ARGENTINA: ARGENTINA: LES WAGE LEVELS CONTINUE TO

UNCLAS SECTION 01 OF 03 BUENOS AIRES 000654

SENSITIVE
SIPDIS

WHA/EX FOR J.ROBERTSON AND J.SEALE
HR/OE/CMP - SALLY CINTRON

E.O. 12958: N/A
TAGS: EFIN AMGT AFSN APER ECON AR
SUBJECT: ARGENTINA: ARGENTINA: LES WAGE LEVELS CONTINUE TO
ERODE AS INFLATION PERSISTS

REF: BUENOS AIRES 160


1. (U) 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.

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Summary
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2. (SBU) With the Argentine economy slowing rapidly and most
local analysts predicting a 2-3 percentage point contraction
in 2009, expectations have been that inflation levels would
also decelerate significantly. While "true" inflation is off
its mid-2008 annualized peak of roughly 25%, it has remained
stubbornly high and there are few signs of further decline in
the near future. Although official GoA statistics show
year-on-year inflation in the range of 6%, private analysts
say it is about three times that level: in the range of
15-20%. Public and private salaries have been increasing at
a similar rate, with the GoA recently announcing a 15% public
sector wage increase. As a result, Argentina is likely
looking at several years of stagflation, with the cost of
living facing Argentines and Embassy personnel staying high.
As a result, despite four salary increases in the past twelve
months, Embassy Buenos Aires locally engaged staff (LES)
salaries continue to lag behind local comparable salary
levels. End Summary.

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Rapid Economic Deterioration Fails to Dampen Inflation
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3. (SBU) The cost of living in Argentina continues to rise,
despite the general consensus among economists and financial
analysts in late 2008 that inflationary pressures would
subside in response to the sharp deceleration of domestic
economic activity, tighter monetary policy, and higher
interest rates. Reflecting this shared belief, late last
year analysts forecast that 2009 inflation would be at the
lower end of the 15-20% range, and many of Post's contacts
were predicting inflation would even fall into the 10-15%
y-o-y range by the end of 2009.


4. (SBU) There are certainly forces at play that are slowing
the rate of inflation, which has fallen from a peak mid-2008
level of 25% y-o-y. Real growth, which averaged 8.5% per
year between 2003 and 2008, has fallen off a cliff in 2009,
with most economists estimating a recession in 2009 of about
2-3%, as well as much lower capacity utilization and a major
contraction in domestic demand. Central Bank monetary
policies have also been increasingly contractionary in recent
years, contributing to higher local interest rates (still
negative in real terms, albeit less negative than in previous
years). Financial uncertainty over the last year, which led
to huge increases in yields on all Argentine government debt
issuances and provoked major capital outflows ($23 billion in
2008 and almost $6 billion in the first quarter of 2009),
also pushed up local interest rates and brought bank lending
almost to a halt. Finally, lower commodity prices and the
government's elimination of many subsidies on utilities and
transportation have reduced fiscal spending and curtailed
consumption of such goods.


5. (SBU) The combined result is that many factors that pushed
unsustainably high growth in domestic consumption and led to
the overheating of the Argentine economy in recent years have
diminished in importance in 2009. Nevertheless, the
relatively high private sector estimates for inflation so far
in 2009 have brought into question the accepted wisdom that
inflation will subside significantly in the future. In fact,
many analysts are now reporting that they see no signs that
true inflation levels will continue to fall further from
current levels.

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Contrary to Official Stats, CPI Continues to Climb
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6. (SBU) Consumer prices, as reported by Argentina's national
statistics agency, INDEC, rose by a much lower than expected
0.3% month-over-month rate in April, down from 0.6% m-o-m in
March. The y-o-y official headline inflation figure improved

BUENOS AIR 00000654 002 OF 003


to 5.7% in April from 6.3% in March. Year to date INDEC
reports that consumer prices have risen by only 1.9%.


7. (SBU) However, as Post has reported on numerous occasions
(reftel),virtually all private sector economists and
analysts take as a given that INDEC is manipulating inflation
statistics. (This, in turn, distorts and understates
measures of unemployment and poverty levels. There are also
strong suspicions that INDEC manipulation has now extended to
the national accounts). Actual or "true" y-o-y inflation,
estimated by numerous independent private sector analysts, is
instead in the range of 15%-20%, or nearly three times higher
than the officially reported figures.


8. (SBU) Goldman Sachs reports a "consensus estimate" for
actual or "true" inflation in April exceeding 1% m-o-m.
Noted local consulting group Evaluadora Latinoamericana,
which is one of the few private organizations to conduct its
own consumer price survey, estimates May inflation at 15.6%
y-o-y. Another well-known firm, Fundacion Mediterranea, uses
San Luis Province's data on price changes, since San Luis is
one of the more independent provincial governments. For
April, San Luis reported 15.5% y-o-y. Other noted Argentine
economists have higher estimates, including Miguel Kiguel,
who argues that inflation is stuck at around 17% with minimal
chance of falling significantly further this year.

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CPI Expectations Refuse to Budge
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9. (SBU) In tandem with high CPI readings, consumer inflation
expectations have come down significantly from their peak
mid-2008 levels (of about 30%),but remain stubbornly high.
The median of Di Tella University's 12-month inflation
expectations index, remains unchanged at 20% since March.

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Wage Hikes Continue
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10. (SBU) According to a recent survey by SEL Consultores, a
think tank specializing in labor issues, despite the slowing
economy, companies still expect unions to demand wage
increases of about 20% (on average),in line with 2009
inflation estimates. The GoA set the stage with its recent
announcement of a 15% two-stage public sector wage increase
for 2009. The Banking Association has agreed to 19% wage
increases, the construction industry has agreed to 15%
increases, and many other sectors of the economy have
reported wage increases in the same range or higher. These
increases are lower than those of previous years. For
example, INDEC reports that salaries rose by an average of
22.4% in 2008, and increased an average 50% for the combined
period 2007-2008.

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Embassy Salaries Still Lagging Behind
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11. (SBU) In spite of Post and the Department's best efforts
-- four salary increases over the last year ) Embassy salary
levels continue to lag the market. The gap is further
exacerbated by the recent wave of GoA and private sector wage
increases in the range of 15-20%. In sharp contrast to the
50% 2007-2008 average wage increase in the country, Post
implemented a 5-6% wage increase in 2007 and a 13% wage
increase in 2008. To place this in a longer-term context,
INDEC reports that from December 2001 - December 2008,
salaries increased on average 189%, compared to the Embassy
average accumulated increase of only 71%.


12. (SBU) Depressed Embassy salaries are negatively affecting
recruitment and retention, as demonstrated by several recent
lost opportunities to hire qualified personnel for key
positions. For example, the well-qualified candidate we
selected for our Security Assistant position was considering
leaving his 16-year government career to come work for us.
Unfortunately, we were unable to lure him away. Despite the
fact that his government salary compares poorly with current
local private sector equivalents, it still paid him twice as
much as what the Embassy could offer. In fact, the previous
incumbent in that position left the Embassy for a job that
paid twice as much as he had earned at the Embassy.

BUENOS AIR 00000654 003 OF 003




13. (SBU) Similarly, Post has struggled to attract qualified
applicants for the Facilities Maintenance foreman position at
the advertised salary. We had to lower the requirements of
the position and re-advertise. In the end, post was unable
to attract a qualified candidate from outside and hired from
within. We found from an informal market analysis that the
British Embassy pays their foreman 20% more than we do. (We
expect that disparities similar to these will be recorded on
the next comparator survey, which should be completed by
Birches Group in July/August 2009.)

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Next Steps on Embassy Salaries
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14. (SBU) The large accumulated difference between Embassy
salaries and average salaries in the economy will be
exacerbated in 2009 as the price-salary spiral continues. In
September 2008, HR/OE gave Post authorization to raise wages
between 12.60% and 30.59%, depending on the grade of the
position. To date, Post has been able to increase salaries
by a cumulative 11% in FY09. Given the rate of inflation and
the difficulties recruiting and retaining staff at this
Mission, it is clear that we need to carry out another salary
increase to remain competitive. Post intends to fully
utilize the authorization granted and implement another
salary increase as soon we receive confirmation of exchange
rate gains from WHA/EX.

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Comment: LES Hit by Stagflation
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15. (SBU) Many analysts started this year expecting inflation
to moderate on the back of lower global commodity prices and
a contraction in domestic demand. However, the continuation
of high domestic wage increases, a significant increase in
utility and transportation prices due to cutbacks in GoA
subsidies, still high fiscal spending ahead of June 28
mid-term legislative elections, and the steady depreciation
of the peso have all combined to keep actual inflation well
into double digits. In past cables, Post has argued that the
decisive factors that would determine whether deflationary or
inflationary forces won out would be wage increases and peso
depreciation. So far in 2009, it looks like both will
support higher consumer price increases and higher
inflationary expectations in the medium term. This could
worsen after the elections, assuming the consensus view is
correct that the Argentine Central Bank will allow the peso
to depreciate at a faster rate and end the year in the 4-4.20
pesos/dollar range (from the current level of 3.75). With
negative growth expected this year and low growth expected in
2010, and inflation remaining stubbornly high, Argentina is
likely facing several difficult years of stagflation amidst
an environment of dangerous financial uncertainty and
volatility.


16. (SBU) In this environment, it is essential for Post to
have the flexibility to increase LES wages to a comparable
level with those of the private sector. Otherwise, our
employees' standards of living will continue to deteriorate
and Post's ability to compete for top talent ) still highly
sought in the competitive Argentine labor market ) will
continue to diminish.

WAYNE