SIPDIS SENSITIVE SIPDIS NSC FOR JOSE CARDENAS, ROD HUNTER PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE ROBITAILLE 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 EINV ETRD ELAB EAIR AR SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JANUARY 28 - FEBRUARY 22, 2008 ¶1. (U) Provided below is Embassy Buenos Aires' Economic and Financial Review covering the period January 28 - February 22, 2008. The unclassified email version of this report includes tables and charts tracking Argentine economic developments. Contact Econoff Chris Landberg at landbergca@state.gov to be included on the email distribution list. This document is sensitive but unclassified. It should not be disseminated outside of USG channels or in any public forum without the written concurrence of the originator. It should not be posted on the internet. -------------- Highlights -------------- -- Trade surplus reaches $11.2 billion: high export prices trump accelerating imports -- February 20 presentation by FIEL Chief Economist -- Former INDEC employees estimate 2007 CPI at 22-26%, almost three times official rate -- IMF questions INDEC on CPI calculation methodology -- UNCTAD report shows similar FDI performance in 2006 for Argentina and Brazil -- Mercedes Marco del Pont sworn in as new President of Banco de la Nacion -- ICSID tribunal appointed for Italian holdout bondholders' arbitration against the GoA -- GoA appoints first Director of new Civil Aviation Agency; day-to-day operations to remain unchanged -------------- Trade -------------- Trade surplus reaches $11.2 billion: high export prices trump accelerating imports -------------- -------------- ¶2. (SBU) The value of Argentine exports grew 20% in 2007 and imports jumped 31%, according to GoA statistics agency INDEC. Exports totaled $55.9 billion and imports were $44.8 billion in 2007, with a net trade surplus of $11.2 billion, down 9.4% from the 2006 surplus of $12.3 billion. INDEC attributed 60% of the increased value of exports to higher goods prices, and 40% to increased quantity. On the export side, the increase was led by primary products, especially oilseeds (soy) and grains. ¶3. (SBU) Total value of exports in those areas (including processed soy) rose from $13.4 billion in 2006 to just over $20.0 billion in 2007, roughly 70% of the total value increase of Argentina exports during the same period. Another $1.1 billion -- 40% of the increase other than soy and grains, and 12% of total 2007 export growth -- was attributed to increased automotive exports to Brazil, thanks to a bilaterally negotiated relaxation of restrictions on the export of Argentine finished cars and parts. Hydrocarbon and energy exports, despite an 11% increase in price, fell 12% in total value to $6.8 billion due to expanded GoA export tariffs and administratively imposed local market preferences (resulting in a 20% reduction in the quantity of energy exports). The largest value increase in imports was in the category of intermediate goods, which rose from $11.9 to $15.5 billion. This was complemented by a 34% rise (to $5.1 billion) in consumption goods, a 33% increase (to $2.7 billion) in motor vehicles, and a 64% increase (up to $2.8 billion) in imports of refined hydrocarbon fuels. Imports of productivity-enhancing capital goods also increased, up 28% to $10.8 billion. ¶4. (SBU) The increase in primary global agricultural commodity prices has contributed significantly to Argentina's trade surplus: the 2007 price increases for exports of Argentine primary products and agricultural-based manufactured goods accounted for $5.8 billion in increased exports, or 52% of Argentina's trade surplus. Local analysts acknowledge that the trade surplus is shrinking, but do not believe it is at risk of disappearing soon. However, a plunge in global agricultural commodity prices would have a severe, negative impact on the trade balance. Equally important, any such price decline would also significantly reduce the GoA's revenue intake, since taxes on primary BUENOS AIR 00000245 002 OF 005 commodity exports contribute a large share of the GoA's primary fiscal surplus. -------------- Economic Outlook -------------- February 20 presentation by FIEL Chief Economist -------------- --- ¶5. (U) Mission representatives attended a February 20 presentation by FIEL Chief Economist Daniel Artana (Buenos Aires-based Latin American Economic Foundation -- FIEL -- is a highly regarded, independent Argentine think tank devoted to economic and social research on Argentina and Latin America). FIEL's main points: ¶6. (SBU) INDEC Statistics. Manipulation of statistics goes beyond the CPI to include wholesale prices and industrial production indices. Evidence of data manipulation is clear when analyzing time series, with seasonal variation of prices for core products -- especially food items -- disappearing over the last year. ¶7. (SBU) 2007 GDP growth overestimated. The BCRA consensus survey estimates 2007 GDP growth at 8.6%, an overestimation of up to 0.5-0.7% due to the underestimation of the CPI. GDP data through third quarter 2007 (latest released) appears relatively reliable, but FIEL has strong doubts about the input data used to calculate GDP during fourth quarter 2007 and going forward. FIEL's economists predicted that the GoA would ensure that 2008 real GDP growth remains in the 8.5-8.7% range, if not through stimulative policies then through "methodological innovations," to use Citi's term. ¶8. (SBU) Impact of international turbulence. Argentina is increasingly dependent on high global commodity prices for its main exports for maintaining the twin surpluses (trade and fiscal). However, the good news is that prices are expected to remain high even with growth decelerating in the US and Europe. Growth in China (and the rest of Asia) should compensate for lower demand in U.S. and Europe, even if annual real growth in China falls (as the economists expect) from 11% to 8%. This is also partly due to the appreciation of the Yuan, which has already appreciated 12% in 2008 compared to only 6% in 2007, providing ample room for the dollar value of exports to remain high. ¶9. (SBU) Macro Policy. Fiscal and monetary policies remain extremely expansive, with primary expenditure still growing at a rapid pace and real interest rates still net negative. Even though primary fiscal expenditure is decelerating (from the 50% plus growth rate in 2007),it is still growing at about 35% nominally, which translates to about a 15-16% real growth rate assuming true inflation of 20%. Economists from the entire political spectrum are calling for slower growth, even heterodox economists who support the GoA such as Eduardo Curia, Aldo Ferrer, and Roberto Frenkel. ¶10. (SBU) Energy. Two instruments that Argentina used to attenuate energy shortages in the past were to reduce natural gas exports to Chile and to import electricity from Brazil. However, these two instruments are no longer particularly useful, because Argentina barely exports any natural gas to Chile anymore (see below graph, measured in thousands of cubic meters)) and Brazil's recent dry weather will limit the amount of electricity Brazil can continue to export to Argentina. Also unclear is whether Brazil will allow Bolivian natural gas to be diverted to Argentina. (The recent energy summit held in Buenos Aires involving Brazilian President Lula da Silva and Bolivian President Evo Morales suggests that Brazil will not/not do so.) On the positive side, two factors that should help the GoA manage the energy shortages this winter are: 1) the two new thermal generation plants that should come on line by May; and, 2) current forecasts indicate that the 2008 winter may not be as cold as the one in 2007, which was the coldest in decades. Former INDEC employees estimate 2007 CPI at 22-26%, almost three times official rate -------------- -------------- ¶11. (SBU) A group of former INDEC technicians publicly BUENOS AIR 00000245 003 OF 005 announced their calculation of the 2007 Buenos Aires metropolitan area CPI at about 22-26%, almost three times the official INDEC CPI of 8.5%. These were mostly staffers fired by Secretary of Internal Trade Guillermo Moreno, who replaced many of the more capable and experienced INDEC employees in charge of calculating inflation and poverty statistics, after they reportedly refused to acquiesce to Moreno's demand that they "adjust" the data. (Note: Moreno is the GoA official responsible for the government's system of price controls and is also alleged to be the mastermind behind the manipulation of INDEC data. INDEC's internal union states that 14 employees were removed from the agency and re-employed at the Ministry of Economy after they testified against GoA intervention of INDEC and CPI data manipulation. Additionally, the union argues that an unspecified number of statisticians and administrative employees have been demoted and replaced with employees willing to collaborate with the Moreno.) ¶12. (SBU) The ex-INDEC employees mainly based their unofficial estimate of 22-26% on the inflation rate reported by the statistical agency of the province of Mendoza. Mendoza's inflation rate has been strongly correlated (99.75%) with the Buenos Aires CPI from 2003 to 2006. According to this report, food and beverage prices have been distorted the most. For Mendoza, this subcategory of the index increased about 36-39%, compared to the official INDEC increase of only 8.6%. (Note: the Buenos Aires CPI is commonly used as the official Argentine inflation figure and is also used to construct the CER (coeficiente de estabilizacion de referencia),the CPI-linked index used to adjust peso-denominated debt.) Unions have argued to the media that INDEC's CPI does not reflect true inflation, and are, therefore, requesting wage increases in the range of 20-35% (depending on the union) in order to maintain the purchasing power of employees' salaries. IMF questions INDEC on CPI calculation methodology -------------- -------------- ¶13. (SBU) Buenos Aires daily Cronista reported February 6 that the IMF asked GoA statistics agency INDEC, in a seven-page written request, to clarify the methodological changes introduced in 2007 to the CPI calculation, as well as to explain the impact of those changes. This IMF information request takes into account concerns among economists and statisticians over the reliability of the CPI data, for which there is much disagreement. INDEC reports 2007 CPI at 8.5% y-o-y, while private analysts and former INDEC employees estimate "true" inflation in the range of 22-26%. ¶14. (SBU) The IMF reportedly also asked for explanations on: 1) the reported layoffs of INDEC employees, who resisted the alleged data manipulation; and, 2) if it were true that INDEC had revealed to GoA officials the identity of the retailers it surveys to measure the CPI, which would be a breach of confidentiality. According to Cronista, the IMF alerted the SIPDIS GoA about the possibility of removing the Argentine inflation statistics from its publications (such as the World Economic Outlook report, the so-called WEO) if they fail to meet UN standard's in compiling its statistics. (Comment: Post understands from IMF sources that the letter included no such threat, although the Cronista report is otherwise mostly correct.) UNCTAD report shows similar FDI performance in 2006 for Argentina and Brazil -------------- -------------- ¶15. (SBU) Contrary to common belief that Argentina is not receiving sufficient FDI when compared to other countries and especially in comparison Brazil, a recent UNCTAD report finds similarities between Argentina and Brazil and other LatAm countries in terms of FDI. According to the report, inward FDI flows to Argentina reached $4.8 billion in 2006, while outward FDI flows totaled $2.0 billion, resulting in a net inflow of $2.8 billion. In comparison, Brazil received FDI flows of $18.8 and outflows of $28.2 billion. (For reference, Latin-America and Caribbean as a whole received FDI inflows of $83.7 billion and outflows of $49.1 billion.) Even though Argentina's FDI inflows are small compared to Brazil's in dollar terms, when measured as a percentage of gross fixed capital formation, Argentina's FDI inflows BUENOS AIR 00000245 004 OF 005 represent 9.6% of 2006 gross fixed capital formation, while Brazil's inflows are only a slightly higher 10.5%. Also, when comparing FDI stock as a percentage of GDP, Argentina performs better than Brazil. In 2006, Argentina's FDI stock reached $58.6 billion, or 27.4% of GDP, while Brazil stock reached $221.9 billion, or 20.8% of GDP. ¶16. (SBU) The UN report ranks countries' FDI flows relative to the size of their economies. The report presents the Inward FDI performance Index, which is the ratio of a country's share in global FDI inflows to its share in global GDP, and the Outward FDI performance Index, which is calculated as the ratio of a country's share in global FDI outflows to its share in global GDP. In 2006, Argentina ranked 83 on the Inward FDI Performance index (losing one position compared to the previous year),better than Brazil (which ranked 93),almost similar to Mexico (ranked 82),but much worse than Chile (ranked 30). However, in the Outward Performance Index, even though it gained two positions compared to 2005, it ranked 54, worse than Chile (ranked 31), Brazil (ranked 36),and Mexico (ranked 49). -------------- Finance -------------- Mercedes Marco del Pont sworn in as new President of Banco de la Nacion -------------- -------------- ¶17. (SBU) On January 30, Chief of Cabinet Alberto Fernandez swore in Mercedes Marco del Pont as President of the state-owned Banco de la Nacion Argentina (BNA). Marco del Pont, who replaces Gabriela Ciganotto, stated that she will work to promote credit to small-and medium-size enterprises (SMEs),to reduce nominal interest rates, and to improve income distribution, as well as finance the government as necessary (although she clarified that the 2008 GoA financial program is manageable without BNA help). She stated that the BNA is committed to current monetary and foreign exchange policies, making it clear that BNA will complement the BCRA's efforts to purchase foreign exchange to maintain an undervalued peso. Regarding interest rates, she mentioned the need to reduce interest rates for SMEs as well as to extend local currency loan tenors beyond current ceilings of about five years. It remains to be seen whether the BNA will play a role in the GoA announced strategy to create a national development bank similar to the Brazilian BNDES (providing long-term credit, possibly at subsidized interest rates, in order to promote economic development). (Background: BNA is entirely state-owned with roughly 500 branches in Argentina and other countries. A main goal of BNA is to serve as the financial agent of the federal government: it receives public deposits and makes payments on behalf of the government. Of late, BNA has concentrated on SME lending as well as on serving under-banked sectors of the population (e.g. lower income individuals and from isolated towns of Argentina).) ICSID tribunal appointed for Italian holdout bondholders arbitration against the GoA -------------- -------------- ¶18. (SBU) On February 4, the World Bank appointed Swiss citizen Robert Briner as the presiding Judge of the ICSID (International Center for Settlement of Investor Disputes) arbitral tribunal that will rule on the complaint filed against the GoA by Task Force Argentina (TFA). TFA is defending about 195,000 Italian investors that did not participate in the 2005 GoA debt restructuring and still hold defaulted debt totaling about $4.4 billion (and are claiming payment of face value plus interest arrears on the defaulted bonds). The TFA is basing its suit on the failure of Argentina to respect the 1990 Italian-Argentine bilateral treaty. ¶19. (SBU) TFA representatives celebrated the designation of the judge as it overcame the GoA's attempts to block the registration stage of the case and then, when that was unsuccessful, block the appointment of the presiding judge. (The tribunal is composed of three judges, one chosen by each party and the third jointly agreed upon. The GoA named Georges Abi-Saab of Egypt and TFA named Albert Jan van der BUENOS AIR 00000245 005 OF 005 Berg of the Netherlands, but the World Bank directly appointed Briner following the GoA's objection to the appointed third judge.) -------------- Civil Aviation -------------- GoA appoints first Director of new Civil Aviation Agency; day-to-day operations to remain unchanged -------------- -------------- ¶20. (SBU) Former Mendoza Governor Rodolfo Gabrielli was sworn in on January 29 as the GoA's first Director of the newly-created civil aviation agency, ANAC (National Civil Aviation Administration),the organization that will eventually take full and formal control of Argentina's civil aviation structure. This appointment is a small but important step in the GoA's road towards civilian control of civil aviation in Argentina. ¶21. (SBU) Presently, Argentina civil aviation largely falls under the control of two state bodies: the Ministry of Defense's Air Regions Command, and the Secretary of Transportation's Under Secretary of Commercial Air Transport. ANAC will formally replace both bodies and their functions. ¶22. (SBU) ANAC's structure and responsibilities have slowly been defined as a result of three GoA decrees over the past year. Although ANAC's general role and director are now known, these same decrees also mandate that ANAC will only take full legal control of Argentine civair once the GoA updates certain other aviation codes and other relevant legislation, which the GoA has mandated will occur no later than May 29, 2008. In fact, many observers think that ANAC will not likely be a truly functional civair agency even then, and the process could take another one to three years, if not longer. Meanwhile, Argentine civair will continue to be run, on a day-to-day basis, by the Air Regions Command and the Secretary of Transportation (the Under Secretary of Commercial Air Transportation's role was legally terminated this month). ¶23. (SBU) Rodolfo Gabrielli is the former Peronist Governor of Mendoza province (1991-1995),and son of another Mendoza Governor, Francisco Gabrielli. (The Mendoza airport is named after his father Francisco). Gabrielli was Mendoza's Minister of Economy from 1987-1991, a national congressman from 1995-1999, Interior Minister under former President Adolfo Rodgriguez Saa, president of the state satellite company ArSat under President Nestor Kirchner, as well as a Director of the national airports regulator, ORSNA. Observers concur that Gabrielli's considerable political skills will come in handy in managing the diverse and conflictive world of Argentine civil aviation. KELLY